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Legal Watch: Volume 10

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

PUNITIVE DAMAGES FOR EXXON VALDEZ OIL SPILL REDUCED TO $2.5 BILLION BECAUSE OF EXXON'S PROMPT EFFORTS TO MITIGATE HARM

Case Summary: The U.S. Court of Appeals for the Ninth Circuit addressed for the third time the amount of punitive damages that could be imposed on Exxon as a result of the Exxon Valdez’s calamitous grounding on the Bligh Reef in Alaska’s Prince William Sound on March 24, 1989. The original punitive damage award of $5 billion was reduced to $4 billion by the District Court under a remand order by the Ninth Circuit (“Punitive Damages Opinion I”). Exxon appealed the $4 billion punitive damages award, and the Ninth Circuit again remanded in order for the District Court to reconsider the award in the light of recent Supreme Court decisions. On remand, the District Court increased the punitive damages award to $4.5 billion noting that this award represented a 9 to 1 ratio of punitive damages to economic harm to the plaintiffs. The District Court found that the plaintiff had sustained approximately $500 million in economic harm. On appeal, the Ninth Circuit agreed with Exxon that the recent Supreme Court cases discussing punitive damages supported a lower punitive damage award. The Court found that Exxon’s reprehensible conduct – allowing the relapsed alcoholic Hazeltine to command a super-tanker in dangerous and environmentally sensitive waters – was mitigated by Exxon’s prompt efforts to mitigate the harm by immediately commencing cleanup operations and making voluntary payments to plaintiffs. The Court, after observing that the Supreme Court had reserved the upper echelon of constitutional punitive damages (9 to 1 ratio) for “conduct done with the most vile of intentions,” found that Exxon’s reprehensibility was in the mid-range (above 4 to 1), and thus supported an award of punitive damages of $2.5 billion. The Court reduced the District Court’s award of $4.5 billion in punitive damages by $2 billion. However, the Ninth Circuit discussed and rejected the argument made by Exxon that the base for determining punitive damages – economic harm – should be reduced by the monies Exxon voluntarily paid to injured parties prior to any court decree. Exxon argued that the Ninth Circuit ruled in its Punitive Damages Opinion I decision that the “amount that a defendant voluntarily pays before judgment should generally not be part of the numerator.” As a result, Exxon argued that all of its settlement and pre-judgment compensatory payments to plaintiffs must be subtracted from the $500 million amount of actual harm thereby reducing the base from which punitive damages were to be calculated. Notably, the Court observed that if it accepted Exxon’s argument, “…the measure of harm would be a mere $20.3 million,” and applying the ratio of close to 1 to 1 that Exxon asserted was appropriate, the punitive damages would amount to only $25 million. The Court ruled it would not apply its earlier “generalized” rule in this instance, and refused to subtract the amount Exxon had voluntarily paid from the $500 million amount of actual harm.

LESSON: Even an accidental spill of petroleum products or chemicals can expose a terminal operator to punitive damages in ensuing court cases. Terminal operators can substantially reduce this exposure by rigorous attention to the requirements of their SPCC Plans and, in the event of a spill, by prompt and rigorous efforts to mitigate the harm. (In re: The Exxon Valdez, et al.)

PRIOR REFINERY OWNER CAN NOT BE SUED FOR $600 MISSION FOR FAILURE TO REPLACE DEFECTIVE PIPEFITTING AT A REFINERY

Case Summary: In August of 2001, CITGO Petroleum Corp. incurred damages of over $600 million at its Lemont, Illinois refinery when an elbow pipefitting suddenly ruptured and caused hot oil and chemicals to escape. This resulted in a series of fires which led to “catastrophic physical” damage to the refinery. CITGO sued The Babcock & Wilcox Co. (B&W), the manufacturer of the pipefitting, claiming that the elbow pipefitting was defectively designed and manufactured. Specifically, CITGO claimed the pipefitting was to contain 4% to 5% chromium – and was certified by B&W to contain 4.66% chromium – but was tested after the fire to contain only .88% chromium. B&W then filed a third-party complaint against Union Oil Company of California (Unocal), the prior owner of the refinery, for failure to properly inspect and maintain the pipefitting. The third-party complaint alleged that, in 1982, B&W learned that some of its fittings may not have met the appropriate chromium standard and contacted Unocal offering to replace all elbow pipeline fittings. Unocal declined the offer stating that its own inspection, using a nuclear analyzer, indicated the fittings met applicable standards. B&W further alleged that it was owed a right a contribution by Unocal under the “joint tortfeasor” statute because Unocal failed to adequately inspect and maintain the B&W pipefittings, and was therefore, at least, partially liable to CITGO for the pipefitting’s failure. Unocal moved to dismiss the suit on two grounds: (a) that the Illinois statute of repose blocked any suit for faulty construction after ten years; and (b) that B&W could not avail itself of the “joint tortfeasor” statute because contracts between Unocal and CITGO extinguished Unocal’s tort duty to CITGO. The circuit court denied Unocal’s motion to dismiss on the “statute of repose,” and granted it on the joint tortfeasor statute. B&W appealed and the Illinois Appellate Court granted Unocal’s motion to dismiss on both grounds. First, the Appellate court affirmed the dismissal under the joint tortfeasor statute, noting that CITGO had agreed to indemnify Unocal for any such liability as part of the sale agreement. Second, the Appellate Court reversed the lower court on the “statute of repose” issue. Essentially, the Court ruled that while B&W alleged that Unocal was negligent in failing to maintain the refinery piping system, the allegations were solely based on a defective pipefitting which was alleged to have been installed when the refinery was constructed, and therefore fell within the statute of repose’s ten year time limit.

LESSON: When selling assets, terminal operators should attempt to include in the sale contract language indemnifying the operator from all claims of any nature arising from the operation or maintenance of the facility prior to the sale. The broadest possible language can protect the seller of the asset from unforeseen liability years later. (CITGO Petroleum Corporation, et al. v. Babcock and Wilcox Company, et al.)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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