U.S. Supreme Court Again Reduces Punitive Damages in Exxon

Raymond Mariani
October 24, 2008 — 1,072 views  

The United States Supreme Court has again addressed the issue of punitive damages in a very recent decision, Exxon Shipping Co. et al. v. Baker, Slip Op. 07-219 (June 25, 2008). This decision concludes a 20-year saga over the appropriate measure of punitive damages for a massive oil spill that occurred off the coast of Alaska and caused economic losses to local residents and communities. The court decided the case on narrow grounds of whether admiralty law permits punitive damages of the magnitude and the ratio to compensatory damages that was awarded by the jury, and modified several times by the trial judge and intermediate appellate court. However, the sweeping history and review of punitive damages jurisprudence, which was not essential to the decision, suggests that this court has not written its last decision eroding punitive damages as a weapon of the plaintiff’s tort bar in the United States.

The court’s decisions over the past few years that addressed whether punitive damages are excessive have relied upon the due process clause in the 14th amendment to the Constitution. That provision prohibits the imposition of grossly excessive or arbitrary punishments. The court has criticized and reversed those punitive damages verdicts as inconsistent with these notions of fundamental fairness and justice, particularly where the awards do not bear a close ratio to the compensatory damages in the case.

Exxon presented several issues for review in this recent decision, two of which have potentially broader implications. Exxon asked the court to reverse and strike the punitive damages award on the grounds that the federal statute governing plaintiff’s damages claims implicitly prohibits punitive damages entirely, because it did not authorize that type of damages explicitly. The court rejected this argument, holding that congressional inaction does not necessarily prove legislative intent. It also noted the inconsistency of Exxon’s position because the other damages awarded, e.g., economic loss with no bodily injury or property damage, are likewise not explicitly authorized by statute, but were not appealed on that basis by Exxon. This suggests that the court will not easily strike punitive awards on the basis of federal preemption or any weak statutory construction.

More importantly, the court addressed whether the ratio of punitive damages to compensatory damages was consistent with the common law of admiralty. The court reviewed the history of punitive damages, from its origins predating English common law to its treatment across a wide variety of jurisdictions. Punitive damages are grounded historically, in part, in compensation, but now are universally used to deter and punish. The majority ultimately concluded that the ratio of punitive awards to compensatory awards can be no greater than 1 to 1 in a maritime case. Accordingly, the case was remanded for entry of a verdict with a punitive damage award not to exceed the compensatory award.

The court looked at three means of tempering the magnitude of punitive awards. It first concluded that verbal admonishments to the jury are insufficient. The wide variety of instructions used and the vagueness inherent in such non-quantitative criteria do not promote the systemic consistency that the court seeks to promote in damages awards. The court also reviewed the use of fixed-dollar amounts. Some states currently impose monetary caps on awards. The court rejected this approach as impractical for judicial management. A fixed-dollar cap requires either an inflation adjustment, which the court found too speculative to fix for the indefinite future, or for a court to adjust the dollar cap over time, which can only occur when a ripe case is presented for review.

The third approach, of employing a ratio was cited as the best available, because it uses an inherent inflation adjustment, namely the gradual increase over time in compensatory awards. While this approach is arguably circular, the court also cited its use of ratios to set the boundaries of punitive damages in the due process cases as a basis to do so again in Exxon for maritime cases. The court surveyed ratios used by various states and other countries, and also cited articles that analyzed the mean and median ratios that are a product of statewide or nationwide awards. As support for its holding of a 1-to-1 ratio for maritime cases, the court noted the maximum in many states of 2 to 1 or 3 to 1, as well as the historic median of 0.65 to 1 cited by one commentator.

What the Exxon decision may predict about restrictions imposed by the court in future punitive damages cases, particularly nonmaritime tort cases, can be discerned from a few different aspects of this decision and the prior landmark cases on the subject. First, the makeup of the panel in Exxon compared to prior decisions suggests a likelihood of further restrictions on punitive damages based on due-process considerations. The most recent punitive damages award cases before the Supreme Court have been: Phillip Morris v. Williams, 549 U.S. 336 (2007) (reversing award because it was based on harm to people other than the named plaintiffs in the case); State Farm v. Campbell, 538 U.S. 408 (2003) (holding that ratio of greater than 9 to 1 will rarely be justifiable under due-process clause); Cooper Industries v. Leatherman Tool Group, 532 U.S. 424 (2001) (the constitutionality of lower court decisions are reviewed de novo, not for abuse of discretion); and BMW v. Gore, 517 U.S. 559 (1996) (three factors to consider in reviewing awards are degree of reprehensibility of conduct, disparity between actual harm and punitive award, and comparison of award to similar cases).

The common members of the majority in those four prior decisions and in Exxon are Justices Souter and Kennedy. Chief Justice Roberts voted with the majority in the cases while he has been on the court, namely Exxon and Phillip Morris. This creates three reliable votes for any further rollback on punitive damages. Justices Scalia and Thomas are both ardent opponents of punitive restrictions based on the due-process clause and joined the majority in Exxon only because it was a maritime case. Justice Ginsburg has opposed any restrictions and has never voted with the majority on the issue.

This leaves three generally supportive but less-predictable jurists on the issue as the swing voters: Justices Stevens, Breyer, and Alito. Stevens voted with the majority in State Farm and Gore and wrote the opinion in Cooper. He appears to have voted against the strict 1-to-1 ratio in Exxon solely because of a philosophical difference on maritime law. Breyer likewise voted with the majority in all four prior cases, but dissented in Exxon on the ratio issue because of the need for less rigidity in maritime cases. Alito recused himself in Exxon due to his ownership of stock in the company, but voted with the majority in Phillip Morris (albeit that was not a ratio case). This voting history indicates a likely five, or perhaps six, justices who would support further restrictions on punitive damages.

Further, certain comments in Exxon suggest that we should watch this space. The majority clearly favors a 1-to-1 ratio generally, not just for maritime cases. It ends the Exxon opinion by stating in the final footnote that a 1-to-1 ratio also might be the constitutional limit in the case had a due process analysis been warranted, because it would have aggregated the compensatory damages of all plaintiffs and then decided if the total was “substantial.” The court had already laid the groundwork for that 1-to-1 ratio in State Farm, holding that an inverse correlation generally should be applied as compensatory damages increase in magnitude.

The majority also notes the inherent authority of the judiciary to shape maritime law, including its remedies, because it is so much more a common law than legislative creation. Of course, many of these same comments could be directed to the common-law history of tort, particularly outside strict liability. While many states have codified certain causes of action for product and other tort liability, torts remain very much a creature of common law.

Lastly, the majority flatly stated that it will not hesitate to act if the Congress does not make the first move. It considers judicial inaction as a shirking of responsibility for crafting necessary common law remedies. The distance between these statements, and the fashioning of additional and perhaps more stringent punitive damage rules in non-maritime cases, is not so great that the current makeup of the Supreme Court cannot cover that ground.

For further information contact, your regular Nixon Peabody attorney or:

Raymond L. Mariani at (516) 832-7520 or [email protected]
Brian C. Dalrymple at (415) 984-8275 or [email protected]

Raymond Mariani

Nixon Peabody LLP