Although the grounding of the Exxon Valdez occurred almost twenty years ago, its consequences are still being felt in environmentally sensitive industries. In May 2007, the Ninth Circuit issued its final opinion on the punitive damages award from the resulting litigation, cutting the jury's $5 billion award to $2.5 billion on due process grounds. The Ninth Circuit's approach to evaluating punitive damages in In re Exxon Valdez is an important precedent providing guidance for environmental defendants to limit exposure to massive punitive damages claims should a similar incident happen in the future.

Punitive Damages Awards, Due Process and the United States Supreme Court

The Exxon Valdez ran aground in Prince William Sound in Alaska in March of 1989. At that time, common-law principles governed punitive damages and due process considerations — the Constitutional requirement that the defendant have fair notice that such a penalty could result from its conduct — had never led the Supreme Court to invalidate a punitive damages award. However, in the early 1990s, the Supreme Court began a series of substantive reviews of punitive damages awards, culminating in its decisions in BMW v. Gore, 517 US 559, in 1996 and State Farm v. Campbell, 538 US 408, in 2003. In these cases, the Supreme Court identified three factors to evaluate to ensure that punitive damages do not violate due process. Reprehensibility of the conduct is the first and most important factor, followed by the ratio of the punitive award to the actual harm and then the difference between the punitive damages and any civil and criminal penalties applicable in the particular state based on the alleged conduct.

Within the primary factor, reprehensibility, the Supreme Court defined five sub-factors: (1) the type of harm; (2) reckless disregard for health and safety of others; (3) financially vulnerable targets; (4) repeated misconduct; and (5) intentional malice, trickery or deceit. It did not rank these factors, instead indicating that if only one sub-factor is present, a punitive damages award may be invalidated and the absence of any renders punitive damages suspect.

The Supreme Court did not enunciate a bright-line test on the ratio of punitive damages to actual harm, but it did state that single-digit ratios are "more likely to comport with due process." Within those ratios, other factors, such as whether the actual harm is hard to quantify or the conduct is particularly egregious, may warrant higher ratios.

Ninth Circuit Court Review of the Exxon Valdez Punitive Damages Award

The punitive damages award in the Exxon Valdez case has been pending in the Ninth Circuit over a timeline that has overlapped that of the Supreme Court in fleshing out the more general issue of due process. In 1994, the Exxon Valdez jury first returned a $5 billion punitive damages award on top of its $287 million compensatory damages award. Over the intervening years, as the Supreme Court undertook its review of punitive damages that led to the BMW and State Farm decisions, Exxon appealed the punitive damages award several times, resulting in three remands and revised punitive damages awards of first $4 billion and then $4.5 billion. Exxon once again appealed and the Ninth Circuit Court of Appeals issued its final Exxon Valdez opinion in May 2007. In re Exxon Valdez, 2007 WL 1490455.

In this opinion, the Ninth Circuit promulgated its test for reviewing punitive damages. Its test largely adopts the Supreme Court approach, focusing on reprehensibility, the ratio of punitives to actual harm and comparable statutory penalties; but, in a potential boon to defendants, it also adds as a factor a review of mitigating circumstances. Similarly, the Ninth Circuit deemed reprehensibility to be the most important element of the three, using the same sub-factors used by the Supreme Court — the type of harm, reckless disregard for health and safety of others, financially vulnerable targets, repeated misconduct and intentional malice, trickery or deceit.

The Ninth Circuit's review of the Exxon Valdez punitive damages award provides extensive analysis and explanation of its punitive damages test, starting with the reprehensibility sub-factors. First, it held that physical and emotional types of harm are more reprehensible than economic harm. While the spilling of 11 million gallons of oil into Prince William Sound resulted in obvious economic harm, the court deemed the conduct more reprehensible because of the mental and emotional impact on the lives of the thousands of injured claimants. Notably for environmental defendants, the Court based its rationale for tying the punitive award to this mental and emotional damage on the "[entirely predictable] massive disruption of lives...when a giant oil tanker goes astray." The Court considered as a deliberate act that Exxon knowingly put a relapsed alcoholic at the helm.

Second, the Court found Exxon's conduct more reprehensible because of its reckless disregard for the health and safety of others. The Court based its holding on the grave risk the grounding of the Exxon Valdez created for the crew and its rescuers, noting that the oil could easily have ignited.

Third, the Court indicated that intent to harm vulnerable parties or categories of people increases a defendant's blameworthiness. The Court held that although subsistence fishermen are financially vulnerable, Exxon did not intend to target them. This sub-factor was thus inapplicable. Importantly, the Court held that although the intent to harm financially vulnerable parties amplifies reprehensibility, the absence of such does not reduce it.

Fourth, the Court found that repeated action existed, as Exxon permitted the captain to command its ships for three years after it knew he was a relapsed alcoholic.

Fifth, the Court determined that Exxon's behavior knowingly put others at risk, but it did not find the acts intentional. Had Exxon acted intentionally in spilling the oil, the court would have assigned the conduct the highest level of reprehensibility.

Significantly, the Ninth Circuit added a sub-factor not found in the State Farm decision, holding that mitigation of reprehensibility must be considered with the other sub-factors to encourage defendants to quickly address similar problems. Following the Exxon Valdez disaster, Exxon promptly began cleanup efforts and compensatory payments to those harmed. These actions, the Court held, decrease the level of reprehensibility.

After determining reprehensibility, the Court calculated the actual harm in order to establish the ratio of punitive damages to harm. In so doing, it held that while the actual damages calculation may be reduced by pre-judgment compensation paid by the defendant, such payments cannot be applied if the result would eliminate punitive damages altogether. The Court ultimately held that Exxon caused $504 million in actual damages and used that figure, even though Exxon had already settled hundreds of millions of dollars in claims.

Next, the Court analyzed the reasonableness of the punitive damages ratio. Given the Supreme Court's holding that single-digit ratios are appropriate, the Ninth Circuit indicated that 9 to 1 awards are only permissible for egregious acts with minor economic damage or those in which harm is hard to detect or quantify. Thus, the Court determined that because Exxon's conduct was egregious and involved great economic damage, but was unintentional and Exxon acted quickly to mitigate the damage, a 5-to-1 ratio was appropriate and consistent with due process.

Finally, the Court briefly addressed the comparability of statutory penalties for oil spills and found that federal and state laws support significant penalties for Exxon's conduct.

Thus, the Ninth Circuit found that in order to conform to due process requirements under this analysis, a punitive damages award of $2.5 billion was appropriate.

Looking Forward

The Ninth Circuit's decision in the Exxon Valdez case suggests some guidelines for environmental defendants on operating an at-risk enterprise and, in the unfortunate event of an accident, reducing exposure to punitive damages awards.

Here, Exxon's reprehensibility was increased due to its carelessness, coupled with the knowledge that a spill would result in great harm, economic and otherwise; but at the same time, its level of reprehensibility was diminished thanks to its swift environmental mitigation and compensatory payments to victims. This precedent demonstrates that companies can work to reduce the potential degree of reprehensibility that a court or jury may find by strictly adhering to regulatory guidelines, particularly those aimed at human health and safety. Exxon was penalized not just for the environmental impact of the spill, but also for the grave risk it created for the crew and rescue workers. In addition, swift attention to correct known regulatory violations or dangerous activities will likely drive down the reprehensibility calculus, as the Ninth Circuit made it clear that evidence of repeated activities will increase punitive damage awards.

Moreover, while $2.5 billion is still a substantial penalty, the court explicitly stated that Exxon's quick steps to remediate the situation and compensate injured parties without protracted litigation contributed greatly to the 50 percent reduction from the original $5 billion award. This mitigation factor must now play a role in the settlement calculus environmental defendants use following environmental accidents or other harm. Settling with certain damaged parties in advance of litigation with others may have strategic implications that reduce a defendant's exposure in the long term.