[tt] Jacob Sullum: $13,000-a-Barrel Oil

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Jacob Sullum: $13,000-a-Barrel Oil
http://www.theatlasphere.com/columns/printer_071105-sullum-exxon.php
7.11.5

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, plausibly enough, 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.

Jacob Sullum is a senior editor at Reason magazine. His first book,
For Your Own Good: The Anti-Smoking Crusade and the Tyranny of
Public Health, was Amazon.com's #1 public policy bestseller in
1998. Sullum is a graduate of Cornell University, where he majored
in economics and psychology. He lives in Northern Virginia with his
wife and daughter.