$23,000-a-Barrel Oil

How many times should Exxon be punished for fouling Prince William Sound?

Jacob Sullum | October 31, 2007

When does oil cost $13,000 a barrel? When you spill it in Prince William Sound. That's how much Exxon paid after one of its tankers ran aground on Bligh Reef near the southern coast of Alaska in 1989, spilling 258,000 barrels of oil.

The company spent more than $3.4 billion on clean-up costs, fines, and compensation payments. Yet in 1994 a federal jury in Anchorage said Exxon should cough up another $5 billion in punitive damages, a number that an appeals court eventually cut in half.

Now the U.S. Supreme Court has agreed to decide whether that punitive damage award, by far the largest ever upheld by an appeals court, is consistent with maritime law. In addition to raising that question, the gargantuan judgment casts doubt on the very concept of punitive damages.

The case was a class action brought on behalf of some 33,000 fishermen and other individuals who argued that they had not been adequately compensated by Exxon's voluntary payments after the accident. The jury put their compensatory damages at $287 million, an award that came to about $20 million after the earlier payments were subtracted. The $5 billion punitive award was 250 times as high.

The legal wrangling that followed the trial focused on whether that eye-popping award was so disproportionate that it violated the constitutional right to due process. The litigation took 13 years, mainly because the Supreme Court was simultaneously issuing rulings that said the Due Process Clause places limits on punitive damages but did not clarify what those limits are.

The U.S. Court of Appeals for the 9th Circuit said Exxon's employment of Joseph Hazelwood, the tanker captain who precipitated the accident by leaving the bridge during a crucial maneuver, was "reckless," since management knew he was "a relapsed alcoholic." Yet the court also emphasized that the damage caused by the crash was not intentional and that Exxon acted quickly to mitigate and repair it.

Finding that the "reprehensibility" of Exxon's conduct was neither low nor high, the 9th Circuit figured a middling ratio of punitive to actual damages was appropriate. Based on a 5-to-1 ratio and a damage estimate of $500 million (almost twice the compensatory award), it calculated that $2.5 billion was an appropriate number.

The Supreme Court has said ratios in the single digits are "more likely to comport with due process." But it also has said that "when compensatory damages are substantial" even a 1-to-1 ratio "can reach the outermost limit of the due process guarantee." Combine this ambiguity with the various possible interpretations of what should count as actual damages, and a court can rationalize just about any number.

Perhaps not surprisingly, the Supreme Court has chosen not to wade once again into this due process thicket. Instead it will consider whether federal maritime law, a form of common law dealing with ships at sea, allows punitive damages in a case like this one and, if so, whether it imposes limits on them.

These questions illustrate the fundamental problem with punitive damages: They're not really damages at all; they're punishments. Like criminal penalties, they're supposed to serve the goals of deterrence and retribution. Exxon argues, pretty plausibly, that the $3.4 billion it already has paid is "more than enough to deter and punish anyone for anything."

Given the impact that the Prince William Sound disaster had on Exxon's reputation as well as its finances, oil companies have a strong incentive to avoid anything like it in the future. As for retribution, it's a tough concept to understand when it's applied not to culpable individuals such as Joseph Hazelwood but to corporations owned by shareholders who are innocent of any wrongdoing.

In any event, Exxon was already punished, paying the U.S. government a criminal fine prescribed by statute. It should not be punished again for the same conduct under rules that allow fines to be pulled out of thin air.

© Copyright 2007 by Creators Syndicate Inc.

Comments

|10.31.07 @ 7:45AM|#

"Jacob Sullum asks if the recriminations for the Exxon Valdez disaster will ever end"

Did I miss something? Were new damages just added to the reward? Or is Exxon still just litigating over damages from the fine of 13 years ago?

Gosh, I wish I had the money to litigate an issue until eternity, and the money to buy off a magazine who will claim that each time I go to court it is somehow like a new punishment has been added.

Is the $5B or $2.5B too large? Seems like an awful big paddle to be spanked with.

http://www.google.com/search?q=exxon+quarterly+profits

Oh look, $2.5B is about three weeks worth of profit to Exxon.

Yeah, losing three weeks worth of profit is a terribly big paddle.

Reason? Or Wanking?

The Artist Formerly Know as Tr|10.31.07 @ 7:51AM|#

I didn't know Reason was shilling for big oil now.

ed|10.31.07 @ 8:03AM|#

Did I miss something?

Yes, jerry, you did.

|10.31.07 @ 8:23AM|#

I generally think that damages can get way out of hand and that there are too many frivolous lawsuits.

In this case, though, Exxon should have paid out and shut up a long time ago. The fact is that they are being rewarded for dragging this thing on.

http://www.faegre.com/articles/article_751.aspx

|10.31.07 @ 8:25AM|#

Exxon has been ordered to pay because they completely ruined generations of wildlife, and miles of our planet's oceans. Most especially they destroyed the local fishing industry, and as a direct result many fishermen committed suicide. Untold, unimaginable, levels of destruction were sustained by the area while Exxon continues with endlessly high profits. Exxon can well afford to compensate the local economy, and the State of Alaska for grievous wrongs that have been already determined by the courts. Their delay in doing so is an injustice, and they deserve due punishment for not paying in a timely manner as ordered by the courts.

dello|10.31.07 @ 8:33AM|#

"Untold, unimaginable, levels of destruction were sustained by the area while Exxon continues with endlessly high profits."

So if Exxon were only making pennies on the dollar instead of high profits, they should pay less? Or nothing?

How much or little Exxon profits should have nothing to do with how much they are ordered to pay.

|10.31.07 @ 9:02AM|#

Jerry, you got it right. 5B$ sounds like a lot to a redneck fisherman. But if Jacob agrees that Exxon should be punished, and that is unclear from the article, then that punishment should hurt. 5B$ will hurt Exxon a little.

Dave Woycechowsky|10.31.07 @ 9:04AM|#

I like the way Exxon hasn't crashed anymore boats into the coast since the Valdez.

They seem to have learned.

They are like Luke and the tort court is like Obi-Wan. The wildlife that has gone undestroyed since 1989 is like the Ewoks of the forest moon of Endor. I am sort of like a wisecracking Han Solo.

|10.31.07 @ 9:08AM|#

I knew Han Solo, I worked with Han Solo, and you, sir, are no Han Solo.

|10.31.07 @ 9:13AM|#

I like the way shareholders are exactly the same entity as the corporation when the discussion is about taxation, and innocent, uninvolved parties when the discussion is about corporate liability.

|10.31.07 @ 9:15AM|#

"Exxon argues, pretty plausibly, that the $3.4 billion it already has paid is 'more than enough to deter and punish anyone for anything.'"

On my ebay site I am listing the Brooklyn Bridge and the Goldengate Bridge. Bid early and bid often. $5 billion doesn't seem outrageous. AIG had a full year of profit taken for its misdeeds.

Dave Woycechowsky|10.31.07 @ 9:21AM|#

I like the way shareholders are exactly the same entity as the corporation when the discussion is about taxation, and innocent, uninvolved parties when the discussion is about corporate liability.

a late winner this month for "Comment Of The Month"!

Jozef|10.31.07 @ 9:42AM|#

Untold, unimaginable, levels of destruction were sustained by the area while Exxon continues with endlessly high profits.

I'm having higher profit margins than Exxon. So does 2841 of publicly traded companies. I fail to see why Exxon is being singled out for "endlessly high profits".

hamilton|10.31.07 @ 9:42AM|#

Punitive damages are meant to be of a level such that the offending entity cannot simply view offenses as a cost-of-doing-business. I don't see why that should be related to the actual compensation costs at all. Hitting a large offender in their profit-pocket is a decent way to emphasize that they committed a crime, not a business expense. Five billion is a big number but, as has been indicated, not disastrous to Exxon. Pay it, shut up, and move on.

Reason is not doing a particularly good job in drawing a clean line between libertarian politics and simple big-corporation shilling of late, IMHO.

Aaron Burr|10.31.07 @ 10:00AM|#

REASON IS DOING A VERY GOOD JOB, "hamilton". TWENTY PACES! NOW!!!!!!!!

|10.31.07 @ 10:20AM|#

I cross posted this comment elsewhere, but I'll add it here too.

What Exxon doesn't say is that average income for commercial fisherman is not half of what it was before the spill.

Exxon doesn't tell you that limited entry permits that used to sell for 1/2 a Million dollars now can be purchased for 30K and in some cases are worthless.

Exxon doesn't tell you that the herring, which used to be a huge fishery, are now gone. There are no more herring in Cordovan waters.

Exxon doesn't say that you can go out to the beaches of Prince William Sound, turn over a rock, and find oil.

Exxon doesn't say how very little fishermen have received in compensation to this point. If you have a business and you, on average, make 500,000 per year, then someone does something like spill oil all over your business, and after that you can only make 250,000 a year, but the spillers give you 250,000 one time, is that fair? In this example you receive 250,000 once, but lose it 18 times (18 years since the spill happened).

Also, Exxon likes to point to the 3.4B it spent cleaning up the spill but it doesn't tell you how that money was spent. I had many friends who assisted in the cleanup and they all couldn't believe the total incompetence of the clean up effort. There were laws in place at the time of the spill regarding any possible spill and the required assets Exxon must keep on hand. None of the laws were followed, they had next to nothing.

I knew about Bligh Reef when I was six years old, how could anyone on an oil tanker, especially one named the Exxon Valdez, not know?

When the original punitive damages award of 5Billion was set it was supposed to represent one year of Exxon's net profits. Having been lowered to 2.5Billion it now amounts to around 3 weeks of Exxon's profits. I would say (and I admit to not being impartial) that the award is now too small. Punitive damages are meant to punish, 3 weeks profit is not true punishment.

hamilton|10.31.07 @ 10:37AM|#

BRING IT ON!.... OW! [thud].

VM|10.31.07 @ 10:40AM|#

That's okay, hamilton, you can be used to name my college!

Freeranger|10.31.07 @ 10:42AM|#

"As for retribution, it's a tough concept to understand when it's applied not to culpable individuals such as Joseph Hazelwood but to corporations owned by shareholders who are innocent of any wrongdoing."

Shareholders hired the directors, who hired the executives, who hired the people who hired Hazlewood, so the buck stops with the shareholders. If shareholders don't like the responsibility of running a corporation, they can sell at any time. I thought Reason stood for individual responsiblity?

|10.31.07 @ 10:46AM|#

Against my will, I overheard part of the Randi Rhodes show the other day. The show was ostensibly about the wildfires, but Randi and her guest couldn't stop tossing each other's salad over how badly Bush managed the Katrina aftermath. It sounded like he personally peed in the drinking water in the Superdome.

A couple of years ago, I received an email forwarded from a friend about how I should boycott Chevron. You see, decades ago, an oil company (I forget which one) polluted the crap out of their own property. Then some other guy bought the land and sold it to a developer who built houses and such. Meanwhile, Chevron bought the oil company and inherited their liabilities. Now, the people living on this polluted land are blaming Chevron for all of their ills. The email also considered it important that the majority of the current residents are black. Chevron is resisting being saddled with the full liability of all of the claims, hence the call for boycott.

So, the answer is no, there will be no end to the recriminations.

|10.31.07 @ 10:57AM|#

Yeah, those shareholders. Plotting. Planning. Watching. Judging.

Without limited liability for investors, we'd have a 19th century economy. Good-bye retirement, good-bye growth, good-bye America.

|10.31.07 @ 10:58AM|#

Chevron is resisting being saddled with the full liability of all of the claims

I'm sure they are! But then, they bought the company in full. Assets and Liabilities.

|10.31.07 @ 11:06AM|#

Limited Liabiality is one thing, Pro Lib. I'm all for NOT jailing holders of Exxon stock for their corporation's negligence.

But shielding them from taking a stock loss because of that negligence is quite a different matter.

|10.31.07 @ 11:06AM|#

The fact that JS is scared by the big numbers once again shows that he is not a good person to have writing about complex topics.

Pure pablum.
It's like it was taken off of an Exxon press release.

|10.31.07 @ 11:13AM|#

Joe,

Okay, that's not as big an issue with me. I think the damages should be reasonable, but I lack the facts to make that determination in this case. Still, punishment should focus more on the bad actors and less on innocent parties. Jail the management team? ☺

The tough thing for me in this case is that a relatively benign bad act--negligent hiring and employment--had major consequences. I wonder how this compares with the Union Carbide situation?

|10.31.07 @ 11:16AM|#

"they bought the company in full. Assets and Liabilities."

Wouldn't it be neat if all you had to do to avoid liability was to create a shell corporation, use that shell to buy a corporation with a lot of liabilities, then claim that the liability isn't the fault of the new company?!! We could really get some big business accomplished then.

Pro Libertate: hitting the stock price is the only punishment these people know.

|10.31.07 @ 11:16AM|#

Way to speak truth to power Reason! I'm glad Sullum has the balls to stand up for Exxon, that exemplar of free-market principals and reason and their noble investors whose awe-inspiring low time preference allowed them to prosper while benefiting even those envious and shiftless parasites who seek to destroy them.
You just watch. If we don't put a stop to the tyranny of these pesky fishermen, nature lovers, and other statist fatcats, I wouldn't be suprised if the enterprising souls behind Exxon, Lockheed-Martin, Microsoft, and other representatives of this persecuted minority don't get fed up with this nonsense and sequester themselves behind a holographic shield the Rockies-or Dubai. With Blackwater providing defense and police and Halliburton taking care of the rest of the logistics, the place will be a lassiez-faire paradise. I sure hope they invite me...

|10.31.07 @ 11:24AM|#

Never have understood why this is not more formulaic. If insurance companies can base their underwriting and premiums on damage estimates, why aren't damage awards more proportional?

Damage awards should cover actual/incidentals including future loss. Punitive awards should be a reasonable mulitiple with rapid escalation for each repeat (or forseeably similar) offense.

Based on the jury pools I've been in, there is unreasonably high % of people who want to ensure "corporations" pay, sometimes at a level unhinged from reality, however, it doesn't appear so here. 3.4B is chicken feed and Exxon is clearly being rewarded for dragging their feet.

Big oil should (if they don't already) pool their coverages so they can pay big sums for big events.

|10.31.07 @ 11:34AM|#

Lamar says:

Wouldn't it be neat if all you had to do to avoid liability was to create a shell corporation, use that shell to buy a corporation with a lot of liabilities, and then claim that the liability isn't the fault of the new company?!! We could really get some big business accomplished then.

There are many ways to buy a company. Buying up all the stock (a Type B reorganization) is not always the best idea. You can buy the underlying assets of a company without taking on the liability. In cases like Chevron (mentioned above) and Halliburton (they purchased a company with heavy asbestos liability and are currently attempting to get out from under that liability) a type B reorganization is a very bad idea. It is a failure of management to adequately investigate before purchasing a company.

|10.31.07 @ 11:46AM|#

As a libertarian, I am wary of anything the gov't or large corporations do, as they generally function very similarly (and in concert). I think Exxon has gotten off pretty easy here. What is the status of double-hulled tankers?

|10.31.07 @ 11:58AM|#

Marcvs:

Following the Exxon Valdez accident in 1989, the United States, dissatisfied with the ineffectiveness of the international standards on the prevention of pollution from ships, adopted an Oil Pollution Act in 1990 (OPA 90). With this Act, the United States unilaterally imposed double hull requirements on both new and existing oil tankers, set according to vessel age limits (between 23 and 30 years, as from 2005) and according to deadlines (2010 and 2015) for the phasing out of single-hull oil tankers.

dbust1|10.31.07 @ 12:32PM|#

Tbone wrote:

"Never have understood why this is not more formulaic. If insurance companies can base their underwriting and premiums on damage estimates, why aren't damage awards more proportional?"


Because insurance companies are private enterprises and profit driven. While damage awards are decided by courts based upon meeting the emotional needs of biased special interest groups. There is no reason involved in the amounts sought for damage awards.

|10.31.07 @ 12:47PM|#

These questions illustrate the fundamental problem with punitive damages: They're not really damages at all; they're punishments.

Hence the word "punitive", ya?

Given the impact that the Prince William Sound disaster had on Exxon's reputation as well as its finances, oil companies have a strong incentive to avoid anything like it in the future.

Just last year, BP's neglegence lead to a leak in the Prudhoe Bay Pipeline, spilling some 700k gallons of oil onto the ground (about 1/15 the amount the Valdez lost). The only reason BP isn't suffering the same fate (in court and in the media) is there were no cute otters covered in oil this time.

|10.31.07 @ 12:51PM|#

EDIT: Whoops, I misread the article, 300k gallons, not 700k.

|10.31.07 @ 4:11PM|#

Punitive damages are supposed to be a punishment meted out by the civil (tort) system. While you could argue whether punishment should be the sole province of the criminal system, that's already been decided, as the punitive damages concept is anchored in statute and has been reaffirmed by courts, including the Supreme Court. The only question is extent, not the concept itself.

Punishment is part deterrence, part retribution. The argument that retribution doesn't apply to a corporation is shaky - corporations have most of the privileges and rights of actual persons under the law, and many of the responsibilities. You can't send a corporation to jail, but you can fine it (same with a limited liability partnership, etc.). So no, the shareholders will never suffer any loss bigger than their investment (that's the limitation of liability piece that makes for nicely liquid capital markets). All that's been well established as well. And the retribution aspect of punishment is as much to server the community at large and make people feel made whole as it is to spank the offender. It's hard to see how those goals are achieved with a punishment that has no real impact on the offender (the 3-weeks profits argument).

As for deterrence, it's hard to argue what level of punitive damages are an effective deterrent w/o violating due process.

The Supreme Court is chickening out on this thing by not taking up the question of whether the extent of punitive damages in this case is (or is not) compatible with due process. True to form, they are restricting themselves to the much narrower question of whether in this particular case, maritime law barred punitive damages altogether. That means they get to wait until a better, more general, case comes along to decide the question of a framework of what constitutes excessive punitive damages that would then be incompatible with due process. Smart on their part, even if dissatisfying to everyone watching and wanting some clarity.

But the fact they didn't take up the appeals court's reasoning of what's appropriate (2.5B) as opposed to excessive (5B) doesn't mean they've spoken on that, or have accepted the lower court's reasoning - all they've done is dodged that question to decide whether the whole concept (while valid in civil law in general, according to statute and precedent) applies in THIS CASE due to the complication of maritime law playing into this whole thing as well.

But of course, it's a banner case for all the different sides on this issue, so don't expect anyone to care about the maritime law thing. If they strike down the punishment on those grounds, the anti-punitive damage people will crow; if they don't, they'll simply appeal the damages on the grounds they might be excessive to have the appeals court's reasoning reviewed on that issue.

|11.1.07 @ 3:39PM|#

Let's give some additional thought to the hundreds of fishermen who were put out of work by Exxon. After all these years, some fishermen have died and their families are destitute because Exxon is able to keep appealing the law suit.

It cost my stepson (his father was killed in an accident when my stepson was 10), who was at the time of Exxon spill a young man with two young children. He spent $250,000 to buy his salmon permit, required by the state. He paid more for his boat and nets. He still had to pay off that entire $250,000 note after the oil spill. He had no choice.

Now he has a very bright daughter who will be entering college next fall. His son, a math whiz, will be going off to school soon.

My son once supplemented his fishing income by flying over the sound, spotting schools of herring, and by helping other fishmen impound the herring. Until the spill, they sold the herring roe to the Japanese. Now there are very few schools of herring in the sound. And no Japaense interest in seafood from those waters.

He now must go far, far from home to fish. And his wife also has her own permit so they can continue to live in their rustic home. The price for native salmon is far lower for fishermen than it was before the spill -- although people are, of course, paying high prices at the supermarket.

With current profits, Exxon shareholders would feel little pain if Exxon did the right thing and took care of the damage it did to the fishermen and their families. Besides, they hae been earning interest on the money they put aside as ordered by the court.

If my stepson had been on a commercial airliner that crashed, wouldn't the airline be forced to pay fair compensation? Instead he was working on water that was ruined for fishmen by an Exxon captain.

Yes, he got out with his life. His children still have a father. But he must leave them for weeks if not months at a time to bring home the money required to care for his family. All thanks to an employee of Exxon.