Resident Fellow Ted Frank

This June, the Supreme Court, in a 5-3 decision, reduced the punitive damages in the 1989 Exxon Valdez spill from $2.5 billion to "only" $507 million. Partisans on both sides of Exxon Shipping v. Baker portrayed the decision as a victory for business--but plaintiffs' lawyers will find a lot to like in this case. If anything, the opinion highlights the need for legislative reform of arbitrary punitive damage awards.

In 1994, plaintiffs in the Valdez case sued under federal maritime law. They sought $800 million of damages based on the theory that, contrary to the law of supply and demand, the oil spill had reduced fish prices. That didn't fly. Instead, a jury found only $20 million in damages that Exxon hadn't already paid, for a total of $507 million in compensatories.

The lawyers had better luck when it came to punitive damages. Though Exxon had immediately spent $2.1 billion (two years of profits at the time) in cleanup costs, and another $1.3 billion in criminal fines and damages (which a court had found to be adequate punishment) a jury awarded $5 billion. The Ninth Circuit eventually reduced it to $2.5 billion. That was the figure the Supreme Court reversed, suggesting that a 1:1 ratio of punitive to compensatory damages was the outer limit for Exxon.

But the Supreme Court's opinion endorsed studies purporting to show that courts' discretion to award punitive damages "has not mass-produced runaway awards"--though those studies measure median verdicts. In the words of legal analyst Walter Olson, that's like saying that Californians don't have to worry about earthquakes because the median quake is barely noticeable. The problem for both seismic engineers and businesses are the outliers--and more nine-digit punitive damages awards have been made in the past 10 years than in the rest of American history. Those studies also failed to measure the countless settlements induced by the threat of outlandish punitive damages.

The main danger is that trial lawyers will use the Court's 1:1 ratio as a floor, rather than a ceiling. The court said that a ceiling was appropriate when the conduct was not intentional and the defendant did not profit from the conduct. But those conditions usually suggest a court should not allow any punitive damages (a proposition four out of eight justices agreed with). So trial lawyers will likely allege in the future that one of the two elements is present, that the Exxon limits don't apply, and that punitives should therefore be higher than the 1:1 ratio. After previous cases suggesting a 9:1 limit on punitive damages, many courts used that ratio as a starting point. Exxon may have inadvertently increased the amount and likelihood of punitive damages being awarded.

Lower courts already circumvent Supreme Court rulings. The trial court in Valdez repeatedly failed to correctly apply Supreme Court precedent on punitive damages. The Ninth Circuit Court of Appeals reviewed the lower court decision three times before it exasperatedly imposed its own oversized award. (Meanwhile, commentators repeatedly blamed Exxon for this 14-year delay--though plaintiffs could have expedited the issue by not seeking an illegitimate multi-billion-dollar windfall. Other press coverage falsely stated that Exxon used the appeals to delay paying fishermen. Exxon made most of its compensatory-damages payments before the 1989 fishing season.)

It would be foolish to count on the Supreme Court correcting the resulting problems from state courts. Three justices thought that $2.5 billion in punitive damages was just peachy. Two in the majority, Justices Thomas and Scalia, believe that the Supreme Court does not even have the constitutional power to review outlandish, state-court punitive damages awards.

Thus, if a similar injustice were to arise from a state court, a majority of the present court may well be willing to let it sit. Exxon saved $2 billion, but other businesses may pay the price. If one wants common-sense rules on punitive damages, state legislatures will need to step up.

Ted Frank is a resident fellow at AEI.