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Friday, July 11, 2008

WSJ Editorial Attempts to Exonerate Exxon

By now, most poeple know of the 1989 Exxon-Valdez oil spill. You heard about the drunken oil tanker captain who handed the keys to an unqualified underling just before a hair-pin turn near Alaska. As a result, the ship crashed into a reef, spilling 11 million gallons of oil into pristine Prince William Sound.

Well part of the story that you may not have heard is that in 1994, Exxon Shipping Co. v. Baker awarded $5 billion in punitive damages to those affected by the spill, and it seemed a fair price for an obscenely wealthy corporation to give to the citizens whose livelihoods were ruined. But, that sum was later cut in half by the Ninth Circuit Court of Appeals. And in June, the Supreme Court reduced it even further to a mere $507 million. It was a huge blow to the victims of the spill that trivialized the company's catastrophic negligence.

The American Enterprise Institute’s Ted Frank, however, thinks otherwise. In an editorial in yesterday's Wall Street Journal, Frank asserts that the case represents a need for legislative reform to actually reduce punitive damages in the future. Ignore the fact that the $500 million Exxon now has to pay is just barely more than 1% of its earnings last year alone. Also the fact that the two decade delay further diminished the value of this already paltry payout, especially since many of the oil spill's victims have died waiting for compensation.

The fact of the matter is that the 1:1 ratio of punitive to compensatory damages that was awarded in this case was -- compared to similar rulings in the past -- modest at best. And when you consider the extreme negligence and the dire consequences of the spill, it seems egregiously low (as the jury who awarded the $5 billion can attest). Frank asserts however, that “[t]he main danger is that trial lawyers will use the Court's 1:1 ratio as a floor, rather than a ceiling.”

This statement completely discounts the actual principle behind punitive damages, which is to punish defendants and to act as a deterent for futer misconduct. How is an award going to deter such negligence if a company knows that a jury can only award punitive damages equal to compensatory damages? It won't.

And that’s something even a soused ship captain should be able to grasp.

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