Lessons learned from the Exxon Valdez case

Today’s lesson for Exxon, and presumably other mega companies hit with large punitive damages?

It pays to drag the case through the courts for as long as possible. Consider the effect of the courts’ decisions regarding punitive damages against the oil giant, which has been enjoying record profits.
After the Exxon Valdez ran aground in pristine Prince William Sound in 1989, a jury said Exxon had to pay the Alaskan fishermen $5 billion as punishment. That’s $5 billion in 1996 dollars.

Exxon appealed and in 2004 another court cut the punitive damages to $2.5 billion, plus interest. Exxon appealed that, and today, more than 19 years after the incident, the U.S. Supreme Court cut the damages again, this time to $500.7 million, or about 10 percent of the original verdict.

That’s $500.7 million in 2008 dollars, at a time when the value of the dollar is sinking faster than a penguin soaked in crude oil.
So what does it mean for the Alaska fishermen and the Minneapolis-based Faegre & Benson lawyers who represented a majority of them? With interest, the $500.7 million almost doubles to $1 billion, still a significant chunk of change.

Brian O’Neill, Faegre partner who spearheaded the litigation, said a formula was devised years ago to figure out fees to the lawyers, based on their involvement in the case and years with the firm, and the amounts of money that go to the thousands of fishermen, based on the size of their businesses before the spill.

With this decision, they all know that the X in the formula now equals $1 billion. Mechanisms are in place to cut checks within 60 days, O’Neill said.

“At the time of the first decision, Faegre & Benson went out of its way to tell partners not to count on this money and to live their lives as though it never happened,” said David Lebedoff, author of “Cleaning up — The story behind the biggest legal bonanza of our time,” published in 1997.  “That was very wise advice.”

Legal significance

What does the decision (PDF) mean for the law?

A couple of things. Exxon appealed to the U.S. Supreme Court saying that maritime law, which says shipping companies are not responsible for their vessels, should apply here. Maritime law was written centuries ago, the fishermen argued, when ships would be at sea for months without contact with their owners. With today’s communication owners can be in constant touch with their captains, they argued. The lower court agreed with the fishermen, and since the Supreme Court justices split 4 to 4 (Justice Sam Alito recused himself), the lower court decision stands. Now, shipping companies are responsible for their ships.
While maritime law is probably of little interest to landlocked Minnesotans, the question of punitive damages is more important in a state that manufactures medical devices and other products that could go wrong.

The law says a company can be punished at an amount equal to the damage the event caused. In this case, the state of Alaska estimated the damage at $500.7 million to its shoreline and fishermen.

The court made a point of noting that Exxon did not set out to harm Alaska. “Reckless conduct is not intentional or malicious, nor is it necessarily callous toward the risk of harming others,” the majority said.

While the matter is of huge interest to Minnesota’s legal community, and most of Alaska, Wall Street didn’t seem to care. Exxon stock opened at $87.25 a share today and dipped to $85.95 just after the decision was released, then bumped back up again, finishing the day at $87.60.

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Comments (2)

  1. Submitted by Rod Loper on 06/26/2008 - 09:14 am.

    The environmental community is taking note. Forget it when the oil companies talk about how good they are at cleanup and protection of fragile areas. Forget any promises about the gentle “footprint” in ANWR and
    pristine coastlines of the lower 48. As an American
    citizen my rights to a clean environment were never
    in play here. As far as I am concerned let the Bushies
    and McCain look under the rocks in Price William Sound
    if they need oil. It is still seeping out into the sea.

  2. Submitted by A T on 06/28/2008 - 09:27 am.

    While the column is appreciated, for such a hugely important decision, I am not sure you did the issues justice both for what you write and what you do not write.

    You leave the impression that the attorneys in this case will be left with little to show for their efforts. While that might be the case for some, others will do quite well, though, of course, not nearly as well as they would have done had the punitive damages award been higher.

    The true losers with this verdict are not the Faegre partners who do well enough on base pay let alone their year-end bonuses, but those in Valdez who relied on fishing for their livelihood. The livelihood is gone, replaced by a payout of approximately $15,000 from the punitive damages award (in addition to any money received under the similar compensatory damages award).

    The true misstep in the column is not in overlooking who won and lost in this case, however, but what the Supreme Court’s decision means going forward.

    You suggest that the greatest consequence of the Valdez decision is what it will mean for companies throughout the United States (you narrow it to Minnesota companies, though only, I assume, as an example). This case, however, probably will have little effect on punitive damages in non-Maritime cases in which the accepted ratio for compensatory to punitive damages arguably remains somewhere around 9:1 rather than the 1:1 ratio recognized as appropriate under Maritime law.

    On the other hand, though this was a maritime case, defendants in future punitive damages cases certainly will point to the Court’s logic in lobbying for a lower ceiling on punitive damages for non-Maritime cases. While defendants’ ability to gain traction based on such overtures currently seems unlikely–given both prevailing “land law” and the composition of the Court–it appears evident that one critical change to the Court could allow the Court to “view things differently.”

    You also note the Court’s split on the issue of respondeat superior (whether the shipping company is liable for the actions of its subordinates). The 4-4 vote on this issue does not make the Court’s decision on the matter “the law of the land.” Instead, the 4-4 vote merely upholds the decision of the lower court. With respect to Maritime law, that may or may not make the Court’s 4-4 decision “the law of the water.” For various reasons, most notably the Maritime law distinction and the fact that it is merely a plurality decision, it does not, however, make the decision binding in all jurisdictions regarding respondeat superior issues in large companies.

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