Thursday, June 26, 2008

What's So Weird About the Exxon Decision?

I just finished reading the decision in Exxon v. Baker and have a few preliminary thoughts.  As most of our readers are aware from Byron's post, the decision reconsidered the punitive damages in the case arising out of the Exxon Valdez disaster.  The court held that punitive damages are available under maritime law, that this is a federal common law question, and that the appropriate punitive damages award for the type of reckless conduct found in this case was a 1:1 ratio to the compensatory damages awarded in the case.  For those wanting more commentary, you might check Scotusblog commentaries here.   

So what's so weird about the decision? 

1. Its a punitive damages class action! Forgive me for not noticing this before, but that is a rare bird indeed. 

2. The Court's main concern is that punitive damages are inconsistent.  But that assertion, if true, doesn't at all support the idea that punitive damages should be pegged in a 1:1 ratio to compensatory damages.  We need to ask why they are inconsistent and what that means.  For example, assume there are two trials arising out of the same conduct.  In one trial there is a punitive damages award of $8 million and in another trial a punitive damages award of $0.  Does this mean that $0 punitive damages is the right answer? No.  There are three possible answers: $8, $0 and $4.  Which is right? I don't know. But none of them bear any relationship to the compensatory damages in the hypothetical case (which is why, you may have noticed, I did not mention the compensatory damages).  What inconsistent punitive damages tell us is that the whole concept of punitive damages is contested, and people can't agree on whether and how much we should punish wrongdoers through the civil justice system.   Some juries think we should, some think we shouldn't.  Imposing a randomly selected ratio does not solve the underlying policy question.  In any event, here the punitives across cases are consistent because all the cases arising out of this conduct were included in this class action!  Furthermore, we tolerate inconsistent verdicts all the time in personal injury cases.  This is part of life, because the process of valuing cases is one of the social construction of damages.  And it is contested. 

2a.  And on that ratio, the idea that the appropriate measure of punitive damages is the same as the mean ratio is absurd.  The court did not even consider comparable cases (because there aren't any, perhaps).  Can you imagine what my students would say if I told them that I am not reading their exams and grading them individually, but instead giving them a B, because we have a B median requirement at the law school where I teach?   That would be incredibly unfair, regardless of what I think about grading as a policy matter.

3. The Court stands the economic theory of punitive damages on its head.  The majority quite clearly states that the purpose of punitive damages is retribution and deterrence.  But if deterrence is your goal, pegging punitive damages (in any multiplier) to compensatory damages makes no sense.  The theory of deterrence requires that the wrongdoer pay something more than the cost of preventing the accident/bad act.  That cost has no relationship to compensatory damages.  If the cost of preventing the the wrongful act is the same as the damages that act cost, that is pure luck.   For example, maybe a test to find out if ship's captains are relapsed alcoholics only costs $100 per captain per year.  Then the punitive damages need to be something more than that amount.   Not $2.5 billion.  Not $20 million either. 

3a. To the extent that its not about deterrence but about retribution, pegging the punitive damages to compensation still doesn't make sense.  If you want to hurt the defendant, you have to look at the defendant's wealth and figure out what amount will hurt him.   Knowing how much the defendant hurt the plaintiff will not help because there is, again, no relationship between the marginal value of a dollar to the plaintiff and to the defendant.  For an article on the retribution theory of punitive damages see Anthony Sebok, Punitive Damages: From Myth to Theory on SSRN and Iowa L. Rev. 

3b.  The only way that pegging compensatory damages to punitive damages makes sense is to say that punitive damages are a part of compensatory damages - they compensate for other things, say harm to third parties.  This is a theory, but its one the court has rejected as far as I can tell in
Philip Morris v. Williams as well as in Exxon.  For an article on this theory see Catherine Sharkey, Punitive Damages as Societal Damages abstract on SSRN , published in the Yale L. J.


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