Today the Supreme Court issued a decision, described below, of interest to the business community.

Exxon Shipping Co. v. Baker, No. 07-219 (previously discussed in the October 29, 2007 Docket Report).

In an important decision that could put the brakes on the run-away punitive awards that have plagued the business community for the last two decades, the Supreme Court held today that the maximum permissible ratio of punitive to compensatory damages under maritime law is ordinarily 1:1. Although nominally limited to punitive damages under federal maritime law, the effect of today’s decision is likely to reach far beyond maritime law.

The case arises out of the notorious Exxon Valdez grounding in 1989. A federal jury awarded a class of fishermen $5 billion in punitive damages to punish Exxon for its role in causing economic harm to the fishermen. After the Ninth Circuit cut the punitive damages in half, the Supreme Court granted review to consider three issues raised by Exxon.

The first issue was whether Exxon could be held vicariously liable for punitive damages under maritime law for the captain’s misconduct. The Court affirmed the Ninth Circuit’s holding that it could be by an equally divided court (Justice Alito having recused).

The second issue was whether the Clean Water Act preempts punitive damages awards arising from oil spills into navigable waters. The Supreme Court unanimously (8-0) agreed with the Ninth Circuit that it does not.

The third issue was whether the $2.5 billion punitive award is excessive under maritime law. By a 5-3 vote, the Court concluded that it is. In an opinion by Justice Souter, the Court explained that studies reflect that the median ratio of punitive to compensatory damages is less than 1:1, but that the size of punitive awards for similar conduct varies widely. This, the Court observed, demonstrates that “[t]he real problem
. . . is the stark unpredictability of punitive awards.” Id. at 26. Accordingly, the Court held that “a 1:1 ratio, which is above the median award, is a fair upper limit” in maritime cases. Id. at 40. The Court also suggested that, under the facts of this case, “the constitutional limit may well be 1:1” too. Id. at 42 n.28. The Court left open the possibility of higher ratios for cases in which there is “intentional or malicious conduct” or “behavior driven primarily by desire for gain” and/or cases in which there was only “modest economic harm” or a low likelihood that the misconduct would be detected. Id. at 40.

Justices Stevens, Ginsburg, and Breyer dissented from the Court’s ruling on the third issue. Of particular note, Justice Ginsburg asked rhetorically in her dissent: “On next opportunity, will the Court rule, definitively, that 1:1 is the ceiling due process requires in all of the States, and for all federal claims?” Dissent at 2.

Justice Ginsburg has put her finger on what is likely to be a highly contentious issue in future punitive damages litigation. Although the decision purports merely to set the limits for punishment under maritime law, it repeatedly cites with approval the Court’s prior statement that a 1:1 ratio may mark the constitutional line when compensatory damages are substantial. See Slip op. at 28, 42. Moreover, the very same concerns the Court expressed about fairness and reasonable predictability in the maritime context (see id. at 29) apply equally, if not with more force, in the context of due process. Finally, the Court’s suggestion that 1:1 might mark the constitutional line in this case (id. at 42 n.28), not just the limit under maritime law, seems like a strong hint that the Court does expect and intend its decision to have a spillover effect into the due process context. That surely serves to make it one of the most important business cases of the Term.

Mayer Brown filed an amicus brief in this case in support of Exxon on behalf of the American Petroleum Institute, the American Chemistry Council, the National Association of Manufacturers, the American Tort Reform Association, and the Western States Petroleum Association.