No one could blame owners of ships trading to the U.S. for living in constant fear of the risk of punitive damages in the event of a serious maritime casualty. Over the years, the US has gained notoriety for unpredictably large punitive damages awards aiming to punish bad actors and deter others from repeating their behavior. The case of the “Exxon Valdez” is by far the most notorious punitive damages case in maritime circles.
In 1989, Exxon attained infamy when the “Exxon Valdez” ran aground and spilled 11 million gallons of crude oil in Prince William Sound, Alaska. Although Exxon already faced liability well in excess of $ 3 billion for clean up costs, fines, restitution, natural resources restoration, and compensation to private parties for economic losses, an Alaskan jury decided that Exxon should also pay the staggering sum of $ 5 billion in punitive damages. Presumably the jury was motivated to both punish Exxon and deter other ship owners from allowing such an event to happen ever again.
Not surprisingly, Exxon appealed the punitive damages award. After two successive appeals, the U.S. Court of Appeals for the Ninth Circuit cut the award to $ 2.5 billion in 2007. Exxon sought further review by the U.S. Supreme Court, which accepted the appeal.
In late June, the Supreme Court issued its complicated decision in the case, announcing a federal maritime law guideline for maximum punitive damages in circumstances similar to those present in the “Exxon Valdez” case. It also addressed two other issues which are likely to be the subject of further punitive damages litigation in other cases. The ruling offers some hope for reducing fears of punitive damages by making maximum awards somewhat more predictable and identifying arguments which could eventually limit the circumstances in which punitive damages are available in maritime cases.
Unpredictably large punitive damages awards in the U.S. and the Supreme Court's response
In 1990, a doctor bought a new BMW in Alabama and learned several months later that the car had been repainted before it was sold to him. He sued the BMW's American distributor and a jury awarded him $ 4,000 in compensatory damages plus punitive damages of $4 million in light of BMW's practice of not disclosing such repainting to customers.
In 1992, a McDonald's customer in New Mexico spilled scalding hot coffee that she had just purchased onto her lap. She sued McDonald's and a jury awarded her $160,000 in compensatory damages plus punitive damages of $2.7 million in light of a history of similar injuries to other McDonald's customers.
Such extreme awards of punitive damages gave the U.S. a reputation for a judicial system run amok. They also caught the eyes of the nine justices of the Supreme Court, the final arbiter of federal law in the U.S..
Between 1991 and 2007, the Supreme Court decided several cases regarding constitutional due process limits that applied to the imposition of punitive damages in state courts. Although the results in the cases varied depending upon the nature of the wrongdoer's conduct and the specific issues presented on appeal, the Supreme Court established principles of law governing punitive damage awards. In doing so, it made it clear that juries did not have the final say and could not exercise unbridled exuberance when awarding punitive damages, no matter how well intentioned their awards may be.
Through these cases, the Supreme Court determined that the courts must have the opportunity to review and reduce punitive damages awarded by juries and that appellate courts must review constitutional challenges to punitive damages without deference to the trial court's determination. It established that defendants must have fair notice of the severity of penalties that might be imposed for conduct subjecting them to punishment and that juries should not be allowed to consider harm to non-parties or similar conduct outside of the relevant jurisdiction (e.g. conduct in other states) when awarding punitive damages.
The Supreme Court also identified factors for courts to consider when deciding whether a punitive damages award violated due process by being grossly excessive. These include degree of reprehensibility (the most important factor), ratio of punitive to compensatory damages and civil penalties imposed for comparable misconduct.
Although it could have done so, the Supreme Court did not establish a bright-line maximum ratio between compensatory and punitive damages for purposes of determining whether a particular award exceeded due process limitations. Instead, it expressed a strongly held view that few punitive damage awards exceeding a single-digit ratio should survive due process scrutiny - at least in cases of substantial damages. Although more fuzzy than precise, that ratio guideline was aimed at limiting punitive damage awards to amounts which bear a reasonable relationship to the harm caused by the conduct in question.
The “Exxon Valdez” case
In the wake of its treatment of constitutional due process limits on punitive damage awards over the past two decades, last year the Supreme Court granted Exxon's request to review the Ninth Circuit's ruling that Exxon must pay punitive damages of $2.5 billion, the largest punitive damages award ever allowed by a U.S. federal court of appeals. Interestingly, the issue on appeal was not whether the award violated constitutional due process, although due process considerations clearly influenced the court's decision. Instead, Exxon challenged the award on three different substantive maritime law arguments, the proper understanding of which calls for a brief review of both the evidence presented to the jury about the oil spill and the history of the case in the lower courts.
On the fateful day of 24 March 1989, the tanker “Exxon Valdez” plied Prince William Sound with its cargo of Alaskan crude oil. The ship was under the command of a master who had a history of alcohol abuse and had imbibed the night before. Heeding a warning of ice conditions in the usual southerly course, the ship switched to an alternate course that took her outside the shipping lane and would later require a course correction to avoid Bligh Reef. The master went to his cabin minutes before the required course correction, leaving it to a junior mate who lacked the proper license to pilot the vessel in those waters himself. Tragedy struck when the mate failed to timely make the course correction and the ship grounded on Bligh Reef, ripping the hull open and spilling 11 million gallons of crude oil into the water.
Exxon paid about $2.1 billion to clean up the spill. It also pleaded guilty to certain crimes under federal statutes and paid a fine of $25 million and restitution of another $100 million. In addition, Exxon entered into a consent decree with the federal and state governments to pay at least $900 million to restore natural resources. None of these liabilities, however, were in question in the case heard by the Supreme Court.
Private parties seeking damages for harm to them individually were legion. The claims of fishermen, Native Alaskans and landowners were all consolidated into one case in federal court in Alaska, including a claim for punitive damages asserted on behalf of a class numbering more than 32,000 plaintiffs. In a trial conducted in three phases, the jury first considered the recklessness of Exxon and the ship's master for punitive liability, then set compensatory damages and finally set punitive damages.
The trial court instructed the jury that Exxon was responsible for reckless acts of a managerial officer or employee acting within the course and scope of employment. Exxon did not dispute that the master was a managerial employee and the jury determined that both the master and Exxon were potentially liable for punitive damages.
In the course of the proceedings, it was found that compensatory damages incurred by all plaintiffs amounted to $507.5 million. Exxon did not actually pay that much in damages, however, because it voluntarily settled many of the compensatory damages claims over the long course of the litigation.
When it came time for the jury to consider awarding punitive damages against the ship's master and Exxon, the trial court instructed the jury to consider the reprehensibility of their conduct, their financial status, the size of the harm flowing from the spill, and any mitigating facts. The jury awarded two sums of punitive damages - $5,000 against the master individually and $5 billion against Exxon.
The sheer magnitude of the punitive damages award naturally caused Exxon to seek relief on appeal to the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit, however, afforded Exxon no relief as to its exposure to punitive damages for acts of its employees. It affirmed the trial court's jury instruction on corporate liability for the acts of managerial agents.
Exxon did make some headway as to the quantum of punitive damages, though. The Ninth Circuit twice remanded the case to the trial court for adjustments to the enormous punitive damages award in light of the Supreme Court's emerging line of due process decisions discussed earlier. Eventually, the Ninth Circuit reduced the punitive damages award to $2.5 billion - obviously still a gargantuan sum.
Hopeful of either overturning the punitive damages award completely or at least reducing the amount further, Exxon persuaded the Supreme Court to grant a writ of certiorari to address three punitive damages issues.
Issues addressed by the Supreme Court in its recent decision
The Supreme Court considered three maritime law questions on Exxon's appeal. The questions, and how the Supreme Court treated them, are addressed serially below.
1. Can a shipowner be held liable for punitive damages if it did not acquiesce in the harmful actions of managerial employees?
This question has very broad application to any ships trading with the U.S.. If the ship's officers and crew engage in reckless (or worse) conduct causing great harm without consent or participation of owners, does federal maritime law only allow punitive damages to be awarded against the officers and crew in question, or may punitive damages also be imposed upon owners?
Exxon specifically argued that the trial court erred when it instructed the jury that a corporation “is responsible for the reckless acts of … employees … in a managerial capacity while action in the scope of their employment.” Thus, the Supreme Court was asked to decide whether maritime law allows a corporation to be liable for punitive damages on the basis of the reckless acts of its managerial agents. This question rightfully begged for Supreme Court attention inasmuch as lower federal courts of appeal are divided on this issue.
Exxon relied primarily on two longstanding Supreme Court decisions to support its argument that punitive damages are not available against a ship owner for a management employee's reckless conduct. In the “Amiable Nancy”, a Supreme Court admiralty case dating back to 1818, the officers and crew of the privateer “Scourge” had plundered the neutral ship “Amiable Nancy”. Respected admiralty jurist Justice Story wrote that only compensatory damages were available to the “Amiable Nancy”'s owner as the owners neither directed, countenanced, nor participated in the plundering and thus should only be bound to “repair all the real injuries and personal wrongs sustained by the libellants ... but ... not …to the extent of vindictive damages.”
Exxon also cited Lake Shore & Michigan Southern R. Co. v. Prentice, a railway case from 1893 which itself relied on the “Amiable Nancy” decision to hold as a matter of general common law that “[t]hough [a] principal is liable to make compensation for [intentional torts] by his agent, he is not liable to be punished by exemplary damages for an intent in which he did not participate.”
In response, the plaintiff class argued that maritime law should follow the modern rule of land-based common law, whereby a majority of the States allow punitive damages to be pinned on the corporate employer for the conduct of its employee.
Unfortunately, the first question will not be settled until it makes its way to the Supreme Court again in another case. Only eight of the nine Supreme Court justices participated in this case, Justice Alito having recused himself. The remaining eight justices were equally divided yea and nay.
Without the one additional vote needed to affirm or reverse, the Ninth Circuit's ruling that Exxon could be held liable for punitive damages for the conduct of managerial employees was left "undisturbed." Notably, the Supreme Court was quick to point out that "the disposition here [i.e., allowing the Ninth Circuit ruling to stand] is not precedential on the derivative liability question." Thus, the result on this issue was the same as if the question had never been raised, and we must all wait for the Supreme Court to answer to this important question on another day.
2. Did the federal Clean Water Act, as it existed in 1989, implicitly bar punitive damages in this case by making no allowance for them?
Exxon barely managed to get this question before the courts on appeal. That was because it raised the Clean Water Act ("CWA") argument for the first time so long after trial that the plaintiffs argued with some force that Exxon had waived it. The Supreme Court devoted several pages of its decision to the procedural waiver question as a "cautionary tale" before it considered the merits of Exxon's argument that had not been raised until "very, very late" in the game.
Exxon had asked the trial court to dismiss punitive damages on various grounds shortly after the jury awarded them, but it did not specifically argue that the CWA barred punitive damages at that time. The trial judge, unmoved, denied the request. About one year later Exxon explicitly raised CWA argument for the first time in a renewed attack on punitive damages. Still unmoved, the trial court rejected it.
Then came Exxon's appeals to the Ninth Circuit. Although Exxon did not raise the CWA argument until 13 months after trial, the Ninth Circuit decided the argument had not been waived because Exxon had earlier argued preemption under other federal statutes.
The Supreme Court was not quite as forgiving, but ultimately entertained the argument on the merits. It pointedly disagreed with the Ninth Circuit's view that a party can preserve an argument under one statute by previously citing to others. Nonetheless, it ultimately agreed with the Ninth Circuit's conclusion that Exxon's CWA argument could be entertained because, when circumstances warrant it, courts of appeal have discretion to consider an argument that had not previously been passed upon by the trial court. Thus, the Supreme Court also considered the CWA argument as a nod to broad appellate discretion even though it found fault with how the Ninth Circuit addressed the procedural waiver issue.
When it finally reached the merits of Exxon's CWA preemption argument, the Supreme Court disposed of it in fairly short order and agreed with the Ninth Circuit's conclusion that the argument fails. Exxon argued that CWA's penalty provisions preempted punitive damage awards for water pollution under federal maritime law. The Supreme Court found Exxon's argument to be "untenable" in light of its concession that those same CWA penalty provisions did not displace compensatory remedies for water pollution. It wrote that nothing in the CWA's text "points to fragmenting the recovery scheme this way, and we have rejected similar attempts to sever remedies from their causes of action." Moreover, the Supreme Court found "no clear indication of congressional intent to occupy the entire field of pollution remedies." Nor did it find that allowing punitive damages in oil spill cases will frustrate the CWA’s remedial scheme. Accordingly, having barely survived a procedural waiver challenge, Exxon's CWA preemption argument quickly succumbed to scrutiny on the merits.
3. Did the reduced punitive damages of $2.5 billion in this case exceed what should be allowed under maritime law?
The Supreme Court devoted most of its opinion to the third and, perhaps, most important question as to how much is too much when it comes to punitive damages under maritime law. It held that the reduced $2.5 billion punitive damages award against Exxon was excessive and that, in the circumstances presented in this case, punitive damages should not exceed an amount equal to compensatory damages. Because the question presented was one of first impression, the Supreme Court looked to punitive damages law as it has developed ashore in order to inform its decision.
It first reviewed in detail the historical rationales for allowing punitive damages, observing that "the consensus today is that punitives are aimed not at compensation but principally at retribution and deterring harmful conduct." Therefore, it has developed at common law throughout the U.S. that conduct properly described as gross negligence or worse can lead to a judge or jury punishing or making an example of the bad actor by way of punitive damages.
The Supreme Court then noted that more egregious degrees of bad conduct, difficulty posed to detect it, and smaller size of compensatory damages can all lead to awards of punitive damages using higher ratios of punitive to compensatory damages.
Next, it observed that even though several states in the U.S. either bar punitive damages or allow them only in rare circumstances and others place flat dollar or or ratio caps (i.e., punitive to compensatory damages), nonetheless "punitive damages overall are higher and more frequent in the United States than they are anywhere else." Clearly the Supreme Court saw this as a problem and not a subject of national pride.
At the same time, interestingly enough, the Supreme Court found that recent empirical studies tend to undercut criticism of punitive damages award in the U.S., at least in certain respects. Most notably, the median ratio for punitive to compensatory damages is less than 1:1, and the percentage of cases resulting in punitive damages awards has not shown a marked increase in the past several decades. The data, however, reflected a class of "outlier cases [that] subject defendants to punitive damages that dwarf the corresponding compensatories." That led the Supreme Court to conclude that the "real problem . . . is the stark unpredictability of punitive awards." The balance of its decision was therefore addressed toward reaching more predictable outcomes based on "common sense of justice" that would "bar penalties that reasonable people would think excessive for the harm caused in the circumstances."
The Supreme Court considered three alternative approaches to the problem at hand. One involved formulation of appropriate jury instructions intended to result in appropriate punitive damage awards. The two others were quantitative approaches.
The Supreme Court opted away from addressing the problem with jury instructions. It expressed skepticism that instructions to juries alone would bring about the predictability sought, citing the analogous experience with criminal sentencing.
Of the two quantitative approaches, the Supreme Court rejected a “hard dollar” cap on punitive damages. It recognized that there is no “standard” injury, making it impossible to select a particular dollar figure which could fairly apply across the board.
In the end, the Supreme Court chose a ratio or maximum multiplier approach, obviously guided by the empirical studies of punitive damage awards over time, especially the median ratio of less than 1:1 for punitive to compensatory damages. Thus, it adopted a 1:1 ratio as the “fair upper limit" in maritime cases like this one where there were substantial compensatory damages of $507.5 million and conduct no more blameworthy than recklessness. Accordingly, the original punitive damages of $5 billion that the jury had awarded was reduced nearly 90% to an amount equal to compensatory damages - a reduction in the ratio from nearly 10:1 to 1:1.
Effect of EXXON VALDEZ decision and issues to be sorted in later cases
So what is the ultimate effect of the Supreme Court decision and what is left to be decided in future cases? In the first place, there is now more predictability regarding the outer limits of punitive damages in most federal maritime cases. In its string of constitutional law decisions on punitive damages, the Supreme Court developed the rule that ratios of punitive to "substantial" compensatory damages exceeding 9:1 could withstand constitutional challenge only in the most extreme cases. And in maritime cases, at least those which involve bad conduct no more blameworthy than recklessness and "substantial" damages, the outer limit ratio under substantive maritime law is now 1:1.
Those seeking to recover punitive damages can now be expected to label any bad behavior as something worse than reckless (e.g. malicious, willful, or profit-driven) to differentiate their claims from the “Exxon Valdez” case. They will furthermore likely contend that ratios greater than 1:1 may still apply in all cases where compensatory damages fall below the range of $507.5 million (even though there is nothing in the Supreme Court's opinion to suggest that $507.5 million set some sort of a bench mark for "substantial" damages). Fortunately the courts should be well equipped to recognize such contentions for what they are and apply a rule of reason which should keep the vast majority of punitive damage awards in maritime cases within the guidelines laid down by the Supreme Court.
As previously mentioned, the Supreme Court split on the question of whether ship owners could be held liable for punitive damages due to the misdeeds of managerial employees. That was a disappointment and we will all have to wait for it to rule on that important issue in another case that will end the disagreement between the lower federal courts. The Supreme Court all but invited another case to present the same issue for resolution and hopefully an appropriate case will appear on the horizon in the near future.
Although it is always tricky business to predict how any given justice might view a particular legal issue, one has to wonder whether the missing Justice Alito might have tipped the scales 5-4 in favor of a rule that denies punitive damages awards against ship owners for the acts of managerial employees at sea. Not only would that seem to be consistent with the view that Justice Alito tends toward the conservative end of the spectrum, but it would also be in keeping with Supreme Court doctrine that judge-made federal maritime law should take its signals from Congress when Congress has legislated in a relevant area of law. After all, more than 150 years ago, Congress enacted the Limitation of Liability Act, allowing ship owners to limit their liability on all relevant casualty claims to the value of a vessel at the end of the voyage in question unless the owners had privity or knowledge of the causative fault.
Finally, although the Supreme Court definitively overruled Exxon's argument that the CWA impliedly barred punitive damages for spilling oil, the decision on that point is probably limited to the CWA as it existed in 1989 when the spill occurred. The “Exxon Valdez” incident occurred prior to the passage of the Oil Pollution Act of 1990 ("OPA 90") - indeed, the “Exxon Valdez” incident was the catalyst for OPA 90. That legislation that dramatically changed the law of maritime oil spills in the U.S.. At least one of the lower federal courts of appeals has held that punitive damages are barred essentially because Congress did not see fit to provide for them in OPA 90. That issue will likely be tested in other cases following the “Exxon Valdez” decision and the analytical framework that was applied there. Another significant oil spill case will have to wind its way to the Supreme Court for this OPA 90 preemption issue to be finally resolved.
With thanks to Robert Bocko and Jon Zinke of Keesal Young & Logan for preparing this article.
