June 25, 2008

Exxon Shipping Co. v. Baker Illustrates The Supreme Court's Increasing Frustration with "Eccentrically High" Punitive Damages

Today's decision in the Exxon Valdez case (Exxon Shipping Co. v. Baker) will undoubtedly launch a thousand law review articles over the next few months and years. It will be interesting to see if any consensus develops in the legal academic community about the likely future developments that will flow from this opinion, but in the meantime, here are my initial thoughts.

Taken in isolation, this opinion could be dismissed as a maritime law decision with little impact beyond federal common law. Technically, the opinion won't be binding authority with respect to punitive damages awards arising under state law. But viewed in the context of the Supreme Court's recent line of punitive damages decisions, the opinion seems to be a lot more important than that.

When the Supreme Court ventured into the area of punitive damages in cases like Oberg, Haslip, and TXO, members of the Court expressed some concern about unlimited punitive damages awards, but they declined to impose any limits, focusing instead on procedural safeguards. A few years later, however, in BMW v. Gore, the Court seemed to arrive at the view that procedural safeguards were not enough and substantive limits were needed. But the Court adopted a flexible multi-factor balancing test instead of imposing any concrete limits. When that didn't seem to work, the Court revisited the issue again in State Farm v. Campbell. While Campbell stopped short of imposing absolute bright-line limits, the Court limited the flexibility of its prior guidelines, holding that most awards should be less than ten times the amount of compensatory damages, and perhaps only equal to compensatory damages in cases where the compensatory damages themselves are "substantial."

Most recently, in last year's Philip Morris v. Williams decision, the Supreme Court returned again to a procedural issue and declined to address the issue of ratios. Some commentators opined that Williams indicated a shift away from the idea of ratios and substantive limits. (See for example, Anthony Sebok, "After Philip Morris v. Williams: What Is Left of the Single Digit Ratio.") Today's opinion seems to clearly refute that notion. Single digits are back, with a vengeance.

Because Exxon Shipping arose under maritime law and not state law, the Court felt even less constrained about imposing substantive limits, and opted for the the simplest possible test: a bright-line limit that punitive damages cannot exceed the amount of compensatory damages. Justice Souter, writing for the majority, adopted this ratio out of concern for the "stark unpredictability" of punitive damages and the unfairness that arises from outlier awards. Clearly, the Court did not think these fairness problems were sufficiently ameliorated by their prior decisions, so they abandoned the idea of a flexible multi-factor test in favor of a rigid bright-line rule. Moreover, they did not draw the line at 3:1 or 4:1, benchmarks mentioned in the Court's prior opinions. Instead, they adopted the 1:1 line based on data indicating that the median ratio overall for punitive damages is below that line. I cannot help but conclude that the Court has simply grown frustrated with the more subtle approach of its prior decisions and felt that drastic action was necessary.

In response to the view of the dissenting Justices that the Court's adoption of a substantive limit usurps Congress's lawmaking function, Justice Souter noted that outlier punitive damages award are a judicially created problem and therefore should be addressed by the judiciary. All of this suggests that the Court may ultimately decide to tighten the screws even further if and when it reviews another punitive damages award under the Due Process Clause.

(UPDATE on 6/26/08: Upon further reflection, it might prove difficult for Justice Souter to garner enough votes to adopt a stricter ratio analysis as a matter of due process. Justices Scalia and Thomas, who joined the majority in Exxon Shipping Co., have consistently rejected the Court's use of the Due Process Clause to impose restrictions on the amount of punitive damages. Even if Justice Alito (who recused himself from Exxon Shipping Co.) agreed to adopt a more rigid ratio analysis in due process cases, Justice Souter would still need to get a vote from either Justice Stevens (who wrote BMW v. Gore and concurred in State Farm v. Cambpell but dissented from Exxon Shipping Co.) or Justice Breyer (who concurred in BMW and State Farm but dissented from Exxon Shipping Co.))

Although Exxon Shipping Co. won't be binding authority in many cases, many lower courts are likely to find it persuasive. The reasoning behind the Supreme Court's adoption of the 1:1 limit is not based on any peculiarities of maritime law. It is based on fairness concerns arising from the wild unpredictability of outlier punitive damages awards, an issue that is obviously not limited to maritime cases.