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Punitive Damages: Exxon v. Baker

Compiled by Nicholas Kaasik and Carlos Valero Carrasco


In the aftermath of the Exxon Valdez disaster, where an alcoholic captain negligently operated the Exxon Valdez, causing the vessel to run aground and spill oil into the Prince William Sound, polluting more than 1,500 miles of coastline and disrupting the livelihoods of fishermen and others, Baker et al. sued Exxon Shipping Company for compensatory and punitive damages. In the landmark Supreme Court decision, Justice Souter, speaking for a five justice majority, held that a one-to-one ratio for punitive damages to compensatory damages is a reasonable upper limit in maritime cases to comport with due process and limit the uncertainty of allegedly variable and unpredictable punitive damage awards. This case presents questions on how the Supreme Court used and did not use social science evidence in reaching their opinion and raises questions on the effect of ratio-limited punitive damages on potential tortfeasors.

Credit: National Oceanic and Atmospheric Administration

Relevant legal question

The relevant legal question for our analysis of the effect of punitive damages and the Exxon v. Baker case is whether the $2.5 billion punitive damage award from the appellate court is an acceptable award where the compensatory damages totaled $507.5 million. This legal question is both normative (is it fair to tortfeasors to be exposed to this type of liability) and empirical (does a certain ratio of punitive damages deter future potential tortfeasors).


In relevant parts, the Court held that punitive damages in maritime cases should be limited to a one-to-one ratio relative to the compensatory damages awarded (reducing the award to $507.5 million). Our analysis focuses on what the Court did, and did not, include in their justification for reducing the punitive damages.

Critical Analysis of the Opinion

The Court reduced the punitive damage award from $2.5 billion to $507.5 million (the same amount the plaintiffs were awarded in compensatory damages) because a "one-to-one ratio to compensatory damages is a fair upper limit of punitive damage awards for such maritime cases". This case involves only limited use of social science evidence in determining the deterrent effect of punitive damages.
The Court’s opinion is concerned with the disparity in punitive damage awards relative to compensatory damages awarded and argues that "fairness and consistency" require a predictable ratio of punitive damages to compensatory damages. The Court neglects to evidence demonstrable proof that certain ratios of punitive damages are effective deterrents and argues, somewhat perversely, that the prospective wrongdoer should know how much exposure to liability the actor will face if the actor chooses to violate the law. It is clear that the Court’s opinion is decided on the justices' notion of fairness rather than on any rigorous analysis of the impact of punitive damage awards on deterring future tortfeasors.
The Court argues, in part D of the majority opinion, that because a survey of punitive damage awards shows a trend of restraint relative to the compensatory damages awarded, therefore high ratio punitive damages are more than what is required to deter wrongdoers. The Court reaches this conclusion despite failing to analyze the deterrent effect of punitive damage awards on future behavior and rather simply analyzes the punitive award amounts relative to compensatory awards in past cases as all the evidence the Court needs to limit punitive damages to a one-to-one ratio.
As the Court acknowledges, "some will murmur that this smacks too much of policy and too little of principle."(P. 501). We are among the murmurers. The Court’s decision to limit punitive damages to this one-to-one ratio with compensatory damages is designed not to deter future wrongdoers, but to provide a predictable limited amount of punitive liability for potential wrongdoers. The Court does not acknowledge the potential deterrent effect of large punitive awards or the deterrent effect of potentially (albeit unpredictable) large punitive awards in preventing wrongdoing. Additionally, studies from Professor Theodore Eisenberg and others (some of which are cited in the Court’s own opinion) show that punitive damage awards are far more predictable than the Court suggests is the case. It is our opinion that the Court is engaging in a cherry picking of the social science data to explain and rationalize a decision reached on other grounds, and that Exxon v. Baker was actually decided by relying on the justice’s innate sense of fairness and due process for potential tortfeasors. We believe a predictable maximum one-to-one ratio of punitive damages to compensatory damages serves as an inadequate deterrent for potential tortfeasors and that potential exposure to greater punitive damage awards is a more effective deterrent.

On Punitive Damages Research Cited in the Court's Opinion

Footnote 13: This footnote reflects some studies showing that in the past decades the amounts awarded as punitive damages have increased:

- "RAND Institute for Civil Justice, D. Hensler & E. Moller, Trends in Punitive Damages, table 2 (Mar. 1995) (finding an increase in median awards between the early 1980s and the early 1990s in San Francisco and Cook Counties);
- Moller, Pace, & Carroll, Punitive Damages in Financial Injury Jury Verdicts, 28 J. Legal Studies 283, 307 (1999) (hereinafter Financial Injury Jury Verdicts) (studying jury verdicts in "Financial Injury" cases in six States and Cook County, Illinois, and finding a marked increase in the median award between the late 1980s and the early 1990s);
- M. Peterson, S. Sarma, & M. Shanley, Punitive Damages: Empirical Findings 15 (RAND Institute for Civil Justice 1987) (hereinafter Punitive Damages: Empirical Findings) (finding that the median punitive award increased nearly 4 times in San Francisco County between the early 1960s and the early 1980s, and 43 times in Cook County over the same period)." (P. 497).

However, the Supreme Court relies on another study to justify the reduction of the punitive damages award. This study concluded that "no statistically significant variation exists in the inflation-adjusted punitive award level over the three time periods" T. Eisenberg et al., Juries, Judges, and Punitive Damages: Empirical Analyses Using the Civil Justice Survey of State Courts 1992, 1996, and 2001 Data, 3 J. of Empirical Legal Studies 263, 278 (2006) (hereinafter Juries, Judges, and Punitive Damages) (analyzing Bureau of Justice Statistics data from 1992, 1996, and 2001). It is important to note that Professor Eisenberg, the lead author of this study, believes "the Court went seriously astray" when using his research to support a reduced punitive damages award.

Further, the Supreme Court also cited another study which concluded that "the median punitive damage award in civil jury trials decreased between 1992 and 2001" Dept. of Justice, Bureau of Justice Statistics, T. Cohen, Punitive Damage Awards in Large Counties, 2001, p. 8 (Mar. 2005) (compiling data from the Nation's 75 most populous counties).

Therefore, the Supreme Court, when it acknowledges that discretion to award punitive damages has not mass-produced runaway awards, is essentially acknowledging that the violation of due process they set out to correct by limiting punitive damages to a one-to-one ratio in practice rarely occurs.

Footnote 14: this footnote of the Supreme Court opinion deals with the important issue of what should be the median ratio of punitive to compensatory awards, citing the following studies:

- "Juries, Judges, and Punitive Damages 269 (reporting median ratios of 0.62:1 in jury trials and 0.66:1 in bench trials using the Bureau of Justice Statistics data from 1992, 1996, and 2001);
- Vidmar & Rose, Punitive Damages by Juries in Florida, 38 Harv. J. Legis. 487, 492 (2001) (studying civil cases in Florida state courts between 1989 and 1998 and finding a median ratio of 0.67:1)."(P. 498).

The Court notes another study that found a median ratio of 1.4:1 in "financial injury" cases in the late 1980s and early 1990s. (P. 498).

As we can see, when establishing a punitive to compensatory awards ratio, the Court appears to selectively rely on social science evidence that accords with their beliefs. The Court is following its idea that punitive damages should not be, in their opinion, excessive--regardless of the harm caused by the subject whose conduct was reprehensible.

Footnote 15: in this footnote, the Supreme Court cites studies that support its claim that available data do not substantiate a marked increase in the percentage of cases with punitive awards over the past several decades:

-" Cohen 8 (compiling data from the Nation's 75 most populous counties, and finding that in jury trials where the plaintiff prevailed, the percentage of cases involving punitive awards was 6.1% in 1992 and 5.6% in 2001);
- Financial Injury Jury Verdicts 307 (finding a statistically significant decrease in the percentage of verdicts in "financial injury" cases that include a punitive damage award, from 15.8% in the early 1980s to 12.7% in the early 1990s).
However, another study found an increase in the percentage of civil trials resulting in punitive damage awards in San Francisco and Cook Counties between 1960 and 1984 (see Punitive Damages: Empirical Findings 9)." (P. 498).

It is unclear to us how a low percentage of cases including a punitive damages award suggests that in all cases it is unnecessary to have a high-ratio of punitive to compensatory damages to deter potential tortfeasors. We agree with Justice Stevens in his partial dissent that an abuse of discretion review is a better remedy for disproportionate punitive damages awards. (P. 521).

Footnote 16: in this footnote, the Supreme Court cites a recent comprehensive study of punitive damages awarded by juries in state civil trials, which found a median ratio of punitive to compensatory damages of just 0.62:1, but a mean ratio of 2.90:1 and a standard deviation of 13.81.  Juries, Judges, and Punitive Damages 269. (P. 499).
While we do not dispute the legitimacy of the social science methodology in reaching these numbers, we again question how the Court can reasonably conclude from this that high-ratio punitive damages cases are in all cases excessive and unnecessary to deter potential tortfeasors.

Footnote 17: in this footnote, the Supreme Court cites:

"[The] body of literature running parallel to anecdotal reports, examining the predictability of punitive awards by conducting numerous "mock juries," where different "jurors" are confronted with the same hypothetical case…"
- C. Sunstein, R. Hastie, J. Payne, D. Schkade, W. Viscusi, Punitive Damages: How Juries Decide (2002);
- Schkade, Sunstein, & Kahneman, Deliberating About Dollars: The Severity Shift, 100 Colum. L.Rev. 1139 (2000);
- Hastie, Schkade, & Payne, Juror Judgments in Civil Cases: Effects of Plaintiff's Requests and Plaintiff's Identity on Punitive Damage Awards, 23 Law & Hum. Behav. 445 (1999).
- Sunstein, Kahneman, & Schkade, Assessing Punitive Damages (with Noted on Cognition and Valuation in Law), 107 Yale L. J. 2071 (1998). Because this research was funded in party by Exxon, we decline to rely on it." (P. 501).

All of the research cited in footnote 17 was funded, at least in part, by Exxon. The Court declines to rely on any of the articles in footnote 17 because they were funded by the defendant. (P. 501).

This footnote, noting that the Court does not rely on the study because it was funded by Exxon, has caused significant debate among legal scholars as to the implications on the use of studies and research conducted by or funded by parties to a case. Adam Liptak describes the debate over the implications of footnote 17 here: From One Footnote, a Debate Over the Tangles of Law, Science and Money, The New York Times, Nov. 25, 2008.

Punitive Damages Research in the Amicus Briefs

In addition to the social science research on punitive damages addressed in the opinion's footnotes, several amicus briefs address punitive damages research and merit closer analysis.

For Respondents

Brief Amicus Curiae of Sociologists, Psychologists, and Law and Economics Scholars in support of Respondents

It is interesting to note that both the petitioner and the respondent in this case agree that the paying of damages is necessary to (and does) deter negative behavior. The point in contention is whether the damages already paid by Exxon are a sufficient deterrent (as well as numerous arguments regarding a statutory bar to punitive damages, however, this is outside of the social science and law analysis). The main argument in this brief concerning punitive damages is that they are necessary to act as an effective deterrent to future oil spills. There is little in the way of hard social science argued or cited to, but the central underpinning of economics, that actors are rational profit-maximizers, is used to make the a priori argument that punitive damages are appropriate to deter future economically rational actors from engaging in such dangerous behavior. This, of course, is the core reason for punitive damages, and the justification for punitive damages is very much this social science (economics) argument. See the section below on Additional Social Science Research for an interesting comparison to the BP Gulf oil spill.
The brief goes on to argue that, by awarding compensatory damages alone, the court would be under-assessing the total costs of harm, and therefore not adequately deterring future wrongdoers. The brief also argues that punitive damages will alleviate the social and psychological harm of those injured by the oil spill and placed in uncertainty regarding whether they would be compensated. This is, of course, fraught with difficulties from a social science perspective, that social and psychological harm may be adequately offset through pecuniary benefits (for example, how much money eliminates the social and psychological harm?), but this likely speaks more to a limitation of tort law as a mechanism to address social and psychological harm rather than any disregard for social science in determining punitive awards.

For Petitioners

Brief of Product Liability Advisory Council, Inc., as Amicus Curiae in support of Petitioners:

The main idea of this brief, presented by a manufacturers association, is that the $2.5 billion punitive damages award against Exxon is excessive and unnecessary because it was imposed in violation of the common-law principles limiting punitive awards to a sum reasonably necessary to serve the legitimate purposes of punishment and deterrence.
Amicus state that punitive damages should not be higher than the amount reasonably necessary to deter a particular wrongful behavior. That is to say, if they serve to prevent a company from profiting from their illicit conduct, the goal of deterrence is satisfied, making any higher amount unreasonable.
One important argument presented in the brief is that compensatory damages and other costs paid by the company already serve to accomplish the goals of deterrence and punishment and therefore punitive damages are not necessary to ensure them. For reasons that we discuss below in the section "On the Effects of Punitive Damages Generally", we believe that this argument, if accepted, wuold result in a systematic under deterrence of potential tortfeasors.
Furthermore, this brief argues that the jury should not take into account the defendant's wealth when determining a punitive damage award. This brief objects to the fact that in this case the jury took into account evidence of Exxon's income and net worth in order to impose a higher punitive damages award.
Although the brief considers this fact a violation of the proportionality requirement, it seems clear to us that the effect of the punitive damages award will differ in each case depending on the wealth of the tortfeasor; the same award can achieve deterrence or not (and therefore be effective) depending on the particular circumstances of the defendant. Therefore, we believe it is fully justified to explain to the jury what the consequences of the award for the defendant are.

Brief of the American Petroleum Institute, the American Chemistry Council, the American Tort Reform Association, the National Association of Manufacturers and the Western States Petroleum Association as Amicus Curiae in support of Petitioners:

The main argument raised in this brief is that a punitive damages award is excessive if its amount is higher than that reasonably necessary to accomplish the goals of deterrence and retribution, as it no longer serves a valid and legitimate purpose. In this case, the authors of the brief consider that the existent circumstances do not allow the jury to impose a $2.5 billion award to the defendant.
The authors begin by identifying the conduct being punished as the one of Captain Hazelwood, whose behavior was reckless. However, Exxon must also assume liability, but it can only be deemed guilty of letting him command the vessel. Then, they analyze the degree of reprehensibility of that particular conduct committed by Exxon, the defendant. They conclude that the aforementioned conduct was not so reprehensible compared to other conduct for which punitive damages are awarded and therefore the $2.5 billion award cannot be justified as necessary to punish and deter it.
We cannot agree. Since Exxon failed to exercise control over a person with such a high degree of responsibility as Captain Hazelwood, someone with a known and reported alcohol problem, Exxon’s conduct leading up to the disaster was indeed reprehensible. Had Exxon properly performed its duties, the spill would have been avoided. Therefore the misconduct of the company cannot be placed on a low degree in the scale of reprehensibility, despite the brief authors' claim that "it was not morally repugnant".

Brief of Washington Legal Foundation as Amicus Curiae in support of Petitioners:

The question addressed in this brief is whether the $2.5 billion punitive damages award was within the strict limitations imposed by federal common law and, in particular, federal maritime law. The relevant argument presented in this brief is that neither deterrence nor retribution can justify a punitive damages award in this case, and as these are the only grounds that can justify its imposition, punitive damages cannot be justified.
In this brief the authors also refer to the deterrent effect of compensatory damages as a reason not to award punitive damages. They argue that compensatory damages only fail to deter when there is an evident fear or danger that the defendant will not be held accountable for its conduct. As in this case where the defendant is an important company and the harm is evident, they believe compensatory damages will be awarded and therefore the deterrence goal will be satisfied. As we said before, this argument cannot be supported by us because punitive damages have a punitive or retributive effect that is absent in compensatory damages, which do not take into account profit and the less than perfect chance that potential actors will be caught.
Regarding retribution, the authors of the brief do not believe punitive damages can be justified as a way to punish the company. Actually, they are quite reluctant to accept the retributive effect of punitive damages in cases involving corporations, since individuals are the ones who commit the wrong actions. However, we think that punitive damages should indeed be awarded to ensure that the company as a whole gets the punishment it deserves for having engaged in reprehensible conduct, in this particular case having given the command of the vessel to an alcoholic. Exxon must be held accountable for that behavior and punitive damages are an appropriate means of ensuring that liability.

On the effects of punitive damages generally

It is widely understood that punitive damages have two primary goals: deterrence and punishment. Therefore, when wanting to critically assess the effect of punitive damages, these two objectives must be always considered.
The first assumption of the deterrence effect is that the prospect of having to pay damages will have an effect on the behavior of similarly situated parties in the future. Mitchell Polinsky and Steven Shavell,  Punitive Damages: An Economic Analysis (Harvard L. Rev. Vol. 111, No. 4 869, 877 (Feb., 1998). Accordingly, punitive damages should be awarded when otherwise the deterrence objective will not be accomplished because of the possibility that injurers escape liability. Id. at 954. Thus, the key question is what amount of money injurers should be made to pay in order to achieve appropriate deterrence. According to some scholars, the amount of punitive damages should be no less and no more than the harm their conduct generates. Id. at 873. However, many people feel this proportion is insufficient to deter some subjects, especially wealthy firms, from committing harmful acts, and therefore they feel that higher punitive damages should be awarded to them.
On the other hand, the punishment objective refers to society’s goal of imposing appropriate sanctions on blameworthy parties, those whose conduct is reprehensible because it reflects disregard for the well-being of others. The connection between the imposition of punitive damages awards and the accomplishment of the punishment objective varies depending on the nature of the defendant. When it is an individual, that relationship is straightforward; if after assessing the individual’s conduct, appropriate punitive damages are imposed, the objective is achieved. However, when the defendant is a firm, the relationship is more complex. Depending on how we understand the goal of the punishment objective, punitive damages will be effective or not. If they are intended to punish the firm as an entity (with independence of the conduct of blameworthy individuals within the firm), they fully accomplish their objective. Nonetheless, to the extent that they are mostly aimed at penalizing culpable individuals within firms (penalizing the firm is just the way to penalize the individuals), their effectiveness is significantly attenuated, and they can even penalize those whose conduct is not blameworthy, especially shareholders. Id. at 948-49.

It is important to recognize the limits of social science in measuring the deterrent effect of punitive damages. The ideal punitive damage amount would make the expected cost of engaging in a wrongful behavior higher than the cost of taking proper precautions. However, calculating this expected cost requires knowing the probability of being caught, the cost of being caught (punitive + compensatory + reputational costs), and the cost of taking additional precautions. Such modeling assumes that the probability of being caught, the cost of taking additional precautions, and the cost of wrongdoing can be known in advance. Additionally, punitive damages are awarded in only 3-5% of plaintiff trial cases. A one-to-one maximum potential ratio to compensatory damages, in these rare cases where punitive damages are awarded, is likely to systematically under-deter potential tortfeasors as it serves to reduce the expected cost of tortfeasor behavior. 


Additional Social Science Research on Punitive Damages

Judy Feuer Zimet, Bad eggs and oil slicks: a defendant's wealth is an important factor in properly assessing punitive damages, 5 Int. J. Private Law 1-21 (2011)

This paper criticizes the punitive-compensatory damage ratio from Exxon v. Baker and argues that such a punitive damages scheme under-deters potential tortfeasors. This paper focuses on the recent BP oil spill and its connections to Exxon v. Baker.

Robert D. Cooter, Punitive Damages for Deterrence: When and How Much, 40 Ala.L.Rev. 1143 (1988)

This paper attempts to create an efficient way to measure punitive damage awards for courts to adopt that would serve as an efficient and effective deterrent for future wrongdoers. The article examines some of the shortcomings of the proposed mechanisms for measuring punitive damages (including how to compensate for nonpecuniary loss) and highlights the difficulties of using punitive damages to efficiently deter behavior in a predictable and consistent way.

A. Mitchell Polinsky and Steven Shavell,  Punitive Damages: An Economic Analysis (111 Harvard L. Rev. 869 (1998)

This study analyzes the economic consequences of punitive damages, in particular from the perspective of deterrence. The goal of the article is to develop a set of simple principles determining when punitive damages are necessary and, on the contrary, when they should not be awarded. The authors argue that punitive damages ordinarily should be awarded if, and only if, an injurer has a significant chance of escaping liability for the harm he caused. If this condition is met, punitive damages are needed as a deterrent tool to ensure the injurer will be held accountable and the same harm will not happen again. Moreover, the study also considers the fact that punitive damages can also be used to deprive individuals of the socially illicit gains that they obtain from malicious acts.


Exxon Shipping Co. v. Baker, 554 U.S. 471 (2008)

State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003) (addressing outlier punitive damage awards and due process)

BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996) (holding that a punitive damage award ratio to compensatory damages of 500 to 1 is grossly excessive and violative of due process)