US Supreme Court sets limit for punitive damages in admiralty cases
June, 2008
By
Jess B. Millikan,
Marilyn Raia
In a decision of substantial importance to the entire maritime industry and marine insurers, the United States Supreme Court today brought the nineteen year history of the EXXON VALDEZ nearer to its end, reversing the Ninth Circuit's $2.5 billion punitive damage award against Exxon. While a majority on the Supreme Court did not accept Exxon's argument that maritime law prohibits corporate liability for punitive damages on the basis of the acts of managerial employees, it did hold that the "fair upper limit" for such damages was a 1:1 ratio to the compensatory damages. That holding reduced Exxon's liability for punitive damages, which was originally set by a jury at $5 billion, down to $507.5 million.
The circumstances of this environmental tragedy are well known. On March 24, 1989, the supertanker EXXON VALDEZ grounded on Bligh Reef, off the Alaska coastline, spilling millions of gallons of crude oil. The grounding occurred after the captain left the bridge in the command of an officer not licensed to navigate the vessel in those waters. The evidence also suggested that the captain was intoxicated when he left the bridge and that Exxon knew that he had a history of alcohol abuse.
After nearly two decades of extraordinarily complicated litigation, the United States Supreme Court granted certiorari to consider three questions: 1) whether maritime law allows corporate liability for punitive damages based on the acts of managerial employees; 2) whether the Clean Water Act precludes an award of punitive damages; and 3) whether the punitive damage award approved by the Ninth Circuit was excessive.
Exxon's argument that maritime law precludes vicarious corporate liability for punitive damages relied on two nineteenth century cases, The Amiable Nancy 3 Wheat. 546 (1818) and Lake Shore & Michigan Southern R. Co v. Prentice 147 U.S. 101 (1893). The plaintiffs argued that those cases do not apply, and that maritime law should conform to the land-based law followed by a majority of the states, which allows such damages. The Supreme Court was equally divided on the issue (Justice Alito did not participate in the case), so without a majority for reversal, the Ninth Circuit's ruling permitting punitive damages stands.
Exxon also argued that the Clean Water Act preempts whatever punitive damages might be available under maritime common law. The Supreme Court agreed with the Ninth Circuit in rejecting that argument.
Finally, Exxon argued that the punitive damages award "exceeded the bounds justified by the punitive damages goal of deterring reckless (or worse) behavior and the consequently heightened threat of harm." On this point, the Court agreed with Exxon. After an extensive review of the history of punitive damages and of academic studies and state legislation concerning punitive damages, the Court held that "a 1:1 ratio...is a fair upper limit in such maritime cases" and "anything greater would be excessive here and in cases of this type."
It remains to be seen exactly what is meant by "cases of this type," and we can confidently predict that there will be many cases testing this issue in years to come. The decision does, however, prompt us to reiterate our frequent recommendation that all maritime contracts, including marine insurance contracts, should have a "choice of law" clause which unambiguously adopts federal maritime law as the governing jurisprudence. By clearly selecting federal law, the contracting parties will be in a better position to invoke the protections of the Supreme Court's "fair upper limit" should they be confronted with a claim for punitive damages.
For a more extensive discussion of the Supreme Court's decision, see the soon-to-be-published Summer 2008 issue of the Marine Insurance and Maritime Law Newsletter. If you are not on the distribution list for that publication and would like to be, please e-mail Kristen.leis@bullivant.com