26 Jun 2008 Court Continues Welcome Trend of Reigning in Excessive Punitive Awards

From Research Associate Justin Danhof comes this look at the decision in Exxon Shipping Co. v. Baker, handed down June 25:

In 1989, the Exxon Valdez supertanker grounded on a reef off Alaska’s coast, spilling millions of gallons of oil. Since that time, Exxon has spent $2.1 billion in clean-up efforts, $900 million to settle a civil lawsuit and $303 million in voluntary payments to private parties.

Today, the U.S. Supreme Court ruled, in the case of Exxon Shipping Co. v. Baker, that that is enough… almost.

The Supreme Court did rule that punitive damages are allowed under maritime law. In a 5-3 decision, however, the majority directed the lower court to reduce the punitive award from $2.5 billion to no more than $507.5 million.

The Court took a commonsense approach by aligning punitive damages with compensatory damages. Associate Justice David Souter, writing for the majority, rejected a hard cap for punitive damages and instead affixed the maximum punitive award to the compensatory award: a one-to-one ratio. Although these studies were not dispositive, the Court cited empirical studies showing that a one-to-one ratio is consistent with America’s average punitive award.

The decision was made under maritime common law, not the due process clause under which most punitive challenges are brought. Justice Souter explained:

[t]oday’s enquiry differs from due process review because the case arises under federal maritime jurisdiction, and we are reviewing a jury award for conformity with maritime law rather than the outer limit allowed by due process.

Although the decision did not set direct precedent for future constitutional claims, it offered guidance to lower courts and was instructive of the Court’s position towards punitive awards generally.

The Court was mindful that punitive awards are often criticized for their unpredictability. This unpredictability runs counter to a main goal of punitive awards: to provide an example. The Court explained that,

…a penalty should be reasonably predictable in its severity so that even Justice Holmes’s ‘bad man’ can look ahead with some ability to know what the stakes are when choosing one course of action or another.

This decision goes a long way towards achieving this goal.

The Court’s decision continues a welcome trend of the court reigning in excessive punitive awards. In State Farm v. Campbell (2003), the Court held that a single-digit maximum (i.e., no greater than a nine-to-one punitive to compensatory ratio) is appropriate in all but the most exceptional cases. Indeed, the Exxon decision follows State Farm‘s guidance which suggested that,

[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.

Justice Souter’s majority opinion was joined by Justices Kennedy, Scalia, Thomas and Chief Justice Roberts. Justices Breyer, Ginsberg and Stevens dissented, arguing that the Court went too far in limiting punitive awards. Justice Alito, a holder of Exxon stock, took no part in the decision.

Excessive punitive awards are a scourge on the business community; reducing innovation, investment and economic growth. Today’s decision sends an appropriate message that companies will be held accountable for their mistakes, but not bankrupt by untenable punitive award figures.