When a simple contract dispute is treated as fraud, when a state’s elected jurists are deciding a case in which the state has a financial interest, when punitive damage payments are awarded to the state despite state law saying the state cannot receive such awards, when part of the award is calculated based on expected fraud that had not yet occurred, and when both recent state case law and Supreme Court precedent argue strongly against an exorbitant award, then it’s a fair bet that the award won’t stand without being appealed to the nation’s highest court.
Earlier this month, the Alabama Supreme Court heard an appeal from ExxonMobil of a $3.6 billion jury verdict against the energy giant over a royalty dispute that, when the case was first heard, amounted to a mere $88 million discrepancy (including interest at an extremely generous annual rate of 12 percent).
Do the math, and you see thatthe punitive damages amount to an astonishing 39 times the size of the actual sum (plus interest) at issue. Yet the U.S. Supreme Court has written that punitive damages even four times as large as compensatory damages are “close to the line of constitutional impropriety” (1997 BMW v. Gore) and, in 2003, that anything larger than a “single-digit multiplier” would almost certainly be impermissible.
The Exxon case involves a rather technical dispute about which expenses the oil company could subtract from natural gas-well royalties it pays the state. The original trial court noted that “there isn’t anything clear about that lease.”
Far from trying to hide its own disputed basis of calculations, Exxon filed monthly reports explaining its charges and later filed suit to clear up the discrepancy between the two sides’ interpretations.
Alabama law holds that only in the case of deliberate fraud, rather than mere breach of contract, can punitive damages be awarded. State law also holds that “no portion of a punitive damage award shall be allocated to the state or any agency or department of the state.”
Yet here, during a time when state government was experiencing highly publicized budget shortfalls, a jury of Alabamians conveniently found fraud in this contract and awarded punitive damages to the state.
In an almost identical (but much smaller) case, the state Supreme Court threw out a $24.6 million punitive damage verdict the state won against Hunt Petroleum. Nevertheless, these state court judges are required to sit for re-election, and they know that many voters see the squeezing of an oil giant as easy money. After all, Exxon did post net earnings of $39.5 billion in 2006.
In 2003, Justice Anthony Kennedy pronounced such considerations irrelevant: “The wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award.”
The most straightforward issue in the Exxon case, and the one most likely to garner scrutiny from the state’s justices and perhaps from the nation’s highest court, is not the idea of punitive damages here, but rather the question of whether this particular award is so large as to violate two U.S. Supreme Court cases.
To put the award in perspective, the winning attorney’s fees alone of $490 million would pay for 10 attorneys each to work 80-hour workweeks at $500 per hour without vacation, for 23.55 years straight — 98,000 hours each — to earn so much loot.
The way the trial judge justified the verdict 39 times the size of compensatory damages, rather than the Supreme Court’s limits of between four and nine times the size, was to accept a novel argument offered by the plaintiffs’ attorneys.
What mattered, they argued, was not the $88 million Exxon already had (supposedly) bilked the state, but how much the state would have lost during the life of the contract — about a billion dollars — if the alleged error were never caught.
The logic is astonishing. It’s like charging a parking violator not just for his actual infraction, but for all future infractions he might commit if he had not been caught the first time.
Since when did American justice provide for penalties to be assessed before a violation has even occurred?
This is clearly a case in which jurors and the trial judge alike are guilty of implementing “jackpot justice.” At the very least, a large part of the punitive damage award should be jacked right out of court.
Examiner columnist Quin Hillyer is a senior editor of The American Spectator.
