Wednesday, June 25, 2008

United States to Exxon: Just Kidding!

Today, Justice David Souter led five justices of the United States Supreme Court to take what had been a fairly stark warning against those capable of preventing environmental catastrophes and massive economic and aesthetic damage, and reverse it into a wrist-slap.

One may debate whether Exxon should have been held liable for the damage caused by its drunken officer (had Exxon fired him for alcoholism, would it have been subject to suit under federal antidiscrimination law for failing to accommodate him with a sobriety program?), but that's not what the Supreme Court was about. Instead, it decided in effect to turn the concept of punitive damages on its ear and allow economic damages to serve as a sort of guidepost for total damage awards.

Punitive damages exist for a specific reason: punishment. While the specific kind of evil varies from state to state and from statute to statute, sufficient wrongdoing can give rise to a damages award that is larger than the actual damages caused by the wrongdoer -- not as a lottery award to the injured party, but as a guarantee that other wrongdoers won't decide that it's possible to calculate "actual damages" as a cost of business and intentionally inflict them on the public in the context of ongoing business operations.

Let's imagine the world without punitive damages. A petroleum refinery knows its high-volume plant is behind on maintenance, but it also knows that (a) shutting it down for maintenance will cost a fortune, and (b) the maintenance that needs to be done will take so long they might as well wait until something breaks, because the repair would be about as much delay. The third thing they know is (c) the folks working on the plant site are uneducated manual labor whose incomes are small enough that if they are put out of work -- killed or paralyzed -- that the worst possible cost is pretty modest. They'll just set aside a damages fund from which to fight claims, and after they wear down the broke plaintiffs' bankrupted families, settle them. The genius of this is that since the salaries and pay schedules of all the at-risk employees are known, the only thing the risk management types need work out is the likely number of fatalities caused by the expected plant failure, so they can budget for it in the eventual reconstruction project. That way, everybody can be sure the company's long-term safety is assured and still make bonus this quarter.

Punitive damages are intended to throw a wrench into this calculation by adding an unknown damage variable that is based on the assets of the perpetrator, or the perpetrator's profits, or some other measure unrelated to the damages done but intended to get the evildoer's attention. Again, this isn't a lottery: to avoid punitive damages, you need only exercise appropriate care. You can't stop all industrial accidents, but you can conduct yourself with enough care that you don't need special punishment. Punitive damages are for folks who don't bother to care.

In the case of environmental recklessness, the case that punitive damages are some kind of windfall is even harder to make than if the recipient is some poor ex-employee who can't ever walk again. This is because the injury impacts all kinds of people whose utility and value obtained from the environmental resource is difficult to ascertain. In the case of the Exxon Valdez, the employer (according to the court) knew full well their captain had a history of being on the sauce. The employer also knew the captain had a ship full of crude oil that was well-known to cause costly beach clean-ups and to impair the livelihoods of everyone whos business (fishing? tourism? leisure boating rentals or sales?) depended on water being sort-of clean.

By capping punitive damages at a low multiple of economic damages, the court reassures industrial tortfeasors that their risk management teams can go back to costing out the value of human life and intentionally consuming humans and the environment in the pursuit of near-term financial objectives. And imagine the bonanza when their victim is a socialite whose primary activity is humanitarian work and the support of charitable organizations. She doesn't make a dime. When she dies, her family loses nothing. Killing her is free.


It's a great time to be in business in the good ol' U.S. of A.

Thanks, Dave!

UPDATE: Dave's discount wasn't the first Exxon (now ExxonMobil, XOM) has received off the original jury verdict. The award as it stands is about a tenth of that declared proper by the folks tasked with deciding the facts of the case. (from the LA Times)

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