This article was submitted by Jonathan W. Thames at Archer Norris.

The US Supreme Court today released a very significant decision on maritime punitive damages in the Exxon Valdez case, Baker v. Exxon Shipping. The Court granted certiorari to address three issues: (1) whether the general maritime law allows corporate liability for punitive damages on the basis of unratified acts of managerial employees; (2) whether the federal Clean Water Act forecloses an award of punitive damages because the statute provides for civil penalties and thus preempt any punitive damages award; and (3) whether the $2.5 billion punitive damages award confirmed by the federal appellate court (the Ninth Circuit) was excessive as a matter of the general maritime law.

Under the general maritime law can an employer be liable for punitive damages for the reckless acts of its managerial employees?

As we all know, the law in most every state for land-side cases is that employers are responsible for punitive damages for the acts of their employees that merit punitive damages. This is consistent with both the majority of states’ common law (punitive damages available for acts of any employees) and the Restatement (Second) of Torts § 909(c) (1977) (punitive damages okay for acts of only managerial employees). The Ninth Circuit allowed punitive damages against Exxon directly for the acts of its managerial employee, Captain Hazelwood.

Exxon argued, though, that the general maritime law is different, and has been for over a century. Based on two very august cases from the 19th century (, Exxon argued that a vessel owner is not liable for the reckless acts of the master. It conceded that a vessel owner would be liable for the negligent acts of the master through the theory of respondeat superior, certainly, but not for reckless acts which were not "directed, countenanced or participated in by the owners." This relates to punitive damages because punitive damages cannot be awarded for merely negligent conduct, and thus vessel owner could not be on the hook for punitive damages for the reckless acts of the vessel’s master or any of its employees. Baker argued, though, that the Ninth Circuit’s decision should be affirmed, and the Supreme Court should bring the general maritime law in line with state common law and the Restatement. 

This could have been a very important ruling, but the Supreme Court for once exercised judicial restraint and punted. The justices were equally divided on the question, and so they left the Ninth Circuit’s decision undisturbed-no reversal, no remand, no affirmation. The rule in this situation is that the appellate court’s decision stands, but the Supreme Court’s not reversing the decision has no precedential effect–it is not tantamount to an affirmation. Accordingly, the law in the Ninth Circuit will stand, and vessel owners can be liable directly for punitive damages for the reckless acts of their employees. However, this may or may not be the law in the various other circuits-they remain able to reach their own decisions, since the Supreme Court did not provide any certainty.

 Does the federal Clean Water Act preempt punitive damages because it provides statutory penalties?

Exxon argued that the Clean Water Act preempted general maritime law remedies, including punitive damages, because the statute itself provides for compensatory damages as well as non-compensatory penalties against the responsible party in the event of a spill. Statutory penalties, Exxon argued, take the place of common law punitive damages, and thus the Clean Water Act preempts common-law punitive damages.  The Court simply did not agree with Exxon’s arguments. The Court analyzed the Clean Water Act and found no clear Congressional intent to occupy the entire field of pollution remedies. It held that the Clean Water Act did not prevent an award of punitive damages under the general maritime law.

Is a $2.5 billion punitive damages award for recklessness excessive under the general maritime law?

In this case, the jury found both Exxon and Captain Hazelwood to have acted recklessly, not maliciously. The jury awarded just over $500 million in compensatory damages, and $5 billion in punitive damages against Exxon to punish the reckless behavior. The Ninth Circuit remitted the punitive damages portion of the award to $2.5 billion. The question before the Supreme Court here was whether even that $2.5 billion number was excessive in light of the Due Process clause, which requires that civil fines cannot be so excessive as to be criminal "penalties" without due process of law. 

The Majority focused on the need for certainty, and decried the potential for runaway punitive damages verdicts as evidenced by the "outlier" verdicts that it has already addressed, e.g., BMW v. Gore and State Farm v. Campbell. It discussed three different methods of assessing the constitutionality of a punitive damages award: one verbal and two numerical. 

A verbal standard would require that the Court analyzed whether a punitive damages award under review would "shock the conscience," or whether the conduct to be punished has that "degree of heinousness" to justify the award, or whether the amount of the award had a sufficient "deterrence value.” The Court found such verbal standards unworkable, as they had just as much potential for unconstitutional awards as did no standard at all.  

With regard to numerical standards, it dismissed out of hand a potential hard number cap, because a single number could not take into account the uniqueness of each potential tort. 

Its preferred method was to pick a ratio. It discussed several academic studies of several hundred verdicts in which punitive damages had been awarded, covering the entire gamut of circumstances in which the conduct at issue was found to be reckless, i.e., worse than negligent but less than malicious.  The researchers in those studies found that the median ratio of compensatory to punitive verdicts was actually slightly less than 1:1

The Court found that $2.5 billion, a 10:1 multiplier, was excessive for recklessness. The Court created a new rule defining the upper limits of maritime punitive damages in cases of reckless behavior. Going forward, the maximum amount of a punitive damages award for reckless behavior cannot exceed the amount of compensatory damages. 

As we read the decision, it leaves open the possibility that a higher multiplier could be used where the behavior to be punished was found to be malicious, or some higher degree of opprobrium (though Justice Ginsburg in her concurrence does not appear to agree with our reading). The Court remanded this aspect of the case back to the Ninth Circuit with instructions that it remit the punitive damages award to equal the $507.5 million compensatory damage award.

The written concurrences/dissents

Justices Scalia and Justice Thomas wrote a two-sentence concurrence, observing that, while the Court’s decision was correct as based on its prior holdings, they continue to believe that those prior holdings were decided incorrectly.  

Justice Stevens’ separate partial concurrence is interesting. He roundly criticized the Court’s decision to limit by judicial fiat the amount of punitive damages to be awarded in Admiralty. Citing to Miles v. Apex Marine, Justice Stevens observed that, in light of the many, many federal statutes governing liability under Admiralty Law, the absence of any restriction on punitive damages suggests that Congress did not intend any such limitation, and would not wish the Supreme Court to create a new rule limiting punitive damages exposure "for a wrongdoer such as Exxon."

He was also critical of the Court’s apparent reliance on empirical data on punitive damages cases in reaching its one-to-one ratio. He first argued that the Court failed to take into account an unique feature of maritime law that counsels against uncritical reliance on data gleaned from land-side tort cases: the general maritime law commonly limits the availability of compensatory damages. He posited that, under those circumstances where certain causes of action simply do not exist under the general maritime law, punitive damages also serve a compensatory function, and thus there was less reason to limit punitive damages in a maritime case. The second fault he found with the empirical data analysis was that "… both caps and ratios of the sort the Court relies upon in this discussion are typically imposed by legislatures, not courts." As support for this position he pointed out that the authors of the majority opinion failed to identify a single state court that had imposed a precise ratio, as the Court did today under its common-law authority. 

Equally as interesting is Justice Ginsburg’s partial concurrence/dissent. She agrees with Justice Stevens that, in this situation, while the Court clearly has the power to make the rule that it announced, it should have left the matter to Congress. As pointed out above, she also asked several rhetorical questions about the future implications of the one-to-one ratio, indicating that she did not read the majority opinion as we do to set a maximum for reckless behavior only. We believe that the Court does not address what ratios would be appropriate for punitive damages for, e.g., intentional or malicious behavior. 

Justice Breyer’s concurrence observes that, while he has no jurisprudential problem with a court-mandated mathematical ratio, he believes that the $2.5 billion award was justified here, and should be allowed as a limited exception to the rule the Court just created.

Jonathan W. Thames (