Wednesday, June 25, 2008

Exxon Valdez: still pending

The Supreme Court ruled today on the punitive damages award for the Exxon Valdez oil spill, after over 19 years of litigation. A brief recap: the Exxon Valdez disaster happened in March 1989. In 1994, a jury awarded $5 billion in punitive damages to those directly damaged by the accident. Later that year, an appeals court ruled the award to be excessive. In 2002, the judge reduced the award to $4 billion. Exxon appealed again, and the judge raised the award to $4.5 billion. In 2006 another appeals court reduced the damages to $2.5 billion. Exxon appealed again, all the way to the Supreme Court of the United States, who today ruled that their punitive damages should roughly equal the actual damages, or $500 million -- 10% of the original jury award.

I think the supreme court has forgotten what punitive damages actually are. Punitive damages are a proxy for corporate ethics. Corporations exist for one reason: to maximize shareholder profit. A corporation is inherently amoral and non-ethical. This is different from being immoral, or unethical; corporations aren't inherently evil. Ethics and morals are concepts that simply don't apply to a corporation. A corporation can no more be ethical than it can be tall or purple. It's a concept that doesn't apply. Decisions are governed by what maximizes profit. Period. For corporations, "right" is defined entirely in terms of monetary gain -- not in terms of strictly human concepts like being nice, or not taking advantage of the less fortunate, or trying to minimize the pain and suffering of others. People need to exist cooperatively, and our rules reflect this; corporations exist competitively. And their competition is all about making more money and being the last company standing.

I'll invent a hypothetical illustration. Say a car company can save a pile of cash by sourcing their brake pads more cheaply, but the cheap pads fail catastrophically more often than the expensive ones. The corporate math will consider whether the cheap pads are likely to fail enough to force a recall; if they're not, they'll look at the potential cost of legal settlements with people injured by the faulty brake pads, and the potential public-relations and sales hits they may take if the flaws become common knowledge. If the pads still save money, they'll use them; if they don't, they won't. This is all about money; at no point in the decision does it matter that the cheap brake pads will kill people when they fail. Corporations can't be tried for negligent homicide. The body count is only a factor because the injuries and deaths can result in lawsuits with dollar values attached.

And this is what punitive damages are: an attempt to introduce a dollar value to corporate actions that maim, injure, and kill. Safety costs money; without the potential for lawsuits, corporations would have little direct incentive to behave responsibly. This is what the Exxon Valdez damages were about: Exxon decided to save money by understaffing their ships and dangerously overworking the crew, and to keep a drunk on crew, rather than go through the trouble and expense of replacing him. A large punitive damage award doesn't make the accident un-happen, but it gives the company -- all companies -- incentive to factor safety into their decisions, even if it costs money. Punitive damages give corporations incentive to imitate ethical behavior. And limiting these damages reduces corporate incentives to take actions which businesses call "expensive", and people call "responsible".

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