Supreme Court issued a decision, described below, of interest to the business
Exxon Shipping Co. v. Baker,
No. 07-219 (previously discussed in the
October 29, 2007 Docket Report).
important decision that could put the brakes on the run-away punitive awards
that have plagued the business community for the last two decades, the Supreme
Court held today that the maximum permissible ratio of punitive to compensatory
damages under maritime law is ordinarily 1:1. Although nominally limited to
punitive damages under federal maritime law, the effect of today’s decision is
likely to reach far beyond maritime law.
arises out of the notorious Exxon Valdez grounding in 1989. A federal
jury awarded a class of fishermen $5 billion in punitive damages to punish Exxon
for its role in causing economic harm to the fishermen. After the Ninth Circuit
cut the punitive damages in half, the Supreme Court granted review to consider
three issues raised by Exxon.
The first issue was whether Exxon could be held vicariously liable for
punitive damages under maritime law for the captain’s misconduct. The Court
affirmed the Ninth Circuit’s holding that it could be by an equally divided
court (Justice Alito having recused).
The second issue was whether the Clean Water Act preempts punitive damages
awards arising from oil spills into navigable waters. The Supreme Court
unanimously (8-0) agreed with the Ninth Circuit that it does not.
The third issue was whether the $2.5 billion punitive award is excessive
under maritime law. By a 5-3 vote, the Court concluded that it is. In an opinion
by Justice Souter, the Court explained that studies reflect that the median
ratio of punitive to compensatory damages is less than 1:1, but that the size of
punitive awards for similar conduct varies widely. This, the Court observed,
demonstrates that “[t]he real problem
. . . is the stark unpredictability of punitive awards.” Id. at 26.
Accordingly, the Court held that “a 1:1 ratio, which is above the median award,
is a fair upper limit” in maritime cases. Id. at 40. The Court also
suggested that, under the facts of this case, “the constitutional limit may well
be 1:1” too. Id. at 42 n.28. The Court left open the possibility of
higher ratios for cases in which there is “intentional or malicious conduct” or
“behavior driven primarily by desire for gain” and/or cases in which there was
only “modest economic harm” or a low likelihood that the misconduct would be
detected. Id. at 40.
Justices Stevens, Ginsburg, and Breyer dissented from the Court’s ruling on
the third issue. Of particular note, Justice Ginsburg asked rhetorically in her
dissent: “On next opportunity, will the Court rule, definitively, that 1:1 is
the ceiling due process requires in all of the States, and for all federal
claims?” Dissent at 2.
Justice Ginsburg has put her finger on what is likely to be a highly
contentious issue in future punitive damages litigation. Although the decision
purports merely to set the limits for punishment under maritime law, it
repeatedly cites with approval the Court’s prior statement that a 1:1 ratio may
mark the constitutional line when compensatory damages are substantial. See
Slip op. at 28, 42. Moreover, the very same concerns the Court expressed about
fairness and reasonable predictability in the maritime context (see id.
at 29) apply equally, if not with more force, in the context of due process.
Finally, the Court’s suggestion that 1:1 might mark the constitutional line in
this case (id. at 42 n.28), not just the limit under maritime law,
seems like a strong hint that the Court does expect and intend its decision to
have a spillover effect into the due process context. That surely serves to make
it one of the most important business cases of the Term.
Mayer Brown filed an amicus brief in this case in support of Exxon on behalf
of the American Petroleum Institute, the American Chemistry Council, the
National Association of Manufacturers, the American Tort Reform Association, and
the Western States Petroleum Association.