Exxon on trial! Again? - CE Roundtable

Chief Executive, The, Jan-Feb, 1995 by Shanthy Nambiar

Exxon Valdez. To many Americans, the name of the ill-fated tanker conjures images of oil-soaked bald eagles and a man-made disaster on a par with Bhopal, Chernobyl, and Three Mile Island. Senior executives and corporate lawyers get the shivers from thoughts of the Valdez, as well. But in this case, the memory likely is that of a jury last September slapping Exxon with $5 billion in punitive damages - on top of some $3.9 billion the oil company already has shelled out in legal settlements and cleanup costs.

Yet a trip to the scene of the 1989 disaster - Alaska's Prince William Sound - reveals hundreds of miles of clean beaches, sparkling waters, stable wildlife populations, and abundant subtidal communities of crustaceans, worms, and other aquatic life. Pink salmon fishermen in the area had a spectacular year in 1994. Presumably conditions were similar immediately prior to last year's judgment. Thus, the picture-perfect vista raises some critical questions: Was the hefty judgment against Exxon excessive? Will there be a ripple effect throughout corporate America, with billions of investment dollars earmarked for research and development diverted to liability-prevention schemes? Perhaps most important, was science in the Exxon case deliberately subjugated to emotionalism, supporting the contentions of environmentalists bent on subverting market forces through regulation and judicial fiat?

"There was a legal drive to distort science," concludes Jeff Wheelwright, former science editor of Life magazine, who spent five years researching and reporting on Prince William Sound. "Many scientists I knew were caught in the politics of the case. Statistically, there was this gray area surrounding the damages. But [plaintiffs'] lawyers wanted black and white answers."

"There is a minimal relationship between how the money was spent and any plausible conception of justice in this case," adds Jonathan Adler, associate director of environmental studies at the Washington-based Competitive Enterprise Institute. "Large corporations are going to have a slightly harder time getting a fair shake. They are faceless entities that have nothing to lose except profits."

Kenneth Adams of the Washington-based law firm Dickstein, Shapiro & Morin, the lead plaintiff attorney, says the fine sends a signal to Exxon. "Prevention is better than recklessness," Adams says. "What went wrong was fundamental bad management."

Sidestepping value judgments, journalist Wheelwright pinpoints a fundamental flaw in the evidence used to support the judgment: It's impossible to calculate the damages - much less put a dollar value on them - because no one knows precisely what conditions were like in the area's ecosystem prior to the oil spill. "Change from what?" he asks.

In a book on the Valdez debacle, "Degrees of Disaster," Wheelwright argues that nature is constantly in flux, and factors such as weather, food supply, predation, and disease can cause inconsistent swings in wildlife populations. Data cited by plaintiffs' attorneys on some of the carnage - thousands of bird and sea otter carcasses washed ashore, for example - fail to take into account nature's tremendous powers to recover from both natural and manmade disasters. Similarly, lawyers blamed hard economic times among Alaskan fishermen in recent years on a plunge in prices caused by the spill. The argument fails to acknowledge that prices depend on an array of market forces, including supply and demand, and volatile international currency markets.

"The plaintiffs are wrong," says Wheelwright, who hasn't used a drop of Exxon gasoline in five years. "Wrong for the right reasons. Exxon, though I choke to admit it, is correct in maintaining that the Sound has recovered from the spill."

So why a judgment Exxon Chairman and CEO Lee R. Raymond describes as "unwarranted and unfair; ? Simply put, a phenomenon that might be described as legal hyperinflation. A 1992 study by Texaco, "Punitive Damages Explosion: Fact or Fiction?", notes fines against businesses in Texas, California, Illinois, and New York increased an inflation-adjusted 117 times between 1968 and 1971 and 1988 and 1991, from an average of $800,000 to $312.1 million, excluding compensatory damages and other settlements.

There's also an element of sheer caprice. "This area of disaster tort cases is sort of a crap-shoot," notes CEI's Adler, adding that there's no telling what a jury might mete out as punishment. Indeed, if Exxon's appeals fail, and the judgment stands, the Valdez judgment would shatter the standards for both environmental disaster cases and punitive damages - despite the fact that the oil spill ranks as just the sixth largest on record.

In 1987, Texaco paid Pennzoil a total of $3 billion to settle a business dispute, following an initial $10.5 billion jury verdict against Texaco, including $3 billion in punitive damages. The penalty was the nation's second largest. In tanker disasters, the Amoco Cadiz ran aground off the coast of France in 1978, spilling 68.7 million gallons of oil, six times as much as the Valdez. A U.S. court ordered the company to pay French plaintiffs $235 million - none of it punitive damages.