OPED: B.P.s Deepwater Sigh of Relief
By Jeff Mudgett, Co-founder of the Maritime Executive Magazine & former Editor
Mudgett practiced admiralty and maritime law, arguing before the Ninth Circuit Court of Appeals and California Supreme Court, for almost fifteen years.
Has there ever been a more apropos United States Supreme Court decision than Exxon Shipping Company vs. Baker? I doubt it, not with the Deepwater Horizon disaster unfolding in front of us right now. Two years ago, when the United States Supreme Court rendered this groundbreaking decision about punitive damages, one doubts whether the Court could have ever contemplated the ramifications their words would have, and in so short a period of time. The justices most likely never imagined that the environmental disaster they thought they were finally closing the door on would in fact be rendered somehow insignificant-- before their ink had even dried-- by another, more devastating incident. For it is now painfully obvious that before it’s all said and done, Deepwater Horizon may make Exxon Valdez pale in comparison, if it hasn’t already.
Having some knowledge about how appellate courts work, I imagine the Court, considering their words to be the end all, be all to the 1989 Exxon Valdez tragedy would have signed off on the case, considering it put to bed for decades, knowing that most times their words served only as valuable but vintage roadmaps for eternally researching lawyers. But not this time, not with Deepwater Horizon. To be fair, it would have been difficult for any human being sitting on that Court to have imagined a more terrible environmental disaster than the one they were deciding upon at the time and the effect their words would play upon the lives of those now affected by the spewing crude oil in the Gulf of Mexico.
Before I go any further, let me state categorically that I have seen nothing as yet to justify the imposition of punitive damages against British Petroleum for any acts, or failures to act regarding the Deepwater Horizon spill. Accidents do happen and are not necessarily defined as reckless due to the size of the calamity. But that fact has nothing to do with what B.P. is facing legally. Right now, Exxon vs. Baker is B.P.’s world.
At this very moment B.P.’s Chief Executive Officer, subordinate Officers and Corporate Council are utilizing Baker’s precise wording in an attempt to reduce exposure, liability and future damages, as well as creating and mapping out operational strategies. Read this sentence again for it deserves extra attention due to its absolute veracity. Oil spill cleanup strategies, tactics, even the most ‘viable’ fix to cap the well are all being influenced by the Court’s recent words. If you don’t believe me, watch which live feeds of their attempts they decide to release to the media to be viewed by the nation. The information released to the media is being perused over and over again according to its potential for causing or influencing punitive damages—plain and simple.
Fortunately for the oil major, because of the Supreme Court, that potential is now precisely defined. After the Court’s Exxon v. Baker decision, B.P.’s punitive damages have been limited to the amount of compensatory damages proven against them.
What are they, these punitive damages? They are the very thing that scares the living daylights out of every corporate board member, officer and defense team across this land-- the stick in the woodshed, so to speak. At the opposite end of the spectrum, punitives are the pie-in-the-sky for all plaintiffs’ attorneys and the carrot on the stick for the real people out there now thinking Deepwater Horizon might one day bring them gravy because they live close enough to smell the spilled oil. The possibility for and the amount of potential punitive damages is king right now.
Though terribly feared, punitive damages are rarely collected; in fact, punitive damages are awarded in less than 1% of all civil actions. Nevertheless, their possibility changes more corporate strategies, to the good, than any other conceivable mechanism society and the judicial system could ever hope to contrive. Right now, economists at BP are assuming punitive damages will one day be imposed. They are estimating clean-up costs for this spill at somewhere around $7-10 billion dollars, penalties and fines to the federal government at about $3.5 billion, and compensatory damages approximating another $7-10 billion. Because of Baker, these same economists know that punitive damages, if proven, will be limited to at most $10 billion dollars. While immense to others, this figure is digestible for B.P., an irritant at most. Because of Baker, instead of gasping in horror, B.P. breathes a sigh of relief right now, for had the Court not spoken, or ruled the other way, B.P. would be facing punitive damages of $100 billion dollars, or even more—serious deterrence indeed.
Defined legally, punitives are intended not as compensation, as are all other damages, but principally as retribution and a deterrent against future harmful conduct. They are imposed for the sake of example and punishment in cases of ‘enormity’: outrageous conduct, gross negligence, willful, wanton and reckless indifference for the rights of others. Deplorable stuff. Usually only where the actor knows, or has reason to know, of facts which create a high degree of risk of harm to another and deliberately proceeds to act in conscious disregard or indifference to the risk. Our law cautions that awards for punitive should deter, be proportionate to the wrongfulness and not be designed to bankrupt or destroy a defendant. With Deepwater Horizon, they would only be imposed for proven conduct on B.P.’s part that exhibited a reckless disregard for the seriousness of the risk involved- as in the calamity we now environmentally face.
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Exxon v. Baker was on the Supreme Court’s docket as a test of maritime law that reached back to 1818 to a previous decision named The Amiable Nancy. Baker, focused on a punitive damage ruling that stood before them at $2.5 billion after having been reduced from $5 billion by the ultra liberal Ninth Circuit Court of Appeals. The Supreme Court limited its review to the legality of punitive damages under US maritime law. The award if paid would have worked out to roughly $76,000 per claimant, almost five times their actual economic harm as a result of the spill. 32,000 plaintiffs sought punitive damages. They were referred to for convenience purposes as Baker.
The Valdez spilled 11 million gallons of crude oil on Bligh Reef of Prince William Sound. Exxon spent $2.1 billion in clean up costs. Exxon pleaded guilty to violations of the Clean Water Act, Refuse Act, Migratory Bird Act and agreed to pay a $150 million dollar fine, later reduced to $25 million plus restitution of $100 million. A civil action by the US and Alaska resulted with a consent decree for Exxon to pay at least $900 million toward restoring natural resources and it paid another $303 million in voluntary settlements with fisherman, property owners and other private parties. The jury had found the master, Hazelwood, reckless for his role in the grounding. The District Court calculated the total actual compensatory damages as $507.7 million dollars.
Exxon’s appeal before the Supreme Court was structured in three parts. First question: whether punitive damages are proper absent a finding that the owner, “directed, countenanced, or participated” in the ship master’s misconduct and when that conduct violated company policy. Second: whether punitive are available at all for maritime accidents given that Congress has spelled out specific criminal and civil penalties under the federal Clean Water Act. Third, whether the $2.5 billion dollar award was excessive under federal law and constitutional due process. Exxon further stated that not only was the award too high, but that there should have been no punitive damages by law. Exxon’s opponents stated in their briefs that the damages were legal and that $2.5 billion amounted to roughly three weeks of Exxon’s current net profits, hardly a tough pill to swallow for the oil giant.
Exxon argued that maritime law establishes that the owner of a vessel whose officers and men acted illegally at sea may be assessed the actual costs of damages done, but may not be charged, in addition, punitive damages if the owner did not direct or “countenance” the wrongdoing. For more than 150 years it has been so, Exxon said. The conduct of a ship’s master has not been allowed to be used to justify punitive damages. Contrarily, the suing class asserted that long-standing tradition is that corporations can and often are held liable for punitive damages for their employees’ misconduct. The Ninth Circuit had agreed.
The Supreme Court’s decision was landmark; limiting punitive damages and providing new tools for defense counsel. Justice Souter announced the 5-3 majority. The majority did not break down into any identifiable conservative or liberal group. The majority ruled that the upper limit of punitive damages will hence forth be a 1:1 ratio to compensatory damages. As they somewhat ambiguously phrased it, the Court explicitly looked to establish quantified limits, but not a “hard dollar cap”. I still have yet to comprehend this attempt at blurring the indeed very hard dollar limit the Court imposed: the amount of compensatory damages. Accordingly, they ordered Exxon’s punitive damages reduced to $507.5 million, the amount of compensatory damages awarded by the jury. Recall that the jury had originally awarded $5 billion in punitive damages.
The Court let stand, although giving no precedential value to this derivative liability question, the Ninth Circuit’s decision at maritime law recognizing corporate liability in punitive damages for reckless acts of managerial employees.
Justice Stevens dissenting, stated, “In light of Exxon’s decision to permit a lapsed alcoholic to command a supertanker carrying tens of millions of gallons of crude oil through the treacherous waters of Prince William Sound, thereby endangering all of the individuals who depended upon the sound for their livelihoods, the jury could reasonably have given expression to its “moral condemnation” of Exxon’s conduct in the form of this award.”
At the ruling, critics claimed that the amount of punitive damages the Supreme Court ordered Exxon to pay amounted to a mere 1.25% of the corporation’s 2007 profits. Deterrence? I’ll let you decide that. Others opined that the ruling eviscerated, rendering meaningless the deterrence objective of punitive damages in general. If I could, my question to the Court would be what sound scientific basis does the 1:1 ratio have? Especially in light of the immense economic size of defendants such as these oil giants.
How does Baker apply to the current situation? Utilizing numbers might make that question and the Court’s decision about punitive damages easier to understand. Remember that punitive damages are generally sought with class actions, as they will be here with Deepwater. The number of claimants may reach 1,000,000 people. If punitive damages are limited to $10 billion, each claimant would gross roughly $10,000, from which their lawyer’s fee and federal and state income tax would be taken; hardly enough to get excited about, or worried over.
Unhappy with the ruling, Congress may act. There is talk about a new law rejecting the 1:1 ratio determined by the Court. Legislation might demand that punitive damages may be assessed without regard to the amount of compensatory damages assessed in the action. By law, this legislation would not apply retroactively to B.P. and Deepwater Horizon.
MarEx