March 31, 2011 Articles

BP, Exxon Valdez, and Class-Wide Punitive Damages

Exxon Valdez offers important lessons for the BP litigation, particularly in regard to class-action practice and procedure.

By Nimesh R. Desai

Witnesses of the 1989 Exxon Valdez disaster in Alaska’s Prince William Sound could not have imagined a greater disaster. After its intoxicated captain led the oil supertanker into the Sound’s Bligh Reef, the massive ship released approximately 11 million gallons (350,000 barrels) of crude oil. Eventually, more than 1,300 miles of coastline were affected, much of it ecologically sensitive and critical to countless animal species. Commercial fisheries operating in the area were devastated by the contamination, and the impact rippled through the coastal economy, affecting everyone from food processing workers to municipal governments, from cannery workers to area businesses reliant on the fishing economy.

A short 20 years later, history has repeated itself on a grander scale. BP’s Deepwater Horizon disaster in the Gulf of Mexico unfolded over 87 days, making the term “spill” seem wholly inadequate. In that time, nearly 160 million gallons (5 million barrels) of oil spewed into the Gulf from the breached undersea well. Skimming efforts captured 800,000 barrels of oil, more than were ever released into Prince William Sound. Once again, ecologically sensitive and commercially valuable coastline is devastated, with the economic aftershocks only beginning to reverberate through the Gulf states.

With the well seemingly under control, the question naturally turns to compensation for the affected fishers, workers, businesses and municipalities of the Gulf Coast. Analysts and news articles have already raised the specter of the Exxon Valdez disaster, which spawned 20 years of litigation, conflicting state and federal court approaches, and endless appeals. It remains to be seen how BP will approach the litigation, though the federal government’s involvement is an important difference that may speed the process for victims.

 

Nevertheless, the Exxon Valdez litigation certainly offers important lessons for the BP litigation, particularly in regard to class-action practice and procedure. Similar classes of individuals and businesses have been affected, and the substantive claims will likely be similar. If anything, the Oil Pollution Act, passed as a response to the Valdez disaster, extends protection to a broad swath of commercial interests that were denied recovery based on the district court’s application of federal maritime law in Exxon Valdez.

 

The route to class certification in Exxon Valdez was serpentine, to say the least. In parallel proceedings before Judge Brian Shortell in Alaska state court and Judge H. Russel Holland in Alaska Federal District Court, various plaintiffs moved for certification under Federal Rule of Civil Procedure 23(b)(2) and (b)(3), and their Alaska state court procedural equivalents. The arguments for and against certification mirrored those typically raised in mass tort cases—the plaintiffs highlighted the liability case against Exxon, whereas Exxon focused on damages and causation to argue that common questions did not predominate. Moreover, Exxon argued that because most plaintiffs sought monetary damages, certification of a (b)(2) class for equitable relief was not permissible.

 

After a joint hearing, both judges issued rulings on the same day. The plaintiffs’ motion was denied in its entirety in federal court. In state court, Judge Shortell certified a class of cannery workers, as well as classes of commercial fisherman, area businesses, Alaska natives, and property owners two months later. Ultimately, the favorable federal court rulings prompted Exxon to remove pending state court cases into federal court. Though the legal basis for removal was questionable, the prospect of lengthy appeals prompted the parties to formulate a federal trial plan to resolve the claims of certain fishermen. Once the trial plan was established, there was less interest among the plaintiffs in returning to state court to relitigate the same issues.

 

It is against this backdrop of effectively consolidated federal proceedings that the most interesting class-action procedural developments took place. In addition to fighting off the plaintiffs’ class certification motion in federal court, Exxon had also opposed certification of a punitive damages class in state court. However, with all the cases in its favored forum, and with the case poised for trial, Exxon filed a motion for certification of a mandatory punitive damages class in federal court before Judge Holland.

 

Exxon argued that certification was necessary under Rule 23(b)(1) because the resolution of some plaintiffs’ punitive damages claims would be dispositive of other plaintiffs’ claims, or at the very least, might “substantially impair or impede their ability to protect their interests.” Exxon’s argument rested on a variation of the “limited fund” theory articulated most famously in Ortiz v. Fireboard Corp., 527 U.S. 815 (1999). At first blush, the limited fund theory seemingly would not apply, given that Exxon’s revenues in the mid-1990s exceeded $100 billion per year, and yearly net profits were $5 billion. Exxon acknowledged as much, but argued that early punitive awards would exhaust the substantive legal limits on permissible punishment, based on the Supreme Court’s emerging jurisprudence on substantive due process limits to punitive damages.

 

The plaintiffs were conflicted over Exxon’s approach, but Judge Holland ultimately seized on this newly minted “limited punishment” theory to grant the 23(b)(1) motion. Surveying recent Supreme Court jurisprudence, including Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1 (1991) and TXO Production Corp. v. Alliance Resources Corp., 113 S.Ct. 2711 (1993), the court held these cases had, in substance, created a limited fund for punitive damages in multiclaim cases. The court found further support in In re “Agent Orange” Product Liability Litigation, 100 F.R.D. 718 (E.D.N.Y. 1983), which certified the issue of punitive damages for a class of soldiers exposed to the chemical weapon, and contrasted denial of class certification in other mass tort litigation that involved injuries and claimants spread nationwide and over a greater span of time. The singular nature of the Valdez spill made the logistics of compliance with the requirements of Rule 23(b)(1)(B) much simpler, the court explained.

 

Thus, after unsuccessful attempts at class certification through customary 23(b)(2) and (b)(3) motions, it was the Supreme Court’s then-emerging jurisprudence on due process limits to punitive damages that prompted class certification. Further, once certified, the trial necessarily encompassed the liability and damages issues necessary to establish the proper amount of punitive damages.

 

One might envision a similar approach to the BP litigation. In fact, a complaint seeking certification of statewide punitive damages classes for each of the affected states is already on file. See Gallo v. BP, P.L.C., No. 2:10-cv-02795 (E.D. La. filed Aug. 20, 2010). Though the BP spill dwarfs the Valdez spill in size, it still bears more similarity to a discrete event (which the Exxon Valdez court held lends itself to a punitive damages class), than a “dispersed” mass tort that claims victims in disparate places and times, such as a typical pharmaceutical or medical device case.

 

If Exxon Valdez is any guide, a 23(b)(1)(B) motion is certainly a viable procedure. Yet, aside from Exxon Valdez, punitive damages class-certification motions have met with mixed results, as courts have struggled with the correct legal standards to apply and the evidentiary showing needed to justify a 23(b)(1)(B) class under a limited-fund theory. For example, the Second Circuit has commented favorably on the theory. In re Joint E. & S. Dist. Asbestos Litig., 982 F.2d 721, 736–37 (2d Cir. 1992). That same court, however, along with the Ninth and Third Circuits, have reversed certification for lack of adequate factual support for the limited fund or over concerns that the proposed class was underinclusive. See In re School Asbestos Litig., 789 F.2d 996, 1005–06 (3d Cir. 1986); In re Northern Dist. of Cal., Dalkon Shield IUD Prods. Liab. Litig., 693 F.2d 847, 851–52 (9th Cir. 1982); In re Simon II Litig., 407 F.3d 125, 137–39 (2d Cir. 2005) (holding that the plaintiffs had not proved the existence of a “limited fund” and cautioning against entering a punitive award before a compensatory award because the punitive award must “bear a sufficient nexus to the actual and potential harm to the class.”).

 

Nonetheless, as the Supreme Court has solidified its jurisprudence on due process limits to punitive damages by setting more rigid constraints on both the considerations that may inform an appropriate award and the permissible range of any award, it may be that courts will increasingly favor a 23(b)(1)(B) punitive damages class. When most of the appellate decisions cited above were reached, the Supreme Court’s punitive damages due-process analysis was not fully formed.

 

Thus, while the Court initially explained, and continues to maintain, that there is no “mathematical bright line” defining the ratio of punitive to compensatory damages, BMW of North America, Inc. v. Gore, 517 U.S. 559, 560 (1996), it has explained in more recent decisions that “[s]ingle digit multipliers are more likely to comport with due process.” State Farm v. Campbell, 538 U.S. 408, 425 (2003). Further, in State Farm and in Philip Morris USA v. Williams, 127 S. Ct. 1057 (2007), the Court sought to distinguish harm to the plaintiff in particular versus harm to all of the defendant’s victims in general and to guide lower courts and ultimately juries on how these related but distinct forms of harm may factor into a punitive award.

 

Fittingly enough, the Court’s most recent pronouncement came in the Exxon Valdez case. Exxon Shipping Co. v. Baker, 128 S. Ct. 2605 (2008). Though limited to maritime cases, the Court included lengthy discussions on the historical development of punitive damages and the purposes they serve, building on its earlier decisions. Moreover, it found a 1:1 ratio of punitive to compensatory damages to be appropriate given the facts of the case. Id. at 2633.

 

While the Court’s standards are imprecise and subject to strikingly different interpretations by the plaintiff and defense bars, these cases certainly have ramifications for the limited punishment theory. If punitive damages are roughly limited to a multiple of actual or potential damages, rather than being subject to a generalized “proportionality” requirement, then it is easier to conceptualize a defined “limited fund” that all affected victims should share. And, if the Court demands that an award in a particular case be focused principally on the harm visited to that particular victim but permits consideration of harm to others, then, arguably, the fairest awards are possible only in a proceeding that takes into account all the victims’ circumstances and injuries, as well as their respective relationships to the defendant. Of course, there are counterarguments. One could argue that strict adherence to the Supreme Court’s due-process analysis in individual trials should foreclose the possibility that one victim’s award will interfere with another’s, obviating the need for joint or class proceedings.

 

Few decisions have addressed this issue after the Court’s most recent punitive damages decisions. As noted above, the Second Circuit took a cautious approach in Simon II, a case in which Judge Weinstein of the Eastern District of New York certified a class of cigarette smokers seeking punitive damages against the tobacco industry. In re Simon II Litig., 211 F.R.D. 86 (E.D.N.Y. 2002). The Second Circuit reversed, holding that the factors outlined in Ortiz must be strictly followed to certify a 23(b)(1)(B) class and that no true limited fund had been demonstrated. In re Simon II Litig., 407 F.3d at 138. Further, it stated in dicta that State Farm’s focus on the relationship between punitive damages and “actual and potential harm” likely necessitated a finding on compensatory damages before punitive damages could be assessed. Id. at 138–39. In contrast, in In re New Orleans Train Car Leakage Fire Litigation, 795 So. 2d 364 (La. Ct. App. 2001), decided after BMW but before State Farm, the court affirmed a punitive damages award for a class of 8,047 people. The case arose from the ignition of a pressurized railroad tank car loaded with a flammable and toxic substance leading to a massive evacuation. Id. at 370–71. The punitive award was decided after only a small number of class members’ compensatory awards were determined, a procedure the court held was justified under controlling case law. Id. at 379–86.

 

The divergent opinions may be explained by a factor articulated by Judge Holland in Exxon Valdez: whether a case involves a discrete event, like an oil spill, or numerous distinct injuries caused under varying circumstances, albeit due to a common course of conduct, such as a pharmaceutical mass tort. Where a mass tort is delimited by geographic and temporal bounds, courts are more likely to accept that a class can be properly defined and that the entire scope of actual and potential harm can be accurately gauged, thereby permitting a reasoned and constitutionally sound decision on a proportional punitive award.

 

The BP litigation may be the case that fleshes out this still nascent area of the law. If news articles are any guide, the key defendants have acted with the requisite recklessness and malice needed to warrant a punitive damages award, and countless claimants will have a legitimate claim to such an award. The case may also help define the blurry line between “discrete” and “dispersed” mass torts. While the New Orleans Train Car incident affected a local area and the Valdez spill a large but discrete Alaska region, the BP disaster has affected the entire Gulf region. Whatever the result, it is a fair bet that should the court ultimately face a class-certification motion, the Exxon Valdez approach will be thoroughly scrutinized by the parties and the court.

Nimesh R. Desai – March 31, 2011


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