PUNITIVE DAMAGES

By Thomas R. Yocum, Esq.

            In the historic case of Exxon Shipping Company v. Baker, the U.S. Supreme Court rendered a decision on June 25, 2008 limiting punitive damages to the amount of one times the amount of compensatory damages.  This business-friendly decision continued a trend by the Supreme Court to place limitations on punitive damages. 

            The Exxon case arose out of the Supertanker Crude Oil spill in Prince William Sound, Alaska in 1989.  Class actions were brought against Exxon by 32,000 plaintiffs consisting of commercial fishermen, native Alaskans and land owners who sought both compensatory and punitive damages arising from the 11,000,000 gallon crude oil spill into Prince William Sound.

            The claim for punitive damages was based upon the alleged “reckless” acts of the tanker captain who had a blood alcohol content estimated at three times the legal limit for driving in most states at the time of the accident.  The captain had a history of alcoholism, had completed a 28-day alcohol treatment program while employed by Exxon, but dropped out of prescribed follow-up program and stopped going to Alcoholics Anonymous.   The evidence presented at trial to the jury showed that the captain continued to drink alcohol at many places, including aboard Exxon tankers.  At the trial, witnesses testified that before the Valdez left port the night of the disaster, the captain downed approximately 15 ounces of 80 proof Vodka. 

            As the Valdez left port, at a critical moment, the captain inexplicably exited the bridge, leaving a tricky course correction to unlicensed subordinates.  Based upon the evidence, the jury awarded $287 million in compensatory damages and $5 billion in punitive damages against Exxon.  The 9^th Circuit Court of Appeals reduced the punitive damage award to $2.5 billion. 

            The Supreme Court held that the punitive damages awarded against Exxon were excessive as a matter of maritime common law.  In the circumstances of this case, the award should be limited to an amount equal to compensatory damages.

            The Court discussed the nature of punitive damages which are intended to punish and deter defendants and certain conduct.  A corporation may be held liable for the reckless acts of its employees in a managerial capacity while acting in the scope of their employment. 

            While there is a perception that runaway punitive damages are a recent American phenomenon, historical and recent statistical data is otherwise.  Punitive damages have been provided for in legal codes from ancient times up through the Middle Ages and more recently (within the last 300 years) Anglo-American law.  The Code of Hammurabi provided for ten-fold penalty for stealing the goat of a freed man.  The statute of Gloucester in year 1287 provided for treble damages for waste of an interest in real property. 

            The Court noted that some states in the U.S. do not permit punitive damages at all, and some states, such as Ohio, place limitations on punitive damages as a matter of state law.  Nevertheless, punitive damages overall are higher and more frequent in the United States than anywhere else. 

            Notwithstanding the perception of runaway punitive damage awards in America, statistical studies presented to the Court showed that the median ratio to compensatory awards has remained less then 1:1.  Nor did the data presented to the Court substantiate a marked increase in the percentage of cases with punitive awards over the past several decades.

            Notwithstanding this apparent restraint in the award of punitive damages, the Court expressed concern about the unpredictability, fairness and consistency of punitive awards.

            While failing to site any state court which had adopted a “limitation on punitive damages based upon a ratio of punitive to compensatory damages, the Court noted that a slim majority of state legislatures which had limited punitive damages did so based on a ratio of 3 times compensatory damages.  Ohio’s limitation on punitive damages is 2 times compensatory damages.” O.R.C. §2315.21 (D)(2)(a). 

            The Court placed great weight on statistical evidence presented regarding punitive damage awards in the U.S., and concluded that a ratio of 1:1 is a fair upper limit for an award of punitive damages in maritime cases. The 1:1 ratio would be applied against Exxon based upon the trial court’s calculation of total relevant compensatory damages in the amount of $507.5 million dollars.

            Questions remain unanswered as to whether the 1:1 punitive damage limitation will be applied more broadly or limited to federal maritime cases.  One point is clear, the Exxon decision marks an historical point in the trend of both courts and legislatures limiting punitive damages awards.  While this trend will be generally welcomed in the business world as a “business friendly” decision, questions remain as to whether a 1:1 limitation is sufficient to deter certain wrongful conduct which may be fraudulent, or even criminal.  Further, treble damage awards remain available based upon certain legislative remedies at both the state and federal levels.