« Previous | Main | Next »

Oil and water

February 28, 2008 5:24 PM

One thing was clear after the argument before the Supreme Court in the Exxon Valdez case: It's absolutely unclear how the Court is going to resolve it.

For 90 minutes, the justices struggled to come up with a framework for deciding how much of the $2.5 billion in punitive damages Exxon will have to pay. That's the additional price-tag the oil giant is facing for spilling 11 million gallons of crude oil into Prince William Sound two decades ago—a spill Exxon's lawyer called the "one of the worst environmental tragedies in U.S. history."

The stakes are enormous---for Exxon and the 32,000 fishermen and villagers in Alaska who lost their livelihoods, but doctrinally, in the development of the law. Because on this case, as the justices made plain yesterday, the Court is writing on a blank slate.
The facts of the case are well known, at least to anyone over the age of 40. Capt. Joseph Hazelwood, the master of the ship and a lapsed alcoholic, was drunk and in his cabin when the supertanker ran aground on a reef and spilled millions of gallons of oil. It coated hundreds of miles of coastline and beaches, causing staggering environmental damage.

Despite years of cleanup efforts, the oily residue still remains on rocks and beaches for anyone to pick up, which is what one of the plaintiffs did. She brought it to Washington in a jar, and was showing it to reporters after the arguments yesterday.

After the spill, Exxon fired Hazelwood and paid $3.4 billion in fines, compensatory damages and cleanup costs. But the people harmed by the spill got very little—thus far, about $15,000 each. They stand to get about $75,000 more apiece if the Court upholds a $2.5 billion punitive damage award against Exxon.
Exxon says that's too much and argues it's paid enough—and that punitive damages are inappropriate in the case. Now that sounds pretty much like what any corporation sacked with punitive damages argues, whether its Phillip Morris or State Farm or BMW, and the Court over the past decade or so generally has sided with business to impose constitutional limits on those damage awards.

But this case is different. The Court isn't looking at whether the big-dollar damages awards are an excessive punishment under the Constitution. Instead, it will decide whether punitive damages are available for oil spills and other incidents at sea under maritime law, which applies in this case because the Valdez, obviously, was at sea when she ran aground on a reef with a drunken captain aboard.

Because the case is under maritime law, the Court will not decide the bigger questions about the constitutionality of punitive damages. It specifically declined to review whether the $2.5 billion jury award is excessive under the Constitution's Due Process Clause.

Instead, it is looking at rules nearly as old as the nation itself for vessels at sea—and whether those rules allow for punitive damages to punish misconduct by ship captains.

And there isn't a whole lot of precedent for the justices to rely on in making that decision—as Justice Ginsburg sharply pointed out early in the argument when Walter Dellinger, Exxon's lawyer, tried to argue that the rules had "been settled for 200 years."

"Mr. Dellinger, how was that rule settled?" interrupted Ginsburg.

"It's rather, I think, an exaggeration to call it a long line of settled decisions in maritime law," said Ginsburg.
And that pretty much settled that.

So with this blank slate, how will the justices start making the first marks? The most fascinating thing about the argument—and it really was one of the most fascinating arguments of the term--was watching the justices explore different proposals and options to put some limits on punitive damages.

You saw Justice Scalia—who has long refused to put constitutional limits on punitive damages (he doesn't see it in the Constitution any more than he sees a right to abortion in the Constitution)—free to weigh in and discuss a framework.
You saw Chief Justice Roberts, who has not ruled squarely on that broader constitutional issue, expressing skepticism about punitive damages and exploring the differences in maritime law—an area he knows well, having argued (and won) the important maritime case, Grubart v Great Lakes Dredge and Dock, which came about after the great Chicago flood. That case, written by Justice Souter, is one of his favorites—as a lawyer he quoted it frequently as an advocate, because it squarely rejected confusing multi-factor tests for admiralty jurisdiction.

You saw Ginsburg—who always is prepared at argument, but yesterday exhibited an almost astoundingly expert level of knowledge about this tortured and complex case—pressing Dellinger on the record, on precedent and on federal procedural rules. It was an extraordinarily impressive display, and to many observers she clearly got the best of the argument.

And you saw Souter looking back at the history of maritime law, how it developed centuries ago because ships were different than buildings. In the old days, a ship was completely cut off from communications once it set sail, which is why you had more limits on liability for the corporate officers back in the home office. Obviously not true today.
There was a lot to discuss, like whether Hazelwood was high enough in the company's management for him to subject Exxon to this kind of penalty. But here's the bottom line: The justices seemed to be, if anything, moving toward a rule that would be even more restrictive in these maritime cases than what they've said the Constitution limits.

In those cases, the tobacco, insurance and automobile cases, the Court has said that few awards exceeding a single-digit ratio between punitive and compensatory damages would satisfy due process. And it's suggested that four times the amount of compensatory damages might be close to the line.

But it hasn't been able to fashion a clear rule—Scalia and Thomas would say that's because the justices are just making all this stuff up, and that the Constitution doesn't say squat about ratios or punitive damages.

But in the maritime law context, which is at issue here, the justices have more freedom to just make it up—to craft a framework and adopt some clear rules.

It was Souter who best summed up the problem—and the opportunity for the Court in this case:

"We've spent the last decade or so of this Court dealing with the problem of how to set constitutional limits for awards which sort of by most people's standards verged on the excessive. The problem that we've had—and we've had two problems in coming up with those constitutional standards:

"One, is we simply can't substitute ourselves as lawmakers for the State. We're talking about constitutional limits, not optimum standards," Souter said. "And number two, given those limits on us, we have not been able to come up with anything that could be called determinant standards."

The Court, for example, has never found a sufficient reason for imposing an absolute ratio—to say punitive damages can never, ever, ever be more than 5 or 10 times compensatory damages.

But here, as Souter pointed out, the Court could do that. It's sitting as a kind of common-law court, more in the position of the states. So it could just pick a number—a clear administrable standard—to limit punitive damages in these kinds of cases.

And at least three justices seemed ready to adopt a clear formula to restrain punitive damages—maybe setting it at double or triple the compensatory damages. That's significant—because you would think bright-line rules and punitive damages go together about as well, as, say, oil and water.

Why not do that? Souter asked Stanford Law Professor Jeffrey Fisher, arguing for the plaintiffs. Why not just say our number is going to be double the compensatory damages, and that's the limit?

"Would that be an illegitimate thing for us to do or an unwise thing for us to do?" Souter asked.

"Well, I think it would---I'll stick with unwise, Justice Souter," Fisher responded, pointing out that the states didn't have ratios that would limit damages in that way.

But Justice Kennedy jumped in, enamored with the idea of a bright-line rule, much as Scalia seemed to be. And Justice Breyer weighed in, worrying that if punitive damages were to deter future misconduct, why should these people get the money, since they've already been compensated? (Earlier, Breyer had suggested a framework that assessed at damages based on how reprehensible the misconduct, a system that though lacking in clarity and predictability, may make more sense than plucking a number out of thin air.)

At any rate, all this is very good news for Exxon. Because an opinion along these lines—adopting a firm multiplier doubling compensatory damages--would be a huge win. It was ordered to pay close to half a billion dollars in compensatory damages. So if you double that—well, even someone as math challenged as me can see it ain't close to $2.5 billion, which was 5 times the amount of compensatory damages. And beyond that, think of the billions of dollars in interest that Exxon would save if it could cut the $2.5 billion more than half.

Look, we all understand the lure of bright-line rules. There's something enormously appealing about being able to just have a formula, plug in your numbers and, voila, here's our damages.

But it is hard to see how it would be any more workable in this context—for ships governed by maritime law, which has generally not allowed many punitive awards--than in the cases against the tobacco industry, insurance companies and automakers, where they are more common.

This ruling also could affect things like riverboat casinos and cruise liners, which essentially are floating hotels and restaurants. And it's pretty easy to imagine a scenario where assessing punitive damages at double the compensatory damages would be grossly inadequate to deter or punish a hotel or restaurant.

I actually can't believe my good fortune here, because this gives me a chance to talk about one of my all-time favorite lower court opinions, Mathais v Accor Economy Lodging. It was written by (who else?) the great and, at times, almost certifiably eccentric, Judge Posner.

The case came about after a brother and sister were bitten by bedbugs when they stayed at Motel 6 in Chicago.  The motel knew it had a terrible bedbug problem—its exterminator recommended it spray every room, at the hefty fee of $500 for the entire job. But the motel refused, and instead just started moving people from room to (infested) room when they complained. The problem, as Posner wrote, "began to reach farcical proportions….desk clerks were instructed to call the 'bedbugs' 'ticks,' apparently on the theory that customers would be less alarmed."

A jury awarded the siblings $5000 each in compensatory damages and $186,000 in punitive damages, a whopping 37.2 times the amount of compensatory damages. Motel 6 appealed, saying that ratio was way too high.

Posner agreed that the ratio was out of whack with recent Supreme Court decisions, which had signaled that anything over 4 or 5 times compensatory damages would be too high. (Which, remember, is what Exxon is now facing.)
But Posner rejected their arguments and sided with the bedbug victims. That's because in some cases, as he explained, the compensatory damages are just too low to deter future misconduct—and ratios will not work.

If Motel 6 only had to pay $10,000 or  $20,000 in punitive damages, plaintiffs would be discouraged from suing. The motel would therefore have less of an incentive to stop its bad conduct and could continue concealing-to the best it could—its bedbug infestation.

There would be no deterrence—which is one point of punitive damages.

Now Dellinger argued on Exxon's behalf that punitive damages are designed to deter activities done out of malice—where a company intends to harm and hopes it can conceal it.  Exxon is not like Motel 6. It had no malice. It couldn't conceal its misconduct. And it paid hundreds of millions in compensatory damages—no insubstantial sum.

But what is substantial to Exxon? What would deter future misconduct? Fisher scored big points when he pointed out that the company knew for three years that Hazelwood had a drinking problem and did nothing about it. And it's been noted repeatedly that the $2.5 billion award was only a few weeks of profits for the oil giant.

Moreover, Exxon didn't harm its customers. It hurt people in Alaska. Motel 6 (and a cruise liner) could argue it suffered great reputational costs, and that people were heading for the Red Roof Inn instead—which is deterrence enough. Exxon doesn't have those arguments.  Unlike Motel 6, it wouldn't be losing business to, say, BP, for spilling that oil.

The point of all this is that, despite the obvious appeal of a hard-and-fast ratio, there's a reason beyond the Constitutional one that those things are "unwise," as Fisher would say.

Obviously, you can't apply it in the cases where compensatories are "insubstantial." (See Posner.) And if you carve out that exception, then what constitutes substantial? A week of profits? A day? Three weeks?
Already, that bright-line rule is looking a bit fuzzy.

February 28, 2008 | Permalink | User Comments (2)

User Comments

Posted by: Simon | Mar 3, 2008 9:36:12 AM

Posted by: mike | Jun 25, 2008 11:36:30 PM

Post a comment

Name:

Email Address:

URL:

Remember personal info?

Comments: