US Supreme Court slashes punitive damages award in Exxon Valdez oil spill case

Lawrence S Schaner Grace S Ho Publications, Newsletter & Website Editor, Arbitration Jenner & Block, LLP, Chicago Committee; Jenner & Block, LLP, Chicago [email protected] [email protected]

urther limiting the authority of US juries to award night of the disaster, Hazelwood drank at least five Fpunitive damages, on 25 June 2008 the US Supreme double vodkas in the waterfront bars of Valdez, an Court drastically reduced the punitive damages intake of about 15 ounces of 80-proof alcohol. imposed against Exxon for its role in the 1989 Exxon On 23 March 1989, the Exxon Valdez was en route Valdez Alaskan oil spill, cutting the award from $2.5 from Alaska to Los Angeles. At 11:20pm, Hazelwood billion to $500 million.1 The Court ruled in a 5–3 took control of the Exxon Valdez and manoeuvred the decision that, in the absence of malice, a 1:1 ratio tanker east, from the outbound shipping lane into the NEWSLETTER represented the ‘fair upper limit’ of punitive damages inbound shipping lane in search of a less icy path. This to compensatory damages in cases under maritime move put the tanker in the path of the underwater reef law. Accordingly, the Court reduced the US$2.5 billion off Bligh Island. Hazelwood was thus required to turn US Supreme Courtpunitive damages slashes award to US$507.5 million, the the ship back west while it was still north of the reef. NEGLIGENCEamount of compensatory damages paid by Exxon to Two minutes before the required turn, Hazelwood commercial fishermen, landowners and Native Alaskan inexplicably left the bridge, leaving only one officer punitive damages plaintiffs.award in Exxon – who was unlicensed to navigate in those waters AND DAMAGESThe newly established 1:1 ratio for maritime cases is – alone with a non-officer to turn the tanker west and Valdez oil spilleven more restrictivecase than the guidelines previously set avoid the underwater reef. Hazelwood also sped up INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICEby the Supreme DIV CourtISION in State Farm Mutual Automobile the tanker by placing it on autopilot, which made any Insurance Co v Campbell2 for civil cases in general. mistake harder to correct. The unlicensed officer and Lawrence S Schaner There, the CourtGrace held S Hothat punitive damages that the non-officer failed to make the necessary turn and Publications, Newsletter & Website Editor, Arbitration Jenner & Block, LLP, Chicago Vol 8 No 2 exceeded a single-digit ratio betweenO CpunitiveTOBER and 2008 the Exxon Valdez ran aground on Bligh Reef, tearing Committee; Jenner & Block, LLP, Chicago [email protected] damages were presumptively excessive the hull and spilling 11 million gallons of crude oil into [email protected] Supreme Courtand in violation slashes of Due Process. Prince William Sound. urther limiting the authority of US juries to award night of the disaster, Hazelwood drank at least five IN THIS ISSUE FROM THE CHAIR Fpunitive punitivedamages, on 25 June 2008 damages the US Supreme Thedoubleaward Exxon vodkas Valdez in the disasterin waterfront Exxon bars of Valdez, an Damages against Exxon CourtFrom the drastically Chair reduced the punitive1 damages intake of about 15 ounces of 80-proof alcohol. The case arose almost 20 years ago on 24 March In the aftermath of the man-made disaster, Exxon imposed against Exxon for its role in the 1989 Exxon On 23 March 1989, the Exxon Valdez was en route Committee Officers 2 1989, when the supertanker Exxon Valdez grounded paid approximately US$3.4 billion for clean-up Valdez Alaskan oil spill, cutting Valdezthe award from $2.5 oil spillfrom Alaska tocase Los Angeles. At 11:20pm, Hazelwood IBA Annual Conference 2008 – Bonusy Bligh Reef times off the Alaskan and coast, fracturing its efforts, fines and settlements. The remaining civil billion to $500 million.1 The Court ruled in a 5–3 took control of the Exxon Valdez and manoeuvred the Buenos Aires hull and spilling millions of gallons of crude oil into cases were consolidated into the present case in which decisionOur committee’s that, in sessions the absence at this of malice, a 1:1 ratio tanker east, from the outbound shipping lane into the year’s conference Lawrence S3 Schaner Prince WilliamGrace Sound. S Ho The oil eventually covered the District Court for the District of Alaska certified, represented the ‘fair upper limit’ of punitive damages a packedinbound shipping laneagenda in search of a less icy path. This Publications, Newsletter & Website Editor, Arbitration 11,000 Jennersquare & miles Block, of LLP, the Chicago ocean. The Exxon Valdez among others, a class of more than 32,000 plaintiffs. toA compensatorybrief introduction damagesto civil in cases under maritime move putRamón the tanker Bado in Sanz the path of the underwater reef liability insuranceCommittee; in Argentina: Jenner & Block, LLP, Chicago supertanker [email protected] owned by Exxon Shipping Co, a Upon completion of a three-phase trial, the jury law.the ‘claimsAccordingly, made’ principle the Court reduced the US$2.5 billion off Bligh Island. Hazelwood was thus required to turn [email protected] subsidiaryEstudio Dr of Mezzera, Exxon Mobil Montevideo Corporation. It was over 900 awarded US$507.5 million in compensatory damages punitive Martín Gdamages Argañaraz Luqueaward to US$507.5 million, the the ship back west while it was still north of the reef. US Supreme Courtfeet [email protected] and slasheswas carrying 53 million gallons of crude to plaintiffs as well as US$5,000 in punitive damages amount and Jorge of Ocantoscompensatory damages4 paid by Exxon to Two minutes before the required turn, Hazelwood urther limiting the authority of US juries to award oilnight on ofthe the night disaster, of the Hazelwood spill. drank at least five against Hazelwood and US$5 billion in punitive commercialUS Supreme Court fishermen, slashes landowners and Native Alaskan inexplicably left the bridge, leaving only one officer punitive damages, on 25 June 2008 the USear Supreme Negligence anddoubleExxon Damages vodkas admitted Committee in the to itswaterfront negligence members bars in of the Valdez, disaster an damages against Exxon. The amount of punitive Fplaintiffs.punitive damagespunitive award in damages – awardwho was unlicensed in to navigate Exxon in those waters CourtExxon drasticallyValdez oil spill reduced case the punitive damagesWe are hoping youandintake will its of liabilityhave about received for 15 compensatoryounces this newsletterof 80-proof damages. prior alcohol. to Evidence or on damages assessed against Exxon was ten times the The newly established 1:1 ratio for maritimeD cases is – alone with a non-officer to turn the tanker west and imposed Lawrence against S Schaner Exxon for its role in thearrival 1989 at Exxon the International presentedOn 23 Bar March atAssociation’s trial 1989, indicated the 2008 Exxon that Annual Exxon Valdez Conference knew was en that route amount of compensatory damages for which Exxon was even and more Grace Srestrictive Ho than the guidelinesValdez6 previously oil set spillavoid the underwater case reef. Hazelwood also sped up Valdez Alaskan oil spill, cutting the awardin Buenosfrom $2.5 Aires. As ChairJosephfrom Alaskaof Hazelwood, the toNegligence Los Angeles.the ship’s and DamagesAt captain, 11:20pm, wasCommittee Hazelwood a lapsed found liable. by the Supreme Court in State Farm Mutual Automobile the tanker by placing it on autopilot, which made any billionDevelopments to $500 in million.the doctrine1 The Court ruledit is in my a 5–3great pleasurealcoholic,took and control immense that of Exxon thehonour Exxon officials to Valdezaddress drank and you with manoeuvred once Hazelwood, again the The District Court agreed with the jury that the US$5 Insuranceof deepening Co insolvencyv Campbell 2 for civil cases in general. mistake harder to correct. The unlicensed officer and decision that, in the absence of malice, anda 1:1 I ratiohope to meet asandtanker many that east, of Exxon you from as did Ithe did not outbound last consider year in shipping givingSingapore, Hazelwood lane one into the billion punitive damages award was reasonable. The There, Derek theJT Adler Court heldLawrence that punitive S Schaner damages that the non-officerGrace failed S to Ho make the necessary turn and represented and Sarah Loomis the Cave‘fair upper limit’8 of punitiveof the damagesmost successful ainbound shore-sideIBA conferences shipping assignment laneever in held.after search heTaking droppedof a intoless icyoutaccount path. of the This US Court of Appeals for the Ninth Circuit remanded exceededPublications, a single-digit Newsletter ratio between & Website punitive Editor, Arbitration and the ExxonJenner Valdez & Block, ran LLP, aground Chicago on Bligh Reef, tearing to compensatory damages in cases underthe maritime professionalism andprescribedmove excellence put the follow-up tanker demonstrated inprogramme the path by theof upon the IBA underwaterreturning in previous from reef the case to the District Court twice for reconsideration compensatoryBatten down theCommittee; damages hatches? What wereJenner presumptively & Block, LLP, Chicago excessive the hull and [email protected] 11 million gallons of crude oil into law.the creditAccordingly, crunch might the mean Court for reduced theconferences, US$2.5 billion the Argentineans’aoff 28-day Bligh alcohol Island. proclivity treatment Hazelwood to achieve programme. was the thus highest required Witnesses standards to turn in light of the Supreme Court’s due process decisions, and in violation of Due [email protected]. Prince William Sound. punitiveprofessional damages liability awardclaims in to the US$507.5 UK million,in whatever the field theytestifiedthe turn ship their thatback hands before west towhile the and Exxonit the was commitment still Valdez north left of port they the on reef. the BMW of North America v Gore 3 and State Farm,4 which Simon Konsta amount andurther Andrew of limitingcompensatory Forsyth the authority damages 9of paidUS jurieshave by Exxon always to award to shown tonightTwo the legalminutes of the profession, disaster, before theHazelwood success required in the drank turn, land atHazelwood of least tango five is commercialThepunitive Exxon Valdezdamages,fishermen, disaster on landowners 25 June 2008 and guaranteed.the Native US Supreme Alaskan 6doubleinexplicablyDamages vodkas against left in the Exxonthe bridge, waterfront leaving barsIBA Legalonly of Valdez, Practiceone officer Division an NEGLIGENCE AND DAMAGES COMMITTEE NEWSLETTER October 2008 FEuropean update – the state of Courtplaintiffs. drastically reduced the punitive damages intake– who wasof about unlicensed 15 ounces to navigate of 80-proof in those alcohol. waters Thepersonal case injury arose and almost civil law 20 in years Europe ago on 24 ForMarch this year’s conference,In the aftermath our committee of the isman-made planning disaster,a range Exxonof activities imposed The Alberto newly Pérezagainst establishedCedillo Exxon for 1:1 its ratio role11 for in maritimethe 1989 Exxoncases is – aloneOn 23 with March a non-officer 1989, the Exxonto turn Valdez the tanker was en west route and 1989, when the supertanker Exxon Valdezthat grounded we hope you willpaid all get approximately involved in. US$3.4 billion for clean-up Valdezeven more Alaskan restrictive oil spill, than cutting the guidelines the award previouslyfrom $2.5 set fromavoid Alaskathe underwater to Los Angeles. reef. Hazelwood At 11:20pm, also Hazelwood sped up onCan Bligh Irish ADRReef tame off thethe PI Alaskan monster? coast, fracturingWe have its organisedefforts, two working fines andsessions. settlements. The first The of these remaining is called civil ‘Tort billionby the Liam SupremeKennedyto $500 million. Court in1 The State Court Farm Mutualruled in Automobile a 5–3 tookthe tanker control by of placing the Exxon it on Valdezautopilot, and which manoeuvred made any the hull and spilling millions of gallons of crudereform: oil a into solution tocases perceived were consolidateddefects on the into traditional the present tort caseregime, in which decisionInsurance and Colette that, Co O’Beirne v inCampbell the absence2 for civil of13 malice,cases in a general. 1:1 ratio tankermistake east, harder from to the correct. outbound The unlicensedshipping lane officer into andthe Prince William Sound. The oil eventuallyor “Tortcovered deform”?’ Inthe this District session Court speakers for thefrom District various of jurisdictions Alaska certified, representedThere,RIP the theRPI – Court Thompstone the ‘fair held upper vthat Tameside punitivelimit’ of damagespunitive damagesthat inboundthe non-officer shipping failed lane to in make search the of necessary a less icy turnpath. and This 11,000 square miles of the ocean. The throughoutExxon Valdez the worldamong will discuss others, their a class experiences of more than on this 32,000 matter plaintiffs. of great toexceeded& compensatoryGlossop Acutea single-digit Services damages NHS ratio Trust in between cases under punitiveinterest maritime and to the legal profession,movethe Exxon put the contrastingValdez tanker ran in aground experiences the path on of Bligh thetaken underwater Reef, from tearing the reef supertankerand periodic payment was owned orders by for Exxon Shipping Co, a Upon completion of a three-phase trial, the jury law.compensatory Accordingly, damages the Court were reduced presumptively the US$2.5 excessive billion offthe Blighhull and Island. spilling Hazelwood 11 million was gallons thus required of crude to oil turn into subsidiarypersonal injury of Exxon Mobil Corporation.common It was over law 900 and civilawarded law systems. US$507.5 million in compensatory damages punitiveand Helen in violation Kinghorn damages of award Due Process. to US$507.515 million, the thePrince ship William back west Sound. while it was still north of the reef. feet long and was carrying 53 million gallonsThe ofother crude session hasto plaintiffs been developed as well as jointly US$5,000 with thein punitive Space Law damages amount of compensatory damages paid by Exxon to Two minutes before the required turn, Hazelwood oilAntipodean on the night innovation of the – New spill. Committee, and is entitledagainst ‘Drafting Hazelwood and and enforcing US$5 billion liability in andpunitive damages commercialZealand’s no-fault fishermen, accident landowners and Native Alaskan inexplicably left the bridge, leaving only one officer TheExxon Exxon admitted Valdez todisaster its negligence in thereleases’. disaster A panel of expertsDamagesdamages from againstagainst different Exxon.Exxon jurisdictions The amount will of discuss punitive plaintiffs.compensation scheme hypothetical cases and– who give wastheir unlicensed perspectives to navigateon drafting in those and enforcing waters and Christine its liability Meechan for compensatory18 damages. Evidence damages assessed against Exxon was ten times the TheThe case newly arose established almost 20 1:1 years ratio ago for on maritime 24 March cases is –In alone the aftermath with a non-officer of the man-made to turn the disaster, tanker Exxon west and presented at trial indicated that Exxon bothknew contractual that andamount statutory of waivers compensatory and releases. damages This for working which sessionExxon was even1989, more when restrictive the supertanker than the Exxon guidelines Valdez previously grounded set avoidpaid approximately the underwater US$3.4 reef. billionHazelwood for clean-up also sped up Joseph Hazelwood, the ship’s captain, was a lapsed found liable. Continued overleaf byon theBligh Supreme Reef off Court the Alaskan in State coast,Farm Mutualfracturing Automobile its theefforts, tanker fines by and placing settlements. it on autopilot, The remaining which made civil any alcoholic, that Exxon officials drank with Hazelwood, The District Court agreed with the jury that the US$5 InsurancehullContributions and spillingCo to this v Campbellnewsletter millions are2 foralways of civil gallons welcome cases of in crude general. oil into mistakecases were harder consolidated to correct. into The the unlicensed present case officer in which and and that Exxon did not consider giving Hazelwood billionInternational punitive damages Bar award Association was reasonable. The There,Princeand Williamtheshould Court be sent Sound. toheld the Secretary that The punitiveand oil eventually damages covered that the non-officerDistrict10th Floor, Court 1 Stephen failed for Street, theto make DistrictLondon the W1T of necessary 1AT,Alaska United certified, turnKingdom and a shore-side assignment after he dropped out of the US Court of Appeals for the Ninth Circuit remanded exceeded11,000Newsletter square a single-digitEditor miles at the ofaddress theratio below: ocean. between The punitive Exxon Valdezand theamong ExxonTel: +44others, (0)20Valdez 7691a class ran 6868. ofaground Fax:more +44 than (0)20on Bligh 769132,000 6544 Reef, plaintiffs. tearing prescribed follow-up programme upon returning from the case to the District Court twice for reconsideration compensatorysupertanker Carmelwas damages owned Walsh bywere Exxon presumptively Shipping Co,excessive a theUpon hullwww.ibanet.org completion and spilling of 11a three-phase million gallons trial, of the crude jury oil into a 28-day alcoholBarlow Lyde treatment & Gilbert LLP programme. Witnesses in light© International of the SupremeBar Association Court’s 2008. due process decisions, andsubsidiary in violation of Exxon of Due Mobil Process. Corporation. It was over 900 PrinceawardedAll rightsWilliam US$507.5 reserved. Sound. No million part of thisin compensatory publication may be damages reproduced or Beaufort House, 15 St Botolph Street transmitted in any form or by any means,3 or stored in any retrieval4 system of testified that before the Exxon ValdezPrinted left inport the United on Kingdomthe by HobbsBMW of North America v Gore and State Farm, which feet long andLondon was EC3A carrying 7NJ 53 million gallons of crude to plaintiffsany nature withoutas well the as prior US$5,000 permission of in the punitive copyright holder. damages Application the Printers Ltd, Totton, Hampshire, for permission should be made to the Head of Publications at the IBA address. oilTel: on +44 the (0)20 night 7643 7999 of the [email protected] spill. against Hazelwood and US$5 billion in punitive The6 Exxon Valdez disaster This articleIBA Legal wasSO40 Practicefirst 3WX published www.hobbs.uk.comDivision in Negligence NEGLIDamagesGENCE and Damages AN Dagainst DAMA Newsletter GExxonES COMMITTEE, Vol 8, No 2, OctoberNEWSLETTER 2008, and October is reproduced 2008 by Exxon admitted to its negligence in thekind disaster permission of the Internationaldamages Bar against Association, Exxon. London, The UK. ©amount International of punitive Bar Association 2008. Theand itscase liability arose foralmost compensatory 20 years ago damages. on 24 March Evidence Indamages the aftermath assessed of against the man-made Exxon was disaster, ten times Exxon the 1989,presented when at the trial supertanker indicated that Exxon Exxon Valdez knew grounded that paidamount approximately of compensatory US$3.4 damages billion for clean-upwhich Exxon was onJoseph Bligh Hazelwood, Reef off the the Alaskan ship’s captain,coast, fracturing was a lapsed its efforts,found liable. fines and settlements. The remaining civil hullalcoholic, and spilling that Exxon millions officials of gallons drank of with crude Hazelwood, oil into casesThe were District consolidated Court agreed into withthe presentthe jury case that in the which US$5 Princeand that William Exxon Sound. did not Theconsider oil eventually giving Hazelwood covered thebillion District punitive Court damages for the awardDistrict was of reasonable.Alaska certified, The 11,000a shore-side square assignment miles of the after ocean. he dropped The Exxon out ofValdez the amongUS Court others, of Appeals a class for of morethe Ninth than Circuit32,000 remandedplaintiffs. supertankerprescribed follow-up was owned programme by Exxon uponShipping returning Co, a from Uponthe case completion to the District of a three-phaseCourt twice fortrial, reconsideration the jury subsidiarya 28-day alcohol of Exxon treatment Mobil Corporation.programme. ItWitnesses was over 900 awardedin light of US$507.5 the Supreme million Court’s in compensatory due process decisions,damages feettestified long that and before was carrying the Exxon 53 million Valdez gallonsleft port of on crude the toBMW plaintiffs of North as Americawell as US$5,000v Gore 3 and in State punitive Farm, damages4 which oil on the night of the spill. against Hazelwood and US$5 billion in punitive 6 Exxon admitted to its negligenceIBA inLegal the Practice disaster Division NEGLIdamagesGENCE AN Dagainst DAMA GExxon.ES COMMITTEE The amount NEWSLETTER of punitive October 2008 and its liability for compensatory damages. Evidence damages assessed against Exxon was ten times the presented at trial indicated that Exxon knew that amount of compensatory damages for which Exxon was Joseph Hazelwood, the ship’s captain, was a lapsed found liable. alcoholic, that Exxon officials drank with Hazelwood, The District Court agreed with the jury that the US$5 and that Exxon did not consider giving Hazelwood billion punitive damages award was reasonable. The a shore-side assignment after he dropped out of the US Court of Appeals for the Ninth Circuit remanded prescribed follow-up programme upon returning from the case to the District Court twice for reconsideration a 28-day alcohol treatment programme. Witnesses in light of the Supreme Court’s due process decisions, testified that before the Exxon Valdez left port on the BMW of North America v Gore 3 and State Farm,4 which

6 IBA Legal Practice Division NEGLIGENCE AND DAMAGES COMMITTEE NEWSLETTER October 2008 US SUPREME COURT SLASHES PUNITIVE DAMAGES AWARD IN EXXON VALDEZ OIL SPILL CASE

US Supreme Court slashes the District Court had not had a chance to consider. were created to supplement official enforcement by Each time, the District Court concluded that the US$5 inducing private litigation. The Court was ‘wary of punitive damages award in Exxon billion award was justified by the facts of the case reading too much into’ a criminal statute providing based in large part on Exxon’s ‘highly reprehensible’ a penalty of up to twice a crime victim’s loss as an Valdez oil spill case conduct.5 On remand the third time, the District Court alternative to other specific fine amounts which courts reduced the award from US$5 billion to US$4.5 billion may impose at their option. Further, the Court found because the Court of Appeals specifically requested that no consistent multiplier in state laws for environmental Lawrence S Schaner Grace S Ho it reduce the award. Afterwards, the Court of Appeals harm where the punitive damages could be 1.5–5 times 9 Publications, Newsletter & Website Editor, Arbitration Jenner & Block, LLP, Chicago further reduced the award by US$2 billion, concluding the harm. The majority opinion also included an Committee; Jenner & Block, LLP, Chicago [email protected] that the facts of the case and the egregious nature of analysis of the availability, or lack thereof, of punitive [email protected] Exxon’s conduct justified a US$2.5 billion punitive damages in other countries, making the unremarkable damages award – five times, instead of ten times, the observation that punitive damages are much more urther limiting the authority of US juries to award night of the disaster, Hazelwood drank at least five amount of the compensatory damages.6 widely available in the US.10 Fpunitive damages, on 25 June 2008 the US Supreme double vodkas in the waterfront bars of Valdez, an The Court also considered two additional issues: Court drastically reduced the punitive damages intake of about 15 ounces of 80-proof alcohol. whether maritime law allows corporate liability for The Supreme Court’s decision imposed against Exxon for its role in the 1989 Exxon On 23 March 1989, the Exxon Valdez was en route punitive damages on the basis of the acts of managerial Valdez Alaskan oil spill, cutting the award from $2.5 from Alaska to Los Angeles. At 11:20pm, Hazelwood The Supreme Court split five to three on the question agents, and whether maritime punitive damages law is billion to $500 million.1 The Court ruled in a 5–3 took control of the Exxon Valdez and manoeuvred the of whether the punitive damages awarded in this case, pre-empted by the Clean Water Act.11 With regard to decision that, in the absence of malice, a 1:1 ratio tanker east, from the outbound shipping lane into the which were five times the amount of compensatory the first issue, Exxon argued, on the basis of a Supreme represented the ‘fair upper limit’ of punitive damages inbound shipping lane in search of a less icy path. This damages, were excessive as a matter of maritime Court decision from the early 19th century, that a to compensatory damages in cases under maritime move put the tanker in the path of the underwater reef common law. (Justice Alito recused himself from the company could not be liable for punitive damages for law. Accordingly, the Court reduced the US$2.5 billion off Bligh Island. Hazelwood was thus required to turn case because of his ownership of a block of Exxon a shipmate’s recklessness.12 The justices were equally punitive damages award to US$507.5 million, the the ship back west while it was still north of the reef. Mobil stock.) The majority opinion, written by Justice divided on the question, 4:4, and accordingly left amount of compensatory damages paid by Exxon to Two minutes before the required turn, Hazelwood Souter, held that in maritime cases where no malice undisturbed the portion of the Ninth Circuit’s opinion commercial fishermen, landowners and Native Alaskan inexplicably left the bridge, leaving only one officer was involved, a 1:1 ratio of punitive to compensatory allowing liability for punitive damages on the basis of plaintiffs. – who was unlicensed to navigate in those waters damages is ‘a fair upper limit’ of punitive damages. acts of managerial agents. On the second issue, the The newly established 1:1 ratio for maritime cases is – alone with a non-officer to turn the tanker west and The Court, therefore, cut the punitive damages award justices unanimously held that the Clean Water Act even more restrictive than the guidelines previously set avoid the underwater reef. Hazelwood also sped up against Exxon from US$2.5 billion to US$500 million. does not foreclose the award of punitive damages in by the Supreme Court in State Farm Mutual Automobile the tanker by placing it on autopilot, which made any The Court distinguished this case, which was decided maritime spill cases. Insurance Co v Campbell2 for civil cases in general. mistake harder to correct. The unlicensed officer and under federal maritime law, from cases challenging In a concurrence, Justice Scalia, joined by Justice There, the Court held that punitive damages that the non-officer failed to make the necessary turn and punitive damages awards under the Due Process Thomas, agreed that the punitive damages award exceeded a single-digit ratio between punitive and the Exxon Valdez ran aground on Bligh Reef, tearing Clause of the US Constitution; identified punishment against Exxon should be reduced, but reiterated his compensatory damages were presumptively excessive the hull and spilling 11 million gallons of crude oil into and deterrence as the current rationale for punitive view that the Court’s punitive damages jurisprudence USUS S USPRUPREMEEME C OUCOURTRT SLASHES SLASHES P UNIPUNITIVETIVE DAMAGES DAMAGES A WAWARADR DIN IN EXX EXXONON V ALDEVALDEZ ZOIL OIL S PSILLPILL CASE CASE and in violation of Due Process. Prince William Sound. damages and highlighted ‘the real problem’ of is incorrect and, in particular, that the Constitution implementing punitive damages to be the ‘stark imposes no limits on punitive damages awards. unpredictability of these awards’.7 There were three separate dissents. Justice Stevens The Exxon Valdez disaster Damagesthethe District District against Court Court Exxon had had not not had had a chancea chance to to consider. consider. werewere created created to to supplement supplement official official enforcement enforcement by by The Court addressed the unpredictability of punitive argued against the 1:1 ratio because general maritime EachEach time, time, the the District District Court Court concluded concluded that that the the US$5 US$5 inducinginducing private private litigation. litigation. The The Court Court was was ‘wary ‘wary of of The case arose almost 20 years ago on 24 March In the aftermath of the man-made disaster, Exxon damages awards by selecting 1:1 as the appropriate law limits the availability of compensatory damages. billionbillion award award was was justified justified by by the the facts facts of of the the case case readingreading too too much much into’ into’ a criminala criminal statute statute providing providing 1989, when the supertanker Exxon Valdez grounded paid approximately US$3.4 billion for clean-up cap. The Court chose this ratio because of empirical Thus, under maritime law – more than in the land–tort basedbased in in large large part part on on Exxon’s Exxon’s ‘highly ‘highly reprehensible’ reprehensible’ a penaltya penalty of of up up to to twice twice a crimea crime victim’s victim’s loss loss as asan an on Bligh Reef off the Alaskan coast, fracturing its efforts, fines5 and settlements. The remaining civil studies it surveyed finding that the median ratio of context – punitive damages may serve to compensate conduct.conduct.5 On On remand remand the the third third time, time, the the District District Court Court alternativealternative to to other other specific specific fine fine amounts amounts which which courts courts hull and spilling millions of gallons of crude oil into cases were consolidated into the present case in which punitive to compensatory awards from 1992 to 2001 for ‘certain sorts of intangible injuries not recoverable reducedreduced the the award award from from US$5 US$5 billion billion to to US$4.5 US$4.5 billion billion maymay impose impose at attheir their option. option. Further, Further, the the Court Court found found Prince William Sound. The oil eventually covered the District Court for the District of Alaska certified, measured less than 1:1. The Court interpreted this to under the rubric of compensation’. He further wrote becausebecause the the Court Court of of Appeals Appeals specifically specifically requested requested that that nono consistent consistent multiplier multiplier in in state state laws laws for for environmental environmental 11,000 square miles of the ocean. The Exxon Valdez among others, a class of more than 32,000 plaintiffs. mean that ‘in many instances, a high ratio of punitive that limits on punitive damages are better imposed by it reduceit reduce the the award. award. Afterwards, Afterwards, the the Court Court of of Appeals Appeals harmharm where where the the punitive punitive damages damages could could be be 1.5–5 1.5–5 times times supertanker was owned by Exxon Shipping Co, a Upon completion of a three-phase trial, the jury to compensatory9 damages is substantially greater than legislatures, not courts. In her dissent, Justice Ginsburg furtherfurther reduced reduced the the award award by by US$2 US$2 billion, billion, concluding concluding thethe harm. harm.9 The The majority majority opinion opinion also also included included an an subsidiary of Exxon Mobil Corporation. It was over 900 awarded US$507.5 million in compensatory damages necessary to punish or deter’.8 Accordingly, there echoed Justice Stevens’ argument that the legislatures, thatthat the the facts facts of of the the case case and and the the egregious egregious nature nature of of analysisanalysis of of the the availability, availability, or or lack lack thereof, thereof, of of punitive punitive feet long and was carrying 53 million gallons of crude to plaintiffs as well as US$5,000 in punitive damages would be no need for a ‘high ratio’ of punitive damages not the courts, are better suited to regulate punitive Exxon’sExxon’s conduct conduct justified justified a US$2.5a US$2.5 billion billion punitive punitive damagesdamages in in other other countries, countries, making making the the unremarkable unremarkable oil on the night of the spill. against Hazelwood and US$5 billion in punitive in order to punish or deter reckless conduct. damages awards. In yet a third dissenting opinion, damagesdamages award award – five– five times, times, instead instead of of ten ten times, times, the the observationobservation that that punitive punitive damages damages are are much much more more Exxon admitted to its negligence in the disaster damages against Exxon. The amount of punitive6 In settling on the 1:1 ratio,10 the Court rejected higher Justice Breyer disagreed with the majority because amountamount of of the the compensatory compensatory damages. damages.6 widelywidely available available in in the the US. US.10 and its liability for compensatory damages. Evidence damages assessed against Exxon was ten times the ratios established by state and federal law as being of the specific facts of the case, which he found to TheThe Court Court also also considered considered two two additional additional issues: issues: presented at trial indicated that Exxon knew that amount of compensatory damages for which Exxon was inapposite and the ratios in state environmental laws be egregious enough to warrant an exception to the whetherwhether maritime maritime law law allows allows corporate corporate liability liability for for Joseph Hazelwood, the ship’s captain, was a lapsed foundTheThe Supreme liable.Supreme Court’s Court’s decision decision as too inconsistent. For example, the Court rejected Court’s 1:1 ratio, and because of the case’s procedural punitivepunitive damages damages on on the the basis basis of of the the acts acts of of managerial managerial alcoholic, that Exxon officials drank with Hazelwood, The District Court agreed with the jury that the US$5 the 3:1 ratio of compensatory to punitive damages history, which he felt provided no reasoned basis to TheThe Supreme Supreme Court Court split split five five to to three three on on the the question question agents,agents, and and whether whether maritime maritime punitive punitive damages damages law law is is and that Exxon did not consider giving Hazelwood billion punitive damages award was reasonable. The codified by a majority of states as over-inclusive11 for further reduce the Court of Appeals’ award of US$2.5 ofof whether whether the the punitive punitive damages damages awarded awarded in in this this case, case, pre-emptedpre-empted by by the the Clean Clean Water Water Act. Act.11 With With regard regard to to a shore-side assignment after he dropped out of the US Court of Appeals for the Ninth Circuit remanded the purposes of this case because the ratio applied to billion against Exxon, itself a 50 per cent reduction whichwhich were were five five times times the the amount amount of of compensatory compensatory thethe first first issue, issue, Exxon Exxon argued, argued, on on the the basis basis of of a Supremea Supreme prescribed follow-up programme upon returning from theUS case SU toPR theEME District COU CourtRT SLASHES twice for PreconsiderationUNITIVE DAMAGES cases AW ofA recklessnessRD IN EXX asON well VALDE as thoseZ OIL involving SPILL malice CASE from the amount the District Court ‘strongly believed’ damages,damages, were were excessive excessive as asa mattera matter of of maritime maritime CourtCourt decision decision from from the the early early 19th 19th century, century, that that a a a 28-day alcohol treatment programme. Witnesses in commonlightUS S ofUPR the law.EME Supreme (Justice COU RTCourt’s Alito SLASHES recused due process himselfPUNI decisions,T IVEfrom DAMAGES the andcompany A dangerousWARD could IN activityEXX notON be conducted liableVALDE forZ forpunitive OIL the S Ppurpose ILLdamages CASE for was appropriate. common law. (Justice Alito 3recused himself 4from the company could not be liable for punitive damages for testified that before the Exxon Valdez left port on the BMW of North America v Gore and State Farm, which of financial gain. The Court12 also found inapposite casecase because because of of his his ownership ownership of of a blocka block of of Exxon Exxon a shipmate’sa shipmate’s recklessness. recklessness.12 The The justices justices were were equally equally the District Court had not had a chance to consider. weretreble created damages to supplementfor private antitrust official enforcementclaims, which by MobilMobil stock.) stock.) The The majority majority opinion, opinion, written written by by Justice Justice divideddivided on on the the question, question, 4:4, 4:4, and and accordingly accordingly left left 6 IBA Legal Practice Division NEGLIEachGtheENCE District time, AND Dthe CourtAMA DistrictG EShad COMMITTEE notCourt had concluded aNEWSLETTER chance thatto consider. Octoberthe US$5 2008 inducingwere created private to supplement litigation. The official Court enforcement was ‘wary of by Souter,Souter, held held that that in in maritime maritime cases cases where where no no malice malice undisturbedundisturbed the the portion portion of of the the Ninth Ninth Circuit’s Circuit’s opinion opinion billionEach time, award the was District justified Court by theconcluded facts of thethat case the US$5 readinginducingIBA Legal Practicetoo private much Division litigation. into’ NE aG criminalLI GTheENCE Court ANstatuteD D wasAMA providing ‘waryGES COMMITTEE of NEWSLETTER October 2008 7 waswas involved, involved, a 1:1a 1:1 ratio ratio of of punitive punitive to to compensatory compensatory allowingallowing liability liability for for punitive punitive damages damages on on the the basis basis of of basedbillion in award large was part justified on Exxon’s by the ‘highly facts ofreprehensible’ the case areading penalty too of upmuch to twice into’ aa crimecriminal victim’s statute loss providing as an damagesdamages is is‘a ‘afair fair upper upper limit’ limit’ of of punitive punitive damages. damages. actsacts of of managerial managerial agents. agents. On On the the second second issue, issue, the the conduct.based in 5large On remand part on theExxon’s third ‘highlytime, the reprehensible’ District Court alternativea penalty of to up other to twice specific a crime fine victim’samounts loss which as an courts TheThe Court, Court, therefore, therefore, cut cut the the punitive punitive damages damages award award justicesjustices unanimously unanimously held held that that the the Clean Clean Water Water Act Act reducedconduct. the5 On award remand from the US$5 third billion time, theto US$4.5 District billion Court mayalternative impose to at other their specificoption. fine Further, amounts the Courtwhich found courts againstagainst Exxon Exxon from from US$2.5 US$2.5 billion billion to to US$500 US$500 million. million. doesdoes not not foreclose foreclose the the award award of of punitive punitive damages damages in in becausereduced the the Court award of from Appeals US$5 specifically billion to US$4.5requested billion that nomay consistent impose at multiplier their option. in state Further, laws for the environmental Court found TheThe Court Court distinguished distinguished this this case, case, which which was was decided decided maritimemaritime spill spill cases. cases. itbecause reduce the the Court award. of Afterwards,Appeals specifically the Court requested of Appeals that harmno consistent where the multiplier punitive in damages state laws could for environmentalbe 1.5–5 times underunder federal federal maritime maritime law, law, from from cases cases challenging challenging InIn a concurrence,a concurrence, Justice Justice Scalia, Scalia, joined joined by by Justice Justice furtherit reduce reduced the award. the award Afterwards, by US$2 the billion, Court concludingof Appeals theharm harm. where9 The the majoritypunitive opiniondamages also could included be 1.5–5 an times punitivepunitive damages damages awards awards under under the the Due Due Process Process Thomas,Thomas, agreed agreed that that the the punitive punitive damages damages award award thatfurther the reducedfacts of the the case award and by the US$2 egregious billion, natureconcluding of analysisthe harm. of 9the The availability, majority opinionor lack thereof,also included of punitive an ClauseClause of of the the US US Constitution; Constitution; identified identified punishment punishment againstagainst Exxon Exxon should should be be reduced, reduced, but but reiterated reiterated his his Exxon’sthat the conductfacts of the justified case and a US$2.5 the egregious billion punitive nature of damagesanalysis of in the other availability, countries, or making lack thereof, the unremarkable of punitive andand deterrence deterrence as asthe the current current rationale rationale for for punitive punitive viewview that that the the Court’s Court’s punitive punitive damages damages jurisprudence jurisprudence damagesExxon’s conductaward – fivejustified times, a US$2.5instead billionof ten times,punitive the observationdamages in otherthat punitive countries, damages making are the much unremarkable more damagesdamages and and highlighted highlighted ‘the ‘the real real problem’ problem’ of of is isincorrect incorrect and, and, in in particular, particular, that that the the Constitution Constitution amountdamages of award the compensatory – five times, instead damages. of ten6 times, the widelyobservation available that in punitive the US. damages10 are much more implementingimplementing punitive punitive damages damages to to be be the the ‘stark ‘stark imposesimposes no no limits limits on on punitive punitive damages damages awards. awards. amount of the compensatory damages.7 6 widelyThe Courtavailable also in considered the US.10 two additional issues: unpredictabilityunpredictability of of these these awards’. awards’.7 ThereThere were were three three separate separate dissents. dissents. Justice Justice Stevens Stevens whetherThe Court maritime also considered law allows corporatetwo additional liability issues: for TheThe TheSupreme Court Court addressed Court’s addressed decision the the unpredictability unpredictability of of punitive punitive arguedargued against against the the 1:1 1:1 ratio ratio because because general general maritime maritime punitivewhether damagesmaritime on law the allows basis corporate of the acts liability of managerial for damagesThedamages Supreme awards awards Court’s by by selecting selecting decision 1:1 1:1 as asthe the appropriate appropriate lawlaw limits limits the the availability availability of of compensatory compensatory damages. damages. The Supreme Court split five to three on the question agents,punitive and damages whether on maritime the basis punitiveof the acts damages of managerial law is cap.cap. The The Court Court chose chose this this ratio ratio because because of of empirical empirical Thus,Thus, under under maritime maritime law law – more– more than than in in the the land–tort land–tort ofThe whether Supreme the Court punitive split damages five to three awarded on the in thisquestion case, pre-emptedagents, and bywhether the Clean maritime Water punitive Act.11 With damages regard law to is studiesstudies it surveyedit surveyed finding finding that that the the median median ratio ratio of of contextcontext – punitive– punitive damages damages may may serve serve to to compensate compensate whichof whether were thefive punitivetimes the damages amount awardedof compensatory in this case, thepre-empted first issue, by Exxon the Clean argued, Water on Act. the11 basis With of regard a Supreme to punitivepunitive to to compensatory compensatory awards awards from from 1992 1992 to to 2001 2001 forfor ‘certain ‘certain sorts sorts of of intangible intangible injuries injuries not not recoverable recoverable damages,which were were five excessive times the as amount a matter of of compensatory maritime Courtthe first decision issue, Exxon from the argued, early on19th the century, basis of that a Supreme a measuredmeasured less less than than 1:1. 1:1. The The Court Court interpreted interpreted this this to to underunder the the rubric rubric of of compensation’. compensation’. He He further further wrote wrote commondamages, law.were (Justice excessive Alito as arecused matter himselfof maritime from the companyCourt decision could fromnot be the liable early for 19th punitive century, damages that a for meanmean that that ‘in ‘in many many instances, instances, a higha high ratio ratio of of punitive punitive thatthat limits limits on on punitive punitive damages damages are are better better imposed imposed by by casecommon because law. of (Justice his ownership Alito recused of a block himself of Exxon from the acompany shipmate’s could recklessness. not be liable12 The for justicespunitive were damages equally for toto compensatory compensatory damages damages is issubstantially substantially greater greater than than legislatures,legislatures, not not courts. courts. In In her her dissent, dissent, Justice Justice Ginsburg Ginsburg Mobilcase because stock.) ofThe his majority ownership opinion, of8 a block written of Exxonby Justice divideda shipmate’s on the recklessness. question, 4:4,12 The and justices accordingly were leftequally necessarynecessary to to punish punish or or deter’. deter’.8 Accordingly, Accordingly, there there echoedechoed Justice Justice Stevens’ Stevens’ argument argument that that the the legislatures, legislatures, Souter,Mobil stock.) held that The in majority maritime opinion, cases where written no by malice Justice undisturbeddivided on the the question, portion of4:4, the and Ninth accordingly Circuit’s left opinion wouldwould be be no no need need for for a ‘higha ‘high ratio’ ratio’ of of punitive punitive damages damages notnot the the courts, courts, are are better better suited suited to to regulate regulate punitive punitive wasSouter, involved, held that a 1:1 in ratio maritime of punitive cases whereto compensatory no malice allowingundisturbed liability the forportion punitive of the damages Ninth Circuit’son the basis opinion of inin order order to to punish punish or or deter deter reckless reckless conduct. conduct. damagesdamages awards. awards. In In yet yet a thirda third dissenting dissenting opinion, opinion, damageswas involved, is ‘a faira 1:1 upper ratio oflimit’ punitive of punitive to compensatory damages. actsallowing of managerial liability for agents. punitive On damages the second on theissue, basis the of InIn settling settling on on the the 1:1 1:1 ratio, ratio, the the Court Court rejected rejected higher higher JusticeJustice Breyer Breyer disagreed disagreed with with the the majority majority because because Thedamages Court, is ‘atherefore, fair upper cut limit’ the punitive of punitive damages damages. award justicesacts of managerialunanimously agents. held that On the Cleansecond Water issue, Act the ratiosratios established established by by state state and and federal federal law law as asbeing being ofof the the specific specific facts facts of of the the case, case, which which he he found found to to againstThe Court, Exxon therefore, from US$2.5 cut the billion punitive to US$500 damages million. award doesjustices not unanimously foreclose the held award that of the punitive Clean damages Water Act in inappositeinapposite and and the the ratios ratios in in state state environmental environmental laws laws bebe egregious egregious enough enough to to warrant warrant an an exception exception to to the the againstThe Court Exxon distinguished from US$2.5 this billion case, to which US$500 was million. decided maritimedoes not foreclosespill cases. the award of punitive damages in as astoo too inconsistent. inconsistent. For For example, example, the the Court Court rejected rejected Court’sCourt’s 1:1 1:1 ratio, ratio, and and because because of of the the case’s case’s procedural procedural underThe federalCourt distinguished maritime law, this from case, cases which challenging was decided maritimeIn a concurrence, spill cases. Justice Scalia, joined by Justice thethe 3:1 3:1 ratio ratio of of compensatory compensatory to to punitive punitive damages damages history,history, which which he he felt felt provided provided no no reasoned reasoned basis basis to to punitiveunder federal damages maritime awards law, under from the cases Due challenging Process Thomas,In a concurrence, agreed that Justice the punitive Scalia, damages joined by award Justice codifiedcodified by by a majoritya majority of of states states as asover-inclusive over-inclusive for for furtherfurther reduce reduce the the Court Court of of Appeals’ Appeals’ award award of of US$2.5 US$2.5 Clausepunitive of damages the US Constitution; awards under identified the Due Processpunishment againstThomas, Exxon agreed should that thebe reduced,punitive damagesbut reiterated award his thethe purposes purposes of of this this case case because because the the ratio ratio applied applied to to billionbillion against against Exxon, Exxon, itself itself a 50a 50 per per cent cent reduction reduction andClause deterrence of the US as Constitution; the current rationale identified for punishment punitive viewagainst that Exxon the Court’s should punitive be reduced, damages but reiteratedjurisprudence his casescases of of recklessness recklessness as aswell well as asthose those involving involving malice malice fromfrom the the amount amount the the District District Court Court ‘strongly ‘strongly believed’ believed’ damagesand deterrence and highlighted as the current ‘the realrationale problem’ for punitive of isview incorrect that the and, Court’s in particular, punitive damagesthat the Constitution jurisprudence andand dangerous dangerous activity activity conducted conducted for for the the purpose purpose waswas appropriate. appropriate. implementingdamages and highlighted punitive damages ‘the real to problem’be the ‘stark of imposesis incorrect no limitsand, in on particular, punitive damagesthat the Constitutionawards. ofof financial financial gain. gain. The The Court Court also also found found inapposite inapposite unpredictabilityimplementing punitive of these damages awards’. 7to be the ‘stark imposesThere wereno limits three on separate punitive dissents. damages Justice awards. Stevens trebletreble damages damages for for private private antitrust antitrust claims, claims, which which unpredictabilityThe Court addressed of these the awards’. unpredictability7 of punitive arguedThere against were three the 1:1 separate ratio because dissents. general Justice maritime Stevens Thisdamages articleThe wasCourt awards first addressed published by selecting inNegligence the unpredictability 1:1 and as Damagesthe appropriate Newsletter of punitive, Vol 8, No 2,lawargued October limits 2008,against the and availability isthe reproduced 1:1 ratio of by compensatorybecause general damages. maritime IBAIBA Legal Legal Practice Practice Division Division NE NEGLIGGLIENCEGENCE AN AND DAMA DAMAGESG ESCOMMITTEE COMMITTEE NEWSLETTER NEWSLETTER October October 2008 2008 7 7 kindcap.damages permission The awards Courtof the International choseby selecting this Bar ratio Association, 1:1 becauseas the London, appropriate of empirical UK. © International BarThus,law Association limits under the 2008. maritime availability law of – compensatorymore than in thedamages. land–tort studiescap. The it surveyed Court chose finding this thatratio the because median of ratioempirical of contextThus, under – punitive maritime damages law – maymore serve than to in compensate the land–tort punitivestudies it to surveyed compensatory finding awards that the from median 1992 ratio to 2001 of forcontext ‘certain – punitive sorts of damages intangible may injuries serve notto compensate recoverable measuredpunitive to less compensatory than 1:1. The awards Court from interpreted 1992 to 2001this to underfor ‘certain the rubric sorts of intangiblecompensation’. injuries He not further recoverable wrote meanmeasured that less‘in manythan 1:1.instances, The Court a high interpreted ratio of punitive this to thatunder limits the onrubric punitive of compensation’. damages are better He further imposed wrote by tomean compensatory that ‘in many damages instances, is substantially a high ratio greater of punitive than legislatures,that limits on not punitive courts. damages In her dissent, are better Justice imposed Ginsburg by necessaryto compensatory to punish damages or deter’. is substantially8 Accordingly, greater there than echoedlegislatures, Justice not Stevens’ courts. argument In her dissent, that the Justice legislatures, Ginsburg wouldnecessary be no to needpunish for or a deter’.‘high ratio’8 Accordingly, of punitive there damages notechoed the courts,Justice areStevens’ better argument suited to thatregulate the legislatures, punitive inwould order be to no punish need foror detera ‘high reckless ratio’ ofconduct. punitive damages damagesnot the courts, awards. are In better yet a thirdsuited dissenting to regulate opinion, punitive inIn order settling to punish on the or 1:1 deter ratio, reckless the Court conduct. rejected higher Justicedamages Breyer awards. disagreed In yet awith third the dissenting majority becauseopinion, ratiosIn settling established on the by 1:1 state ratio, and the federal Court law rejected as being higher ofJustice the specific Breyer disagreedfacts of the with case, the which majority he found because to inappositeratios established and the by ratios state in and state federal environmental law as being laws beof theegregious specific enough facts of to the warrant case, which an exception he found to to the asinapposite too inconsistent. and the ratios For example, in state environmental the Court rejected laws Court’sbe egregious 1:1 ratio, enough and becauseto warrant of anthe exception case’s procedural to the theas too 3:1 inconsistent. ratio of compensatory For example, to punitive the Court damages rejected history,Court’s which1:1 ratio, he feltand providedbecause ofno the reasoned case’s procedural basis to codifiedthe 3:1 ratio by a ofmajority compensatory of states toas punitiveover-inclusive damages for furtherhistory, reducewhich he the felt Court provided of Appeals’ no reasoned award ofbasis US$2.5 to thecodified purposes by a ofmajority this case of becausestates as theover-inclusive ratio applied for to billionfurther against reduce Exxon, the Court itself of a Appeals’ 50 per cent award reduction of US$2.5 casesthe purposes of recklessness of this caseas well because as those the involving ratio applied malice to frombillion the against amount Exxon, the District itself a Court50 per ‘strongly cent reduction believed’ andcases dangerous of recklessness activity as conductedwell as those for involving the purpose malice wasfrom appropriate. the amount the District Court ‘strongly believed’ ofand financial dangerous gain. activity The Courtconducted also found for the inapposite purpose was appropriate. trebleof financial damages gain. for The private Court antitrust also found claims, inapposite which treble damages for private antitrust claims, which IBA Legal Practice Division NEGLIGENCE AND DAMAGES COMMITTEE NEWSLETTER October 2008 7 IBA Legal Practice Division NEGLIGENCE AND DAMAGES COMMITTEE NEWSLETTER October 2008 7 US SUPREME COURT SLASHES PUNITIVE DAMAGES AWARD IN EXXON VALDEZ OIL SPILL CASE the District Court had not had a chance to consider. were created to supplement official enforcement by Each time, the District Court concluded that the US$5 inducing private litigation. The Court was ‘wary of billion award was justified by the facts of the case reading too much into’ a criminal statute providing based in large part on Exxon’s ‘highly reprehensible’ a penalty of up to twice a crime victim’s loss as an conduct.5 On remand the third time, the District Court alternative to other specific fine amounts which courts reduced the award from US$5 billion to US$4.5 billion may impose at their option. Further, the Court found because the Court of Appeals specifically requested that no consistent multiplier in state laws for environmental it reduce the award. Afterwards, the Court of Appeals harm where the punitive damages could be 1.5–5 times further reduced the award by US$2 billion, concluding the harm.9 The majority opinion also included an that the facts of the case and the egregious nature of analysis of the availability, or lack thereof, of punitive Exxon’s conduct justified a US$2.5 billion punitive damages in other countries, making the unremarkable damages award – five times, instead of ten times, the observation that punitive damages are much more amount of the compensatory damages.6 widely available in the US.10 The Court also considered two additional issues: whether maritime law allows corporate liability for The Supreme Court’s decision punitive damages on the basis of the acts of managerial The Supreme Court split five to three on the question agents, and whether maritime punitive damages law is US SUPREME COURT SLASHES PUNITIVE DAMAGES AWARD IN EXXON VALDEZ OIL SPILL CASE of whether the punitive damages awarded in this case, pre-empted by the Clean Water Act.11 With regard to which were five times the amount of compensatory the first issue, Exxon argued, on the basis of a Supreme damages, were excessive as a matter of maritime Court decision from the early 19th century, that a Significance 2 538 US 408, 425 (2003). common law. (Justice Alito recused himself from the company could not be liable for punitive damages for 3 517 US 559 (1996). The decision must be viewed as a win for corporations, 4 538 US 408. case because of his ownership of a block of Exxon a shipmate’s recklessness.12 The justices were equally particularly those engaged in maritime activities. The 5 296 F. Supp. 2d 1071, 1110 (D. Alaska 2004). Mobil stock.) The majority opinion, written by Justice divided on the question, 4:4, and accordingly left court-imposed cap on punitive damages in maritime 6 See 472 F.3d 600, 625 (9th Cir. 2006) (per curiam). Souter, held that in maritime cases where no malice undisturbed the portion of the Ninth Circuit’s opinion 7 Exxon, 2008 WL 2511219, at *15. cases (a 1:1 ratio of punitive to compensatory damages) was involved, a 1:1 ratio of punitive to compensatory allowing liability for punitive damages on the basis of 8 Ibid. plainly provides defendants with greater predictability 9 Ibid at *20. damages is ‘a fair upper limit’ of punitive damages. acts of managerial agents. On the second issue, the and guards against the spectre of so-called ‘runaway 10 Ibid at *14. The opinion provides an overview of punitive damages The Court, therefore, cut the punitive damages award justices unanimously held that the Clean Water Act in other countries, finding, for example: in England and Wales, juries’. At the same time, it might be argued that the against Exxon from US$2.5 billion to US$500 million. does not foreclose the award of punitive damages in punitive damages are only available for behaviour such as oppressive, ruling undermines the power of punitive damages The Court distinguished this case, which was decided maritime spill cases. arbitrary or unconstitutional action by government servants; injuries to serve as a deterrent, particularly in the case of designed by the defendant to yield a larger profit than the likely cost under federal maritime law, from cases challenging In a concurrence, Justice Scalia, joined by Justice very large and very wealthy defendants, to whom the of compensatory damages; and conduct for which punitive damages punitive damages awards under the Due Process Thomas, agreed that the punitive damages award are expressly authorised by statute. Canada and Australia allow them payment of an amount equal to the compensatory Clause of the US Constitution; identified punishment against Exxon should be reduced, but reiterated his for outrageous conduct, but awards are considered extraordinary damages award might not seem like much of a penalty and are rarely issued. In countries with a civil-code system, punitive and deterrence as the current rationale for punitive viewUS that SU PRtheEME Court’s COU punitiveRT SLASHES damages P jurisprudenceUNITIVE DAMAGES AWARD IN EXXON VALDEZ OIL SPILL CASE at all. damages are unavailable because they are non-compensatory damages. damages and highlighted ‘the real problem’ of is incorrect and, in particular, that the Constitution Further, the Court noted that some legal systems, such as Japan, Italy implementing punitive damages to be the ‘stark imposes no limits on punitive damages awards. and Germany, both decline to recognise punitive damages and refuse unpredictability of these awards’.7 theSignificanceThereUS District SU werePR CourtEME three hadC OUseparate notRT hadSLASHES dissents. a chance PJustice UNIto consider.T StevensIVE DAMAGES Noteswere2 538A Wcreated USA 408,RD 425 INto (2003). supplementEXXON VALDE officialZ OILenforcement SPILL CASE by to enforce foreign punitive judgments as contrary to public policy The Court addressed the unpredictability of punitive Eachargued time, against the Districtthe 1:1 ratioCourt because concluded general that maritimethe US$5 1inducing3 Exxon517 US Shipping 559 private (1996). Co v litigation.Baker, Number The 07-219, Court 2008 WLwas 2511219, ‘wary ofat *22 – though such refusals are on the decline. The decision must be viewed as a win for corporations, 4 (US538 US25 June408. 2008). 11 Ibid at *7. damages awards by selecting 1:1 as the appropriate billionlaw limits award the wasavailability justified of by compensatory the facts of the damages. case reading5 296 F. Supp. too much2d 1071, into’ 1110 (D. a criminal Alaska 2004). statute providing 12 The Amiable Nancy, 3 Wheat. 546 (1818). particularly those engaged in maritime activities. The 2 538 US 408, 425 (2003). cap. The Court chose this ratio because of empirical Significancebased in large part on Exxon’s ‘highly reprehensible’ a6 penaltySee 472 F.3d of up600, to 625 twice (9th Cir. a crime 2006) ( pervictim’s curiam). loss as an court-imposedThus, under maritime cap on punitivelaw – more damages than in in the maritime land–tort 3 517 US 559 (1996). 5 7 Exxon, 2008 WL 2511219, at *15. studies it surveyed finding that the median ratio of Theconduct.context decision – punitiveOn mustremand damagesbe viewedthe third may as time,a serve win thefor to compensatecorporations,District Court 4alternative 538 US 408. to other specific fine amounts which courts cases (a 1:1 ratio of punitive to compensatory damages) 8 Ibid. 5 296 F. Supp. 2d 1071, 1110 (D. Alaska 2004). punitive to compensatory awards from 1992 to 2001 particularlyreducedfor ‘certain the sortsthose award of engaged fromintangible US$5 in maritime injuriesbillion to not activities. US$4.5 recoverable billion The may9 Ibid impose at *20. at their option. Further, the Court found plainly provides defendants with greater predictability 6 See 472 F.3d 600, 625 (9th Cir. 2006) (per curiam). measured less than 1:1. The Court interpreted this to becauseunder the the rubric Court of of compensation’. Appeals specifically He further requested wrote that no10 Ibidconsistent at *14. The multiplier opinion provides in state an overview laws forof punitive environmental damages court-imposedand guards against cap onthe punitive spectre ofdamages so-called in ‘runawaymaritime 7 Exxon, 2008 WL 2511219, at *15. in other countries, finding, for example: in England and Wales, mean that ‘in many instances, a high ratio of punitive casesitthat reduce limits (a 1:1 the on ratio award. punitive of punitive Afterwards, damages to compensatory are the better Court imposed of damages)Appeals by 8harm Ibid. where the punitive damages could be 1.5–5 times juries’. At the same time, it might be argued that the punitive damages9 are only available for behaviour such as oppressive, to compensatory damages is substantially greater than furtherlegislatures, reduced not courts.the award In byher US$2 dissent, billion, Justice concluding Ginsburg 9the Ibid harm. at *20. The majority opinion also included an plainlyruling underminesprovides defendants the power with of punitivegreater predictability damages arbitrary or unconstitutional action by government servants; injuries 8 10 Ibid at *14. The opinion provides an overview of punitive damages necessary to punish or deter’. Accordingly, there andthatechoed guardsthe Justicefacts against of Stevens’ the the case spectre argument and the of egregiousso-called that the legislatures,‘runawaynature of analysisdesigned of by the the availability,defendant to yield or lacka larger thereof, profit than of the punitive likely cost to serve as a deterrent, particularly in the case of in other countries, finding, for example: in England and Wales, would be no need for a ‘high ratio’ of punitive damages Exxon’snot the courts,conduct are justified better suiteda US$2.5 to regulatebillion punitive punitive damagesof compensatory in other damages; countries,Developments and conduct making for which the unremarkablepunitive damages in the doctrine juries’.very large At andthe samevery wealthy time, it defendants,might be argued to whom that thethe punitive damages are only available for behaviour such as oppressive, are expressly authorised by statute. Canada and Australia allow them in order to punish or deter reckless conduct. rulingdamages undermines awardawards. – fiveIn the yet times, power a third instead of dissenting punitive of ten damages opinion,times, the observationarbitrary or unconstitutional that punitive action damages by government are much servants; more injuries payment of an amount equal to the compensatory for outrageous conduct, but awards are considered extraordinary In settling on the 1:1 ratio, the Court rejected higher amountJustice Breyer of the disagreedcompensatory with thedamages. majority6 because widelydesigned available by the defendant in the US. to yield10 a larger profit than the likely cost todamages serve as award a deterrent, might not particularly seem like in much the case of a ofpenalty and are rarely issued. In countriesof with adeepening civil-code system, punitive insolvency of compensatory damages; and conduct for which punitive damages ratios established by state and federal law as being veryof the large specific and factsvery wealthyof the case, defendants, which he to found whom to the Thedamages Court are unavailablealso considered because they two are additional non-compensatory issues: damages. at all. are expressly authorised by statute. Canada and Australia allow them inapposite and the ratios in state environmental laws be egregious enough to warrant an exception to the whetherFurther, maritimethe Court noted law thatallows some corporate legal systems, liability such as Japan, for Italy payment of an amount equal to the compensatory for outrageous conduct, but awards are considered extraordinary The Supreme Court’s decision and Germany, both decline to recognise punitive damages and refuse as too inconsistent. For example, the Court rejected damagesCourt’s 1:1 award ratio, might and becausenot seem of like the much case’s ofprocedural a penalty punitiveand are rarelydamages issued. on In thecountries basisDerek with of athe civil-code JT acts Adler system,of managerial punitive Sarah Loomis Cave to enforce foreign punitive judgments as contrary to public policy the 3:1 ratio of compensatory to punitive damages TheNoteshistory, Supreme which Courthe felt split provided five to no three reasoned on the basis question to agents,damages and are whetherunavailablePublications maritime because they Officer, punitive are non-compensatory Litigation damages Committee; lawdamages. is Hughes Hubbard & Reed LLP, New York at all. – though such refusals are on the decline. 1 Exxon Shipping Co v Baker, Number 07-219, 2008 WL 2511219, at *22 Further, the Court noted that some legal systems,11 such as Japan, Italy codified by a majority of states as over-inclusive for offurther whether reduce the punitivethe Court damages of Appeals’ awarded award in of this US$2.5 case, pre-empted11 Ibid at *7. by the HughesClean Water Hubbard Act. & Reed With LLP, regard New York to [email protected] (US 25 June 2008). and Germany, both decline to recognise punitive damages and refuse the purposes of this case because the ratio applied to whichbillion were against five Exxon, times the itself amount a 50 per of centcompensatory reduction the12 The first Amiable issue, Nancy Exxon, 3 Wheat. argued, [email protected] (1818). on the basis of a Supreme Notes to enforce foreign punitive judgments as contrary to public policy cases of recklessness as well as those involving malice 1damages,from Exxon the Shipping amountwere Co excessive v Baker the, DistrictNumber as a 07-219,matter Court 2008 ‘stronglyof WLmaritime 2511219, believed’ at *22 Court– though decision such refusals from are the on earlythe decline. 19th century, that a and dangerous activity conducted for the purpose commonwas(USUS appropriate. 25S UJune law.PR 2008).EME (Justice COU AlitoRT SLASHES recused himself PUNI fromTIVE the DAMAGES 11company nIbid A anW at important*7.A Rcould D IN notEXX recent beON liable decisionVALDE for punitive Zthe OIL US S damagesCourtPILL CASEof for statute of limitations in Indiana’s Accountancy Act of of financial gain. The Court also found inapposite case because of his ownership of a block of Exxon I12a shipmate’s AppealsThe Amiable for Nancy recklessness. the, 3 Wheat.Seventh 54612 Circuit (1818). The justices addressed were the equally 2001.4 The Seventh Circuit was affirmed in an opinion treble damages for private antitrust claims, which Mobil stock.) The majority opinion, written by Justice doctrinedivided on of thedeepening question, insolvency, 4:4, and accordingly a theory of leftdamages by Judge Posner that also examined the merits of the Souter,Significance held that in maritime cases where no malice thatundisturbed2 538 has US frequently408, 425the (2003). portion been invokedof the Ninth by US Circuit’s bankruptcy opinion claims and discussed the viability of the deepening 3 517 US 559 (1996). IBA Legal Practice Division NEGLIGENCE AND DAMAGES COMMITTEE NEWSLETTERwas involved, October a 1:1 ratio2008 of punitive to compensatory 7 trusteesallowing to liability bring forclaims punitive against damages professional on the advisers basis of insolvency theory of liability. The decision must be viewed as a win for corporations, 4 538 US 408. and others. Judge Posner began with a short primer on damagesparticularly is ‘a those fair upperengaged limit’ in maritimeof punitive activities. damages. The acts5 296 of F. managerial Supp. 2d 1071, agents. 1110 (D. Alaska On the 2004). second issue, the Developments inThe the case of Fehribachdoctrine v Ernst & Young LLP 1 involved deepening insolvency (the trustee’s theory of Thecourt-imposed Court, therefore, cap on cutpunitive the punitive damages damages in maritime award justices6 See 472 unanimously F.3d 600, 625 (9th held Cir. 2006)that the(per curiamClean). Water Act against Exxon from US$2.5 billion to US$500 million. Taurusdoes7 Exxon not ,Foods, 2008 foreclose WL Inc,2511219, thea small ataward *15. Indiana of punitive frozen damages food in damages), deeming it ‘controversial’.5 He discussed cases (a 1:1 ratio of punitive to compensatory damages) 8 Ibid. The Court distinguished this case, which was decided companymaritime liquidatedspill cases. in an involuntary proceeding deepening insolvency’s original formulation – the plainly provides defendantsof with deepeninggreater predictability 9 insolvencyIbid at *20. Developments inunder the Chapter doctrine7 of the US Bankruptcy Code. The theory that borrowing, after a company becomes underand guards federal against maritime the spectre law, from of casesso-called challenging ‘runaway 10In Ibid a atconcurrence, *14. The opinion Justice provides Scalia, an overview joined of punitive by Justice damages Chapterin other 7 countries, trustee finding, for Taurus for example: sued inTaurus’s England andoutside Wales, insolvent, would ‘ineluctably’ hurt the shareholders. punitivejuries’. Atdamages the same awards time, under it might the be Due argued Process that the Thomas, agreed that the punitive damages award Clause of the US Constitution;ofDerek identifieddeepening JT Adler punishment auditorsagainst insolvencypunitive Exxon SarahErnst damages should& Loomis areYoung only be available LLP reduced,Cave (‘E&Y’) for behaviour but claiming reiterated such as thatoppressive, his the He surmised that a corporation can be insolvent in ruling undermines the power of punitive damages arbitrary or unconstitutional action by government servants; injuries and deterrence asPublications the current Officer, rationale Litigation for punitive Committee; auditorsHughes committed Hubbard & Reednegligence LLP, New and York breach of contract the sense of being unable to pay its bills as they come to serve as a deterrent, particularly in the case of viewdesigned that the by the Court’s defendant punitive to yield a damages larger profit jurisprudence than the likely cost damages and highlightedHughes ‘theHubbard real &problem’ Reed LLP, ofNew York inis incorrectfailingof compensatory [email protected] and,include damages; in particular, a going-concern and conduct that for the which qualification Constitution punitive damages due, ‘yet be worth more liquidated than the sum very large and very wealthy Derekdefendants, JT Adler to whom the Sarah Loomis Cave 2 [email protected] in Taurus’sare expressly 1995 authorised fiscal by year statute. audit Canada report. and Australia According allow them of its liabilities and so be worth something to the implementingpayment of an punitiveamount damagesequal to theto be compensatory the ‘stark imposes no limits on punitive damages awards. unpredictability ofPublications these awards’. Officer,7 Litigation Committee; toThere Hughesthefor outrageous trustee, were Hubbard three conduct,if E&Y & Reedseparate buthad awardsLLP, issued Newdissents. are theconsideredYork going-concern Justice extraordinary Stevens shareholders’. damages award might not seem like much of a penalty and are rarely issued. In countries with a civil-code system, punitive n an important recentHughes decision Hubbard the& Reed US LLP,Court New of York qualification,statute [email protected] limitations then Taurus’s in Indiana’s owners Accountancy would have Act of Judge Posner next examined deepening insolvency The Court addressed the unpredictability of punitive argueddamages against are unavailable the 1:1 because ratio becausethey are non-compensatory general maritime damages. at Appealsall. for the [email protected] Circuit addressed the 2001.4 The Seventh Circuit was affirmed in an opinion damagesI awards by selecting 1:1 as the appropriate realisedlawFurther, limits that thethe Courtthe availability companynoted that of some had compensatory legal no systems,future such and damages. as would Japan, Italy claims in a case where management, in cahoots with an doctrine of deepening insolvency, a theory of damages haveby andJudge immediately Germany, Posner both that declineliquidated, also to examinedrecognise averting punitive the US$3 damagesmerits million andof the refuse auditor or other outsider, concealed the corporation’s cap.n an The important Court chose recent this decision ratio because the US of Court empirical of statuteThus, under of limitations maritime in law Indiana’s – more Accountancy than in the land–tort Act of studiesthatNotes has it frequently surveyed findingbeen invoked that the by median US bankruptcy ratio of incontextclaims coststo enforce and which– punitive foreigndiscussed the punitive companydamages the judgments viability mayincurred as serve of contrary the as to deepeninga tocompensate result public policyof its perilous state, which, if disclosed earlier, would have Appeals for the Seventh Circuit addressed the 2001.– though4 The such Seventh refusals areCircuit on the wasdecline. affirmed in an opinion Itrustees1 Exxon Shipping to bring Co v claims Baker, Number against 07-219, professional 2008 WL 2511219, advisers at *22 continuedinsolvency operations.theory of liability.3 The district court dismissed all enabled the corporation to survive in reorganised punitive to compensatory awards from 1992 to 2001 for11 Ibid ‘certain at *7. sorts of intangible injuries not recoverable doctrineand(US others. 25 Juneof deepening 2008). insolvency, a theory of damages byJudge Judge Posner Posner began that also with examined a short primer the merits on of the 6 measured less than 1:1. The Court interpreted this to claimsunder12 The Amiable theagainst rubric Nancy E&Y, 3of Wheat. as compensation’. time-barred 546 (1818). under He further the one-year wrote form. He agreed with the Delaware Chancery Court’s that has frequently been invoked by US bankruptcy1 claims and discussed the viability of the deepening meanThe thatcase ‘in of Fehribachmany instances, v Ernst &a high Young ratio LLP of involvedpunitive thatdeepening limits on insolvency punitive (thedamages trustee’s are bettertheory imposed of by trusteesTaurus Foods, to bring Inc, claims a small against Indiana professional frozen food advisers insolvencydamages), theorydeeming of itliability. ‘controversial’.5 He discussed to compensatory damages is substantially greater than 8legislatures, not courts. In her dissent,IBA Legal Justice Practice GinsburgDivision NE GLIGENCE AND DAMAGES COMMITTEE NEWSLETTER October 2008 andcompany others. liquidated in an involuntary8 proceeding deepeningJudge Posner insolvency’s began with original a short formulation primer on – the necessary to punish or deter’. Accordingly,1 there echoed Justice Stevens’ argument that the legislatures, underThe caseChapter of Fehribach 7 of the v US Ernst Bankruptcy & Young LLPCode. involved The deepeningtheory that insolvencyborrowing, (the after trustee’s a company theory becomes of would be no need for a ‘high ratio’ of punitive damages not the courts, are better suited to regulate5 punitive TaurusChapter Foods, 7 trustee Inc, for a small Taurus Indiana sued Taurus’sfrozen food outside damages),insolvent, would deeming ‘ineluctably’ it ‘controversial’. hurt the shareholders.He discussed companyin order to liquidated punish or in deter an involuntary reckless conduct. proceeding deepeningdamages awards. insolvency’s In yet originala third dissenting formulation opinion, – the auditorsIn settling Ernst on & the Young 1:1 ratio, LLP (‘E&Y’)the Court claiming rejected that higher the JusticeHe surmised Breyer that disagreed a corporation with the can majority be insolvent because in underauditors Chapter committed 7 of thenegligence US Bankruptcy and breach Code. of contractThe theorythe sense that of borrowing, being unable after to apay company its bills becomesas they come Chapterratios established 7 trustee byfor state Taurus and sued federal Taurus’s law as outside being insolvent,of the specific would facts ‘ineluctably’ of the case, hurt which the he shareholders. found to inappositein failing to and include theDevelopments ratios a going-concern in state environmental qualification laws inbedue, egregious ‘yetthe be worth enough doctrine more to warrantliquidated an thanexception the sum to the auditorsin Taurus’s Ernst 1995 & Youngfiscal year LLP audit (‘E&Y’) report. claiming2 According that the Heof its surmised liabilities that and a socorporation be worth somethingcan be insolvent to the in auditorsas too inconsistent. committed negligenceFor example, and the breach Court of rejected contract theCourt’s sense 1:1 of ratio, being and unable because to pay of itsthe bills case’s as theyprocedural come theto the 3:1 trustee, ratio of if compensatory E&Y had ofissued to thepunitivedeepening going-concern damages history,shareholders’. insolvency which he felt provided no reasoned basis to inqualification, failing to include then Taurus’s a going-concern owners would qualification have due,Judge ‘yet Posner be worth next more examined liquidated deepening than the insolvency sum incodified Taurus’s by a1995 majority fiscal ofyear states audit as report.over-inclusive2 According for offurther its liabilities reduce andthe Courtso be worthof Appeals’ something award to of the US$2.5 therealised purposes that theof this company case because had no the future ratio and applied would to billionclaims inagainst a case Exxon, where itselfmanagement, a 50 per centin cahoots reduction with an tohave the immediately trustee, if E&Y liquidated, had issuedDerek averting the JT going-concern US$3Adler million shareholders’.auditor orSarah other Loomis outsider, Cave concealed the corporation’s qualification,cases of recklessness then Taurus’s as well asowners those wouldinvolving have malice fromJudge the Posner amount next the examined District Court deepening ‘strongly insolvency believed’ andin costs dangerous which the activity Publicationscompany conducted incurred Officer, for Litigation asthe a purposeresult Committee; of its wasperilousHughes appropriate. state, Hubbard which, & Reed if disclosed LLP, New Yorkearlier, would have realised that the company3 had no future and would claims in a case where management, in cahoots with an ofcontinued financial operations. gain. TheHughes Court The Hubbard districtalso found & courtReed inapposite LLP,dismissed New York all enabled [email protected] corporation to survive in reorganised have immediately liquidated, averting US$3 million auditor6 or other outsider, concealed the corporation’s claims against E&Y as [email protected] under the one-year form. He agreed with the Delaware Chancery Court’s intreble costs damages which the for company private antitrust incurred claims, as a result which of its perilous state, which, if disclosed earlier, would have continued operations.3 The districtThis article court was first dismissed published inallNegligence enabled and Damages the corporation Newsletter, Vol to8, Nosurvive 2, October in reorganised2008, and is reproduced by 8 n an important recent decisionIBA the Legal US Practice Court Division of NEGLIstatuteGENCE AN ofD limitations DAMAGES COMMITTEE in Indiana’s NEWSLETTER Accountancy October Act of2008 IBA Legal Practice Division NEGLIGENCE AND DAMAkind permissionGES COMMITTEE of the International NEWSLETTER6 Bar Association, October 2008 London, UK. © International Bar Association 2008.7 claimsIAppeals against for E&Ythe Seventh as time-barred Circuit underaddressed the one-yearthe form.2001.4 HeThe agreed Seventh with Circuit the Delaware was affirmed Chancery in an opinionCourt’s doctrine of deepening insolvency, a theory of damages by Judge Posner that also examined the merits of the 8that has frequently been invokedIBA by Legal US bankruptcyPractice Division NEGLIGclaimsENCE ANandD DdiscussedAMAGES COMMITTEE the viability NEWSLETTER of the deepening October 2008 trustees to bring claims against professional advisers insolvency theory of liability. and others. Judge Posner began with a short primer on The case of Fehribach v Ernst & Young LLP 1 involved deepening insolvency (the trustee’s theory of Taurus Foods, Inc, a small Indiana frozen food damages), deeming it ‘controversial’.5 He discussed company liquidated in an involuntary proceeding deepening insolvency’s original formulation – the under Chapter 7 of the US Bankruptcy Code. The theory that borrowing, after a company becomes Chapter 7 trustee for Taurus sued Taurus’s outside insolvent, would ‘ineluctably’ hurt the shareholders. auditors Ernst & Young LLP (‘E&Y’) claiming that the He surmised that a corporation can be insolvent in auditors committed negligence and breach of contract the sense of being unable to pay its bills as they come in failing to include a going-concern qualification due, ‘yet be worth more liquidated than the sum in Taurus’s 1995 fiscal year audit report.2 According of its liabilities and so be worth something to the to the trustee, if E&Y had issued the going-concern shareholders’. qualification, then Taurus’s owners would have Judge Posner next examined deepening insolvency realised that the company had no future and would claims in a case where management, in cahoots with an have immediately liquidated, averting US$3 million auditor or other outsider, concealed the corporation’s in costs which the company incurred as a result of its perilous state, which, if disclosed earlier, would have continued operations.3 The district court dismissed all enabled the corporation to survive in reorganised claims against E&Y as time-barred under the one-year form.6 He agreed with the Delaware Chancery Court’s

8 IBA Legal Practice Division NEGLIGENCE AND DAMAGES COMMITTEE NEWSLETTER October 2008