Court of Appeal Cuts Punitive Damages Award in Half for Exxon Valdez Alaskan Oil Spill

Exxon Mobil Corp. must pay $2.5 billion in punitive damages to victims of the Valdez oil spill almost two decades ago, the 9th Circuit Court of Appeals decided on December 22, 2006.

On March 24, 1989 at 4 minutes past midnight, the oil tanker Exxon Valdez struck a reef in Alaska's Prince William Sound. The ship, captained by Joseph Hazelwood, spilled a total of 11,000,000 gallons of Alaska North Slope crude oil that devastated wildlife, interrupted commercial fishing and wiped out many businesses. Within two months, the oil had been driven along a path stretching 470 miles to the southwest.

Lawsuits brought by fishermen, landowners and others ensued. On September 16, 1994, the district court found defendants liable for $513.1 million in harm, and a jury assessed $5 billion in punitive damages.

U.S. District Court Judge H. Russell Holland in Anchorage reduced the initial punitive damages award to $4 billion, or 17 times the compensatory damages, after the appeals court ruled in 2001 that $5 billion was too high. Last year, Holland increased the punitive damages to $4.5 billion, after concluding actual harm to the victims was about $500 million. Exxon appealed.

On this third appeal, the court vacated the award and ordered a remittitur of $2 billion, reducing the punitive damages award to $2.5 billion. The appeals court found that the district court had erred in inadvertently including a $9 million overpayment in its calculations, and the total harm component was thus $504.1 million.

In weighing Exxon's conduct, the appeals court said the company kept Hazelwood in command knowing "he had relapsed into alcoholism." Hazelwood was found not guilty of operating a vessel under the influence of alcohol. He was convicted of negligent discharge of oil, a misdemeanor, fined $50,000 and ordered to complete 1,000 hours of community service in Alaska, according to the Exxon Valdez Oil Spill Trustee Council.

The court said Exxon's "reckless misconduct" in the 1989 accident still warranted severe sanctions, but the court further noted that the money spent on cleaning up the spill mitigates "at least to some material degree, the reprehensibility in economic terms of Exxon's original misconduct." The court noted that defendants' conduct was not intentionally malicious, though it was knowing and reckless, and that defendants had promptly attempted to clean up the oil spill and mitigate the damage. Thus, a punitive damages award that corresponded with the highest degree of reprehensibility did not comport with due process, inasmuch as defendants' conduct fell squarely in the middle of the fault continuum. The court concluded that a punitive damages to harm ratio of no more than 5 to 1 was proper.

The U.S. Supreme Court has said that even in egregious cases of misconduct, punitive damages usually should be limited to no more than nine times the compensation awarded to plaintiffs for economic loss.

The $2.5 billion punitive damage award ordered is five times the compensation Exxon has paid so far to all the victims, including the $287 million compensatory verdict and an additional $213 million from settlements with the company.

As a direct or indirect result of the Exxon Valdez disaster, tighter environmental regulations have been imposed on many industries. The most important regulation attempting to protect against a repeat of the spill is the modern standard for tanker ships, which now must be built with double hulls, so that if the outer skin is punctured, no oil will leak.

The case is Baker v. Exxon Mobil Corp., 04-35182, 9th U.S. Circuit Court of Appeals (San Francisco).