Amicus Curiae Brief — Shell Oil Co. v. Hebble

MO7TION FILED

NOV 12 20109

No. 10-349

In the Supreme Court of the Anited States

SHELL OIL COMPANY; SWEPI LP (AS SUCCESSOR-IN-

INTEREST TO SHELL WESTERN E & P, INC.),

Petitioners,

Vv.

NANCY FULLER HEBBLE, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF CIVIL APPEALS

OF THE STATE OF OKLAHOMA

MOTION FOR LEAVE TO FILE BRIEF

AND BRIEF FOR AMICUS CURIAE

THE AMERICAN PETROLEUM INSTITUTE

IN SUPPORT OF PETITIONERS

HARRY M. NG DOUGLAS HALLWARD-DRIEMEIER

STACY R. LINDEN Counsel of Record

AMERICAN PETROLEUM AARON KATZ

INSTITUTE EMILY DERR

1220 L Street, N.W. ROPES & GRAY LLP

Washington, D.C. 20016 One Metro Center

(202) 682-8229 700 12th Street, N.W., Suite 900

Washington, D.C. 20005

(202) 508-4600

Douglas. Hallward-Driemeier@

ropesgray.com

Counsel for Amicus Curiae

a A

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D. C. 20002

Hn the Supreme Court of the United States

No. 10-349

SHELL OIL COMPANY; SWEPI LP (AS SUCCESSOR-IN-

INTEREST TO SHELL WESTERN E & P, INC.),

Petitioners,

NANCY FULLER HEBBLRE, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF CIVIL APPEALS

OF THE STATE OF OKLAHOMA

MOTION FOR LEAVE TO FILE

AMICUS CURIAE BRIEF

Pursuant to Rule 37.2 of the Rules of this Court, the

American Petroleum Institute (API) moves for leave to

file the accompanying brief as amicus curiae in support of

petitioners. Counsel for petitioners has consented to the

filing of this brief; counsel for respondents has not.

Amicus curiae is a national non-profit trade associa-

tion that represents over 400 members collectively en

gaged in all aspects of the petroleum and natural gas in-

dustry.

API has a particular interest in this litigation be

cause of the potential adverse effects of the decision be

low on the petroleum and natural gas industry. As fre

quent litigants and frequent targets of large punitive

damages awards, API’s members have a strong interest

ll

in ensuring the predictability and fairness of punitive

damages awards. The arbitrary and excessive award af-

firmed by the Oklahoma Court of Civil Appeals is direct-

ly contrary to those constitutional values and exemplifies

a trend that is particularly troublesome to API’s mem-

bers. In addition to violating defendants’ due process

rights, unpredictable punitive awards and incoherent re-

view of such awards hamper innovation and undermine

effective business and litigation planning.

Amicus curiae’s considerable interest in ensuring the

constitutional application of punitive damages awards

gives it a strong interest in the resolution of the ques-

tions raised by the petitioners in this case. Accordingly,

amicus curiae respectfully requests leave to file the at-

tached brief.

Respectfully submitted,

DOUGLAS HALLWARD-DRIEMEIER

ROPES & GRAY LLP

Counsel for Amicus Curiae the

American Petroleum Institute

il

TABLE OF CONTENTS

INTEREST OF AMICUS CURIAKE....... 2

REASONS FOR GRANTING THE WRIT... 3

I. Although De Novo Review Of Punitive Damages

IT.

Awards Is Constitutionally Mandated, Reviewing

Courts Fail In Their Constitutional Role Due To

The Absence Of Clearer Guidance From This

A. De Novo Review Is Critical To A

Constitutional System Of Jury-Imposed

IO SID chr iccssetraxenavercasarccncnemecptersicisens 6

B. The Court’s Current Guidance Lacks

Sufficient Clarity To Provide The Tools For

Meaningful De Novo Review...............:::s:cee0e 8

C. The Promise Of De Novo Review Can Be

Achieved Only Through Clarification Of The

Critical Character Of The Ratios, Especially

The 1:1 Ratio, And The Relationship Between

We ia xississsitsceaerens nedaianiabientascneiesoamnica 13

Prejudgment Interest That Does Not Measure A

Defendant’s Reprehensible Conduct Should Be

Excluded From The Ratio Of Punitive To Compen-

I Sr ets techsiesdareeiiindansincen 15

A. For The Gore Ratio To Serve Its Function,

The Denominator Must Include Only Harm

Directly Attributable To The Conduct To Be

BIEN <donccrbuessnconnsiiiiguianstuatuvaniasac canteens 16

1V

B. Prejudgment Interest Does Not Reflect The

Defendant’s Conduct That Warrants

PTBPITIOTE vussecaisesentseecesceneeeee ae 19

CONCLUSION cess csesissesesscvessecesantnuessenineeuanaa eae 25

TABLE OF AUTHORITIES

Page(s)

CASES

BMW of N. Am., Inc. v. Gore,

TS) passim

Cooper Indus., Inc. v. Leatherman Tool Group,

IETS 25, GEE (2001 )..c.ccarcsssoevcesccvecseesoessceoses passim

d’Arc Turcotte v. Estate of LaRose,

EDs ccsccesssesescssosssssesvessvecsseresevsnsesveese 19, 22

Dees v.:Am. Nat'l Fire Ins. Co.,

SEEMED CREOOE, LOG) ......cccecossccsscevovsceccosesooseceerses 23

InhMeo v. Philbin,

MEE, ROUND) 5..ssscvccnvescosnesoooosssensscsencssseescens 19

Exxon Shipping Co. v. Baker,

EE ND CAPES) oo cssesecceseroossesessccsesccoossseoeees passim

Fortino v. Quasar Co.,

SEED COUN Cr, 1991).......cc0cccccccccossvocesssescoocsscecs 22

Goff v. Elmo Greer & Sons Constr. Co.,

297 S.W.3d 175 (Tenn. 2009), cert. denied, 130

IE a cssisssrrnsvevssessesessnvestersssssrasovevesseoensenes 12

Grove v. Myers,

EE SE, © LECID) 00.005 ccccssscosscesncsesessccnessonesovescssonees 19

Honda Motor Co. v. Oberg,

IIE REFIT Dos csssesesescsnsanccsssnsccsscscsensessescsseessesesonees 4)

vi

Johnson v. Ford Motor Co.,

Fe ee iit rcidcncntiniececies 22

MckKvoy Travel Bureau, Inc. v. Norton Co.,

Se We a eavesirtencicinccasosnerieicaicncixinctinn 19, 22

Mitchell v. Fortis Ins. Co.,

385 S.C. 570 (2009), cert. denied, 180 S. Ct. 1896

UIP IED sicthinscnesdanaiiaidedplagunanicidtsenigiuciisdadhandduainitaitiaeesee 14

Modern Mgmt. Co. v. Wilson,

Br Fae Oe as SE inactstereniassrentvienetsaaienivinseseeni 12

Pac. Mut. Life Ins. Co. v. Haslip,

CO es BR ees ener? 14

Perrine v. EJ. du Pont de Nemours & Co.,

CG B02 Bh Ces Bi WD ces ine so nestcsnccascdsvindesnssncacs 15

Philip Morris USA v. Williams,

Oe Ge ee bitten seks idissiesereorenseencinacens 6, 16, 17

Ragland v. Digiuro,

--- §.W.3d ---, No. 2009-CA-186, 2010 WL

4137183 (Ky. App. Oct. 22, 2010) ..............ccccccssscreseee 14

State Farm Mut. Auto. Ins. Co. v. Campbell,

Ne Gy ae te I a saitzitcccscodacce cn nessiecen teens passim

Trinh v. Gentle Comme’ns, LLC,

881 N.E.2d 1177 (Mass. App. Ct. 2008)......::.cse000 12

TXO Prod. Corp. v. Alliance Res. Corp.,

Oe cai Se Le ecetesrinsceunnemnuncanseien 11,12

United States v. Bornstein,

Ce 0 Ee Ci citi eintecebaee z=)

vii

Wheeler Motor Co. v. Roth,

BIS Arc. S18 (1098) cececceccesessessersessosessccosesvoreceesesesssnccers 29

Zhang v. Am. Gem Seafoods, Inc.,

339 F.3d 1020 (9th Cir. 2003), cert. denied, 541

Fis Se Te iaiisuiitexesesriessnatedntamebdescakiguesaiesnaniciciiagien 12

STATUTES

Alaska Stat. § OCD.BOGTIO (2O10)..cccrccesccccccccosscesssnseescsascosees 22

Ind. Code § 84-61-4-3 (2016)........c:ccccccsresosesovesecsesseseseeesens 22

Pc ees Cis Bie et GED stntnensvneinsncskecsnesierevensereminins 22

Cicin. Stat. tit. SE, § S7O.19 GOI) nccccssrsccscesscsrsciscrosnrses 3, 20

OTHER AUTHORITIES

Alison F. Del Rossi & W. Kip Viscusi, The

Changing Landscape of Blockbuster Punitive

EPAAGGEE FAOATES CHO IG) cccsevscescvsnsesesvscsseveveveseseserevacoees 2

Restatement (Second) of Torts § 913 emt. d (1979)...... 22

In the Supreme Court of the United States

No. 10-349

SHELL OIL COMPANY; SWEPI LP (AS SUCCESSOR-IN-

INTEREST TO SHELL WESTERN E & P, INC.),

Petitioners,

Vv.

NANCY FULLER HEBBLE, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF CIVIL APPEALS

OF THE STATE OF OKLAHOMA

BRIEF FOR AMICUS CURIAE

THE AMERICAN PETROLEUM INSTITUTE

IN SUPPORT OF PETITIONERS

Amicus curiae the American Petroleum Institute

(API) respectfully submits this brief in support of peti-

tioners.’

* Counsel for each party was informed at least 10 days prior

to this brief’s due date of amicus curiae’s intention to file this brief.

Counsel for petitioners consented to the filing of this brief; counsel

for respondents did not. Accordingly, amicus is filing herewith a

motion for leave to file this brief pursuant to Rule 37.2 of this

Court. No counsel for a party authored this brief in whole or in

part, and no counsel or party made a monetary contribution in-

tended to fund the preparation or submission of this brief. No per-

2

INTEREST OF AMICUS CURIAE

The American Petroleum Institute (API) is a na-

tional non-profit trade association that represents over

400 members collectively engaged in all aspects of the

petroleum and natural gas industry.

API has a particular interest ‘in this litigation be-

cause of the adverse effects that the decision below will

have on the petroleum and natural] gas industry. A re-

cent survey found that companies in the energy and

chemical industry are among the most frequent bearers

of “blockbuster” (at least $100 million) punitive damag-

es awards. See Alison F. Del Rossi & W. Kip Viscusi,

The Changing Landscape of Blockbuster Punitive

Damages Awards, 12 Am. L. & Econ. Rev. 116, 126 tbl.2

(2010). Unpredictable punitive awards, moreover,

hamper innovation and undermine effective business

and litigation planning. Amicus curiae thus has a con-

siderable interest in ensuring that punitive awards are

guided by uniform constitutional standards and are

otherwise consistent with constitutional limits.

This case exemplifies the unpredictable punitive

damages awards, far out of proportion to any wrong-

doing committed by the defendant, to which amicus cu-

riae’s members are frequently subjected. Between

1973 and 1985, petitioner Shell failed to pay approx-

imately $750,000 in “net profits” from an oil-and-gas

lease. In 1995, respondents sued Shell in Oklahoma dis-

trict court seeking actual and punitive damages. Shell

asserted a statute of limitations defense, which was

son other than amicus curiae or its counsel made a monetary con-

tribution to the briefs preparation or submission.

3

tried to the jury; the amount of net profits if due was

not contested. At the close of the liability phase of trial,

the jury awarded respondents $13.2 million, reflecting

the uncontested $750,000 in net profits plus prejudg-

ment interest of $12.45 million, calculated almost en-

tirely at Oklahoma’s “special” 12% compounding inter-

est rate for nonpayment on oil and gas leases. Okla.

Stat. tit. 52, $570.10 (2010). At the punitive damages

stage, the jury awarded $53.6 million. The total award,

arising out of $750,000 in withheld net profits, was

$66.05 million. The Oklahoma district court upheld the

punitive damages award, and the Oklahoma Court of

Civil Appeals affirmed. The appellate court’s purpor-

tedly de novo review of the constitutionality of this $53

million punitive award consisted entirely of two para-

graphs in which the court simply observed that the pu-

nitive award was just over four times the amount of the

jury’s total award at the compensatory stage of trial,

inclusive of prejudgment interest. Such grossly dis-

proportionate punitive awards, and the lack of rigorous

judicial review, are, unfortunately, all too common for

API’s members.

REASONS FOR GRANTING THE WRIT

This Court’s decisions acknowledge the constitu-

tionally problematic nature of punitive damages. Left

largely to their own discretion, guided only by general

principles, juries are subject to improper influences,

such as passion and bias against large, out-of-state cor-

porations. The absence of clear rules regarding the cir-

cumstances in which punitive damages will be awarded,

or in what amounts, is inconsistent with the fundamen-

tal constitutional guarantees of fair notice and predic-

tability regarding punishments.

4

In recognition of those constitutional concerns, this

Court has held out de novo judicial review as a protec-

tion against unconstitutional deprivations of property

and the key to providing the guidance regarding the

imposition of punitive damages that will allow potential

defendants to organize their affairs. But the general

principles that this Court has articulated for lower

courts to apply have failed to provide the necessary

predictability. And, as the Court recently acknowl-

edged in Exxon Shipping Co. v. Baker, 128 S. Ct. 2605,

2628 (2008), mere “verbal formulations” can never do

so; instead, only clear numerical benchmarks can pro-

vide the constitutionally required protection against

arbitrary punishment. The Court should grant the pe-

tition and establish in clear terms the constitutional

benchmark that, where actual damages are substantial,

punitive damages should not exceed a 1:1 ratio to the

compensatory award.

The Court should also grant the petition to clarify

whether prejudgment interest that bears no direct re-

lation to the conduct of the defendant to be punished

can be included in the denominator of the comparative

ratio. For punitive damages to serve their important,

but limited, function of punishing and deterring mis-

conduct, they must be assessed only with reference to

the conduct the State seeks to punish. By including in

the “compensatory damages” denominator prejudg-

ment interest at a rate of 12% compounded, which does

not reflect any assessment of the defendant’s conduct,

the court below severed the relationship between the

punitive damages and the character of the conduct to

be punished.

5

I. ALTHOUGH DE Novo REVIEW OF PUNITIVE

DAMAGES AWARDS IS CONSTITUTIONALLY

MANDATED, REVIEWING CouRTS FAIL IN THEIR

CONSTITUTIONAL ROLE DUE To THE ABSENCE

OF CLEARER GUIDANCE FROM THIS COURT

Although this Court has long accepted that “puni-

tive damages may properly be imposed to further a

State’s legitimate interests in punishing unlawful con-

duct and deterring its repetition,” BMW of N. Am., Inc.

v. Gore, 517 U.S. 559, 568 (1996)) (“Gore”), the Court

has simultaneously recognized that “[p]unitive damages

pose an acute danger of arbitrary deprivation of prop-

erty,’ Honda Motor Co. v. Oberg, 512 U.S. 415, 432

(1994). The Court has therefore imposed both “proce-

dural and substantive constitutional limitations” on the

imposition of punitive damages awards. State Farm

Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416

(2003).

One important constitutional protection is that pu-

nitive damages awards must receive de novo judicial

review. Cooper Indus., Inc. v. Leatherman Tool

Group, Inc., 582 U.S. 424, 486 (2001). Because the

standard of review is constitutionally derived, state

courts must undertake de novu review as well. State

Farm, 538 U.S. at 418.

The promise of de novo review, however, has not

been realized in practice. Standards articulated at a

high level of generality and loose references to accept-

able ratios have given lower courts little clear guidance.

Further guidance from this Court regarding the proper

role of the ratios in the constitutional analysis, and

their relationship to the nature of the defendant’s con-

6

duct, is essential for de novo review to fulfill its consti-

tutionally mandated function.

A. De Novo Review Is Critical To A

Constitutional System Of Jury-Imposed

Punitive Damages

Punitive damages awards raise “fundamental due

process concerns” related to the “risks of arbitrariness,

uncertainty, and lack of notice.” Philip Morris USA v.

Williams, 549 U.S. 346, 354 (2007). “Elementary no-

tions of fairness enshrined in our constitutional juri-

sprudence dictate that a person receive fair notice not

only of the conduct that will subject him to punishment,

but also of the severity of the penalty that a State may

impose.” Gore, 517 U.S. at 574. Punitive damages

awards, however, pose a high risk of violating these

constitutional norms. Although they “serve the same

purposes as criminal penalties, defendants subjected to

punitive damages in civil cases have not been accorded

the protections applicable in a criminal proceeding.”

State Farm, 5388 U.S. at 417. In particular, because

they are assessed, in the first instance, by juries, there

is a distinct risk that punitive awards will be tainted by

passion and bias, particularly “biases against big busi-

nesses *** without strong local presences.” J/bid.

(quoting Honda Motor, 512 U.S. at 432).

Because of these concerns, the Court has held that

reviewing courts must “apply a de novo standard of re-

view when passing on [trial] courts’ determinations of

the constitutionality of punitive damages awards.”

Cooper Indus., 5382 U.S. at 486. “Exacting appellate

review” of jury-awarded punitive damages is necessary

to ensure that punitive damages remain within consti-

tutional limits and “that an award of punitive damages

7

is based upon an ‘application of law, rather than a deci-

sionmaker’s caprice.” State Farm, 5388 U.S. at 418

(quoting Cooper Indus., 532 U.S. at 436).

In adopting the de novo review requirement, the

Court explained that only such judicial review could

provide the fair notice and predictability required by

the Constitution. De novo review allows appellate

courts “to maintain control of, and to clarify, the legal

principles” as well as to “unify precedent” and “stabil.

ize the law.” Cooper Indus., 532 U.S. at 436 (quoting

Ornelas v. United States, 517 U.S. 690, 697-698 (1996)).

The Court further recognized that “general criteria,”

such as the guideposts identified in Gore, acquire “mea-

ningful content” through the process of “case-by-case

application at the appellate level.” Jbid. In addition to

providing citizens adequate “notice of what actions may

subject them to punishment,” “[rlequiring the applica-

tion of law, rather than a decisionmaker’s caprice * * *

helps to assure the uniform treatment of similarly si-

tuated persons that is the essence of law itself.” bid.

(internal quotation marks and citation omitted). In the

absence of de novo review, the goals of clarity, unity,

and stabilization that are essential to the fair notice and

predictability required by due process are unfulfilled,

and the framework that allows the imposition of puni-

tive damages in a constitutional manner ceases to exist.

As demonstrated below, there remains a dearth of

guidance to cabin juries’ passions or ensure consistency

across judgments. Without this Court’s further guid-

ance, there can be no constitutionally adequate system

of assessing punitive damages.

8

B. The Court’s Current Guidance Lacks

Sufficient Clarity To Provide The Tools For

Meaningful De Novo Review

1. As the Court has recognized, generalized stan-

dards alone are inevitably insufficient to protect

against arbitrary and unpredictable punitive damages

awards. Haxon, 128 S. Ct. at 2628. Unlike compensa-

tory damages, which are “tied to specifically proven

items of damages,” zbid., punitive damages calculations

based on only general criteria cannot produce the no

tice and predictability the Constitution requires.

In Haaon, in the context of a punitive award im-

posed under maritime federal common law, the Court

considered and ultimately rejected the adequacy of

“verbal formulations” of general standards to ensure

“against unpredictable outher|]” punitive damages

awards, 128 8. Ct. at 2628. The Court acknowledged

that “luJnder the umbrellas of punishment and its aim

of deterrence, degrees of relative blameworthiness are

apparent” and could be identified. Jd. at 2621-2622

(noting maliciousness, intentional injury, harm inflicted

for financial gain, and hard-to-detect wrongdoing as ex-

amples). The Court also noted attempts by several

States to utilize “criteria for judicial review,” such as

the “degree of heinousness” and “a reasonable relation

ship to the compensatory damages awarded.” /d. at

2627 (quoting Bowden v. Caldor, Inc., 710 A.2d 267,

277-284 (1998)). After reviewing these approaches and

jury “instructions offering, at best, guidance no more

specific for reaching an appropriate penalty,” the Court

expressed its “skepticlism]| that verbal formulations

*** are the best insurance against unpredictable out-

lier[)” punitive damages awards. /d. at 2627-2628.

9

The Court noted that the judicial experience in the

criminal context was similar. The pre-Sentencing

Guidelines “system of general standards,” which left

judges with “relatively unguided discretion to sentence

within a wide range,” had “defied consistency.” Haxxon,

128 S. Ct. at 2628.

The current system of punitive damages is, as the

Exxon Court aptly observed, even worse than the pre-

guidelines sentencing regime. Lacking anything com-

parable to a “‘punitive-damages guidelines” or “even a

statutory maximum,” “it is 7zxevitable that the specific

amount of punitive damages awarded by a judge or by

a jury will be arbitrary.” Ezxon, 128 8S. Ct. at 2628-

2629 (emphasis added) (quoting Mathias v. Accor Econ.

Lodging, Inc., 347 F.3d 672, 678 (7th Cir. 2003)).

In Exxon, the Court’s review of failed attempts to

cabin punitive awards led it to conclude that only “a

quantified approach will work.” Exxon, 128 S. Ct. at

2628. The Court adopted a strict 1:1 ratio as the upper

limit for punitive damages in maritime cases. /d. at

2633. The Court relied on the fact that “the median ra-

tio of punitive to compensatory awards has remained

less than 1:1” and that the “real problem” was “the

stark unpredictability of punitive awards.” Jd. at 2624-

2625. The Court stressed that the range of punitive

damages between those less than 1:1 and the “fully 14%

of punitive awards in 2001 * * * greater than four times

the compensatory damages” did not reflect “refin[ed]”

judgments about the “optimal level of penalty and de-

terrence,” nor did they produce “consistent results in

cases with similar facts,” but instead evidenced “the

inherent uncertainty of the trial process.”’ Id. at 2625-

2626 (quoting BMW of N. Am., Inc. v. Gore, 646 So.2d

619, 626 (Ala. 1994) (per curiam)).

10

Although Exxon was decided under the Court’s

federal common-law authority, the decision noted,

without answering, the possible “constitutional signi-

ficance of the unpredictability of high punitive awards”

on which the Court’s analysis and holding was based.

128 S. Ct. at 2627. Indeed, it would seem to follow nec-

essarily that the same unpredictability of a system

based on only “verbal formulations” that led the Court

in Exxon to adopt a numerically grounded system as a

matter of common law should likewise lead the Court to

reject “verbal formulations” as adequate as a constitu-

tional matter. As noted above, the Court has repeated-

ly stressed that the due process guarantee does not

permit a system of punitive damages that is incapable

of providing defendants with “fair notice” of the “sever-

ity of the penalty that a State may impose.” Gore, 517

U.S. at 574. The same arbitrariness that condemned a

system of general principles and “verbal formulations”

as a matter of common law also makes that same sys-

tem intolerable under the Constitution.

2. This case demonstrates the inadequacy of the

Court’s current approach of “guideposts” and “factors.”

See State Farm, 588 U.S. at 418-419. Loose reference

to acceptable ratios and even looser reference to gener-

al standards to be considered have reduced supposed de

movo review to an abuse-of-discretion review under

which courts feel free to uphold virtually any punitive

damages award. The Oklahoma appellate court’s puni-

tive damages review is emblematic of many reviewing

courts’ inability to effectuate de novo review of punitive

awards without stronger guidance.

Here, the Oklahoma appellate court provided only

two paragraphs of non-analysis. That court made no

attempt whatsoever to evaluate the guideposts in

1]

terms of the legitimate purposes of punitive damages

or whether the large punitive award might have re-

flected improper considerations. Instead of analyzing

whether Shell’s conduct represented a degree of repre-

hensibility that could justify a punitive damages ratio

far in excess of the 1:1 ratio that this Court indicated

might be “the outermost limit of the due process guar-

antee” when “compensatory damages are substantial,”

State Farm, 5388 U.S. at 425, the Oklahoma Court of

Civil Appeals terminated its review after stating simp-

ly (and incorrectly) that this Court had approved a

dramatically higher ratio in 7XO Production Corp. v.

Alliance Resources Corp., 509 U.S. 443 (1993). Accord-

ing to the Oklahoma court, the ratio in this case was 4:1,

which

compares favorably with that in TXO ***,

where the jury awarded $19,000.00 in actual

damages arising from the defendant’s baseless

claim on plaintiff's oil and gas interests and

$10,000,000.00 in punitive damages. Proportio-

nately, Shell has received a much lighter sanc-

tion.

App., 15a-16a.

The decision below reflects the continuing perni-

cious effect of the 7XO decision. This Court has re-

peatedly clarified that the relevant comparison in T7.XO

was the ratio between the punitive award and the large

potential loss to the plaintiffs that could have resulted if

the defendant’s fraudulent scheme had been successful

(which made the ratio between 2.5:1 and 10:1, not

526:1). 509 U.S. at 462; Gore, 517 U.S. at 581. Never-

theless, lower courts continue to exploit the facts while

ignoring the law of 7X0 to justify punitive damages far

12

in excess of those State Farm and Gore contemplate in

the absence of exceptional circumstances. See, e.g.,

Goff v. Elmo Greer & Sons Constr. Co., 297 S.W.3d 175,

194 (Tenn. 2009), cert. denied, 180 S. Ct. 1910 (2010)

(citing 7'XO as affirming “a punitive damage award

that was 526 times as great as the compensatory dam-

ages”); Modern Mgmt. Co. v. Wilson, 997 A.2d 37, 47-48

(D.C. 2010) (characterizing 7XO ratio as 526:1). In-

deed, these decisions prove correct Justice Sealia’s pre-

diction that “the great majority of due process chal-

lenges to punitive damages awards can henceforth be

disposed of simply with the observation that ‘this is no

worse than TXO.” TXO, 509 U.S. at 472 (Scalia, J.,

concurring in judgment).

Many courts, like the Oklahoma court here, treat

any ratio that can be characterized as within single di-

gits, where there is even the least degree of reprehen-

sibility, as per se constitutional. E.g., Zhang v. Am.

Gem Seafoods, Inc., 339 F.3d 1020, 1044 (9th Cir. 2003),

cert. denied, 541 U.S. 902 (2004) (“We are aware of no

Supreme Court or Ninth Circuit case disapproving of a

single-digit ratio between punitive and compensatory

damages, and we decline to extend the law in this

case.”); Trinh v. Gentle Comme’ns, LLC, 881 N.E.2d

1177 (Mass. App. Ct. 2008).

By assuming that any punitive damages award

within the ratios that the Court has identified as the

“outer limits” of what the Constitution will tolerate is

acceptable, courts substitute a deferential, abuse-of-

discretion-type analysis that looks to whether any re-

prehensibility factor is present and the award is within

a single-digit ratio. Without searching, de novo review

of whether the ratio applied appropriately reflects the

reprehensibility of the defendant’s conduct in the given

13

case or whether the denominator in the ratio is the

proper measure of the defendant’s sanctionable mis-

conduct, punitive damages awards are often arbitrary

and unpredictable, and therefore inconsistent with fun-

damental due process requirements.

C. The Promise Of De Novo Review Can Be

Achieved Only Through Clarification Of The

Critical Character Of The Ratios, Especially

The 1:1 Ratio, And The _ Relationship

Between Them

The promise of de novo review—providing clarity,

predictability, a check on abuse and caprice, and consis-

tency across punitive damages awards—has not been

realized because reviewing courts lack the tools to dis-

cern and develop the meaningful content that might,

over time, fulfill the constitutional function this Court

has assigned to the de novo standard. The decision be-

low, and those like it, illustrate the correctness of this

Court’s conclusion in Exxon that multifactor, nebulous

approaches do not provide the clarity and certainty, 128

5S. Ct. at 2628, that due process requires and to which

de novo review aspires. Instead, due process review of

punitive damages awards must be rooted in numerical

benchmarks.

This Court has already intimated at those bench-

marks and the several factors that warrant gradation

between them, as well as the limited circumstances in

which departure from the ratio benchmarks may be ap-

propriate. For the reasons discussed above, however,

the Court must clarify and strengthen that guidance.

The Court has frequently referenced different bench-

marks, but done so in language that fails to convey just

how critical those numerical touchstones must be to

14

lower courts’ de novo review of punitive damages

awards. Rather, the Court’s repeated references to

eschewing “a mathematical bright-line,” Pac. Mut. Life

Ins. Co. v. Haslip, 499 U.S. 1, 18 (1991), or “a simple

mathematical formula,” Gore, 517 U.S. at 582, have led

lower courts to conclude that they are free to eschew

this Court’s statements about the significance of the

numerical benchmarks. See, e.g., Mitchell v. Fortis Ins.

Co., 385 S.C. 570, 588 (2009), cert. denied, 130 S. Ct.

1896 (2010).

The Court’s discussion in State Farm illustrates

both the proper analysis and how imprecisely phrased

caveats in the Court’s opinions allow lower courts to

largely ignore that analysis. In State Farm, the Court

recognized that, apart from egregious circumstances, in

a case with substantial compensatory damages a “ratio

* * * equal to compensatory damages * * * reach[es] the

outermost limit of the due process guarantee.” 538

U.S. at 425. Yet the Court couched that recognition in

qualified language that many lower courts have seized

upon as a reason to ignore the 1:1 ratio altogether. See

ibid. (“When compensatory damages are substantial,

then a lesser ratio, perhaps only equal to compensatory

damages, can reach the outermost limit of the due

process guarantee.” (emphasis added)); see, e.g., Rag-

land v. Digiuro, --- 5.W.3d ---, No. 2009-CA-186, 2010

WL 4137183, at *12 (Ky. App. Oct. 22, 2010) (““However,

we believe the Supreme Court’s choice of ambiguous

terms, such as ‘substantial’ and ‘lesser ratio’ and ‘out-

ermost limit’ and ‘perhaps,’ was intended to facilitate

our ‘considerable flexibility in determining the level of

punitive damages.” (quoting Gore, 517 U.S. at 568)).

Indeed, the Court’s reference to the Constitution per-

mitting “few awards exceeding a single-digit ratio,”

15

State Farm, 588 U.S. at 425 (emphasis added), has en-

couraged some lower courts, as noted above, to believe

that a single-digit ratio automatically blesses a particu-

lar punitive award. See, e.g., Perrine v. E.J. du Pont de

Nemours & Co., 694 S.E.2d 815, 895 (W. Va. 2010)

(“[A]ny punitive damages award that is in single digits

would presumptively be within the constitution.”).

As the Court’s analysis in Hxxon demonstrates, 128

S. Ct. at 2628, only clear guidance regarding firm nu-

merical benchmarks and the factors that warrant gra-

dation of a punitive damages award between those

breakpoints can provide a foundation for a punitive

damages system that satisfies the due process re-

quirements of fair notice and predictability.

II. PREJUDGMENT INTEREST THAT DOES NOT

MEASURE A DEFENDANT’S REPREHENSIBLE

CONDUCT SHOULD BE EXCLUDED FROM THE

RATIO OF PUNITIVE TO COMPENSATORY

DAMAGES

As the Court has observed, the “imposition of puni-

tive damages is an expression of moral condemnation.”

Cooper Indus., 5382 U.S. at 432. Operating as “private

fines,” punitive damages “punish” the defendant’s mis-

conduct and “deter future wrongdoing.” Jbid. As such,

the “focus[]” in a court’s de novo review of a punitive

damages award must always be “the degree of the de-

fendant’s reprehensibility or culpability.” Jd. at 485.

This Court’s review of the awards in Cooper Industries

and other recent punitive damages cases demonstrates

that a critical function of a court in conducting that re-

quired de novo review is to ensure that the punitive

award is compared to the “relevant” figure measuring

“the harm caused by [the defendant’s] tortious con-

16

duct.” See id. at 441-442. As those decisions reflect,

the “fundamental due process concerns” of “arbitrari-

ness, uncertainty and lack of notice” require that puni-

tive damages be based only on the defendant’s own

conduct and its direct consequences. Philip Morris,

549 U.S. at 354.

Many courts, like the Oklahoma court below, con-

tinue to misunderstand the significance of that respon-

sibility. The Court should grant the petition for certi-

orari to clarify that only compensatory damages direct-

ly attributable to the reprehensible conduct that is to

be punished are to be included in the comparative part

of the de novo analysis. Because prejudgment interest

does not reflect harm directly attributable to the de-

fendant’s wrongful conduct—and interest at a 12% pe-

nalty rate plainly does not—it should be excluded from

the ratio of punitive to compensatory damages.

A. For The Gore Ratio To Serve Its Function,

The Denominator Must Include Only Harm

Directly Attributable To The Conduct To Be.

Punished

This Court’s decisions make clear that the repre-

hensible nature of the defendant’s conduct is the ulti-

mate foundation of any punitive damages award. A pu-

nitive damages award can only be justified in relation

to the State’s interest in “punishing unlawful conduct

and deterring its repetition.” Philip Morris, 549 US.

at 352 (quoting Gore, 517 U.S. at 568). Thus, “punitive

damages should only be awarded if the defendant’s cul-

pability,” after fully compensating the plaintiff, “is so

reprehensible as to warrant the imposition of further

sanctions to achieve punishment or deterrence.” State

Farm, 538 U.S. at 419. Reprehensibility, in other

17

words, is the threshold requirement for any award of

punitive damages, and “the degree of reprehensibility

of the defendant’s conduct” is “the most important indi-

cium of the reasonableness of a punitive damages

award.” Gore, 517 U.S. at 575.

The “second” and “most commonly cited” guidepost

in assessing the excessiveness of a punitive damages

award is the “ratio” of the punitive damages “to the ac-

tual [or potential] harm inflicted on the plaintiff.” Gore,

517 U.S. at 580. The function of the ratio is to ensure

that “the award bears a reasonable relationship to the

actual and potential harm caused by the defendant to

the plaintiff.” Philip Morris, 549 U.S. at 353 (paraph-

rasing Gore). Thus, the ratio, like the reprehensibility

factor itself, focuses on “the defendant’s actions” and

the harm they caused. Cooper Indus., 532 U.S. at 435.

This Court’s opinions confirm that the compensato-

ry damages that serve as the denominator in the Gore

ratio must be limited to damages that flow from the

conduct that the State has a legitimate interest in “pu-

nishing.” In Philip Morris, for example, the Court

ruled that “the Constitution’s Due Process Clause for-

bids a State to use a punitive damages award to punish

a defendant for injury that it inflicts upon nonparties.”

549 U.S. at 3538. Likewise, a “defendant’s dissimilar

acts, independent from the acts upon which liability is

premised, may not serve as the basis for punitive dam-

ages.” State Farm, 588 U.S. at 422-423.

A court’s de novo review therefore requires it to

determine whether the “harm” that the plaintiff pro-

poses as the relevant comparator is “attributable to

[the] misconduct” that the state seeks to punish and de-

ter. Cooper Indus., 582 U.S. at 442. In Cooper Indus-

18

tries, the Court remanded for a new de novo review by

the court of appeals because the “wrongdoing” that was

the premise of the punitive damages award—the de-

fendant’s misleading use of the plaintiff's tool in mar-

keting materials—“could not be treated as the principal

cause” of the “potential harm” the plaintiff proposed as

the relevant comparator. /bid.

The reviewing court must also ensure that the

“compensatory damages” comparator does not already

incorporate a punitive element beyond the actual dam-

ages directly caused by the defendant’s sanctionable

conduct. Thus, for example, the Court explained in its

assessment of the 145-to-1 ratio in State Farm that the

ratio arguably understated the extent of the disparity

because the plaintiffs’ compensatory damages for emo-

tional distress already reflected “the outrage and hu-

miliation” resulting from the defendant’s conduct,

which “duplicated [ ] the punitive award.” 5388 U.S. at

426.

As these decisions make clear, the ratio of punitive

damages to compensatory damages is only instructive

to the court’s de novo review if the denominator is li-

mited to those damages that flow directly from the

conduct that the state seeks to punish. Elements of the

plaintiffs ultimate recovery, such.as prejudgment in-

terest (particularly at a punitive 12% rate), that are not

directly related to the misconduct that gives rise to the

punitive damages award must therefore be excluded

from the ratio.

19

B. Prejudgment Interest Does Not Reflect

The Defendant’s Conduct That Warrants

Punishment

1. The “compensatory damages” that provide the

denominator of the Gore ratio are those damages “in-

tended to redress the concrete loss that the plaintiff has

suffered by reason of the defendant’s wrongful con-

duct.” Cooper Indus., 582 U.S. at 482; see McEvoy

Travel Bureau, Inc. v. Norton Co., 408 Mass. 704, 718

(1990) (noting that “actual damages” are losses “flowing

directly from a wrongful act”). The determination of

the “actual damages suffered,” the Court has recog-

nized, “presents a question of historical and predictive

fact” that is tried to the jury. Cooper Indus., 582 U.S.

at 437 (quoting Gasperini v. Center for Humanities,

Inc., 518 U.S. 415, 459 (1996)). Prejudgment interest,

by contrast, is not a question of the “concrete loss”

caused by the defendant’s “wrongful conduct.” Nor, in

most states, is prejudgment interest decided by the

jury at all, but is instead imposed by the court (or the

clerk). See, e.g., d’Arc Turcotte v. Estate of LaRose,

153 Vt. 196, 200 (1989) (“The question of interest is not

properly within the province or discretion of the fact-

finder.”); Grove v. Myers, 181 W. Va. 342, 347 (1989);

DiMeo v. Philbin, 502 A.2d 825, 826 (R.1. 1986) (per cu-

riam). Because prejudgment interest does not measure

a “historical fact” of injury to the plaintiff caused by

“the defendant’s wrongful conduct,” it must be ex

cluded from the comparative analysis.

Even in those cases, such as this one, in which the

jury is asked to calculate prejudgment interest, the re-

sulting figure does not represent the harm to the plain-

tiff caused by the defendant’s wrongful conduct. The

jury in this case was not asked to determine the oppor-

20

tunity cost to respondents, as a matter of historical fact,

that resulted from Shell’s failure to pay net profits. Ra-

ther, the statute itself specified a compounded rate of

12%, without regard to any evaluation of the time value

of money during the relevant period. Okla. Stat. tit. 52,

§ 570.10. Nor did the statute require the jury to make

any individualized finding of Shell’s culpability in caus-

ing the delay in payment.’ Instead, by the statute’s

terms, the fact of the delay was itself sufficient for in-

terest to accrue at a 12% compounding rate. /bid. In-

clusion of prejudgment interest in the ratio thus makes

the relationship between the punitive damages award

and the “the degree of reprehensibility of the defen-

dant’s conduct,” Gore, 517 U.S. at 575, even more te-

nuous.

In most instances, where prejudgment interest is

calculated by the court at the time judgment is entered,

it would not form part of the compensatory basis that

the jury or trial judge would consider as they assess

the relationship between punitive and compensatory

damages. Thus, in most jurisdictions, assuming ar-

guendo that Shell’s conduct warranted a 4:1 ratio of pu-

nitive to compensatory damages, the punitive damages

award would have been $3,000,000. To have prejudg-

* The amount of interest due was significantly increased by

delays attributable to respondents’ failure to initiate suit until

1995, and the courts’ failure to try the case until] May 2008. Pet.

App., 4a-ba. There is no suggestion that Shell improperly delayed

the adjudication of this case. Even if Shell had caused delay, that

was not the “wrongful conduct” for which the punitive damages

were imposed, and thus should have been excluded from the de-

nominator. See Cooper Indus., 532 U.S. at 441 (limiting compari-

son to “the harm caused by Cooper’s tortious conduct”).

21

ment interest included in the punitive damages deno-

minator in states in which the jury does the math, but

excluded where the judge makes the calculation, intro-

duces additional opportunity for arbitrariness in an al-

ready unpredictable system of punitive damages and

flouts the “elementary notions of fairness enshrined in

our constitutional jurisprudence” that a person have

“fair notice” of both the punishable conduct and the po-

tential severity of the penalty. See Gore, 517 U.S. at

574.

Because prejudgment interest does not reflect the

defendant’s conduct or the harm directly inflicted by it,

inclusion of prejudgment interest in the denominator is

inconsistent with the constituvional analysis. Fully 90%

of the $13.2 million compensatory damages figure the

court below used for comparison purposes had no direct

relationship to the defendant’s punishable conduct. The

punitive award here punishes Shell in the absence of

responsibility or control, see Stale Farm, 5388 U.S. at

422, thereby violating the fundamental due process

concerns of fair notice and non-arbitrary application of

the law. Cf. United States v. Bornstein, 423 U.S. 303,

312 (1976) (excluding, in context of tallying culpable

acts for purposes of imposing penalties under the False

Claims Act, instances of wrongdoing that were “com-

pletely fortuitous and beyond [the defendant’s|] know-

ledge or control”).

In this case, including prejudgment interest in the

ratio is particularly problematic because the State’s

12% compounding interest rate was manifestly punitive

in its own right. Its inclusion in the Gore ratio dupli-

cated the State’s interest in punishment and deter-

rence. At the very least, including the punitive pre-

judgment interest award in the Gore ratio should have

22

decreased the permissible ratio based on the fact that

the State has already imposed punishment, Instead, as

applied by the Oklahoma courts: The more punitive the

interest rate, the greater additional punishment can be

imposed on top of it as punitive damages. That is ex-

actly backwards. See Stale Farm, 5388 U.S. at 426. The

presence of prior punishment through an enhanced in-

terest rate (or likewise multiple statutory damages)

should draw into question whether further additional

punishment is warranted or permissible at all—not

serve as justification for increasing the amount of fur

ther punishment that can be piled on.

2. Including prejudgment interest in the denomi-

nator of the Gore ratio is particularly arbitrary because

it permits courts to evade the longstanding prohibition

against awarding prejudgment interest on punitive

damages. Most states, including Oklahoma, do not

permit prejudgment interest on punitive damayes

awards. See Okla. Stat. tit. 12, § 727 (2009); Johnson v.

Ford Motor Co., 45 P.38d %6, 95 (Okla. 2002); see also

Alaska Stat. § 09.80.070 (2010) (“Prejudgment interest

may not be awarded for * * * punitive damuages.”); Ind.

Code § 34-51-4-8 (2010); d’Arc Turcotte, 158 Vt. at 200;

Restatement (Second) of Torts § 918 emt. d (1979) (“In-

terest is not allowable as an element in punitive dam-

ages.”). Courts have explained several reasons for this

rule. First, awarding prejudgment interest on punitive

damages compounds the penalty. See Fortino v. Qua-

sar Co., 950 F.2d 389, 39% (7th Cir. 1991); McEvoy, 408

Mass. at 717. Second, calculating prejudgment interest

on a punitive damages award is inappropriate because

the plaintiff's right to punitive damages does not arise

until judgment is entered. See, e.g., Wheeler Motor Co.

—

23

v. Roth, 315 Ark. 318 (1993); Dees v. Am. Nat'l Fire

Ins. Co., 861 P.2d 141 (Mont. 1993).

Despite the consensus that prejudgment interest

does not apply to punitive damages, including pre-

judgment interest in the denominator of the Gore ratio,

as the courts below did, is the functional and mathemat-

ical equivalent. Because the multiplication of numbers

does not depend on the order in which they are multip-

lied, it does not matter whether the compensatory

award is first multiplied by the Gore ratio and then

multiplied by the rate of prejudgment interest (which is

forbidden) or whether the compensatory award is first

multiplied by the rate of prejudgment interest and then

multiplied by the Gore ratio, as the lower court did

here. The outcome is the same, and it should be prec-

luded by whichever route.

Using a slightly simplified version of the facts of

this case demonstrates the point. Assuming that the

constitutionally permissible Gore ratio in this case is

4:1, then if the punitive damages were deemed owing at

the time of the wrongful conduct in 1985 and, contrary

to Oklahoma law, prejudgment interest was assessed

on the punitive damages, the total award to plaintiffs

would have been $63,750,000. (Compensatory damages

on $750,000 of actual harm would result in $3,000,000 in

punitive damages, and applying the State’s punitive

12% compounding prejudgment interest rate to the full

$3,750,000 from 1985 would reach $63,750,000 by 2010.)

The court below reached the same improper result but

in a different order. Applying 12% compounding inter-

est to the $750,000 in actual damages for twenty-five

years produces $12,750,000. Applying a 4:1 ratio to this

inflated figure yields a punitive award of $51,000,000—

for a total of $63,750,000. The resulting award, in other

24

words, was the mathematical equivalent of precisely

what Oklahoma law forbids.

Had the Oklahoma court started with the compen-

satory award of $750,000, awarded four times that

amount as punitive damages, and then calculated pre-

judgment interest only on the compensatory portion of

the award, the Hebble’s entire award would have to-

taled only $15,750,000 ($750,000 multiplied by 12%

compound interest, plus $3,000,000 in punitive damag-

es). By first calculating prejudgment interest and then

applying the Gore ratio to that inflated amount, the

courts below gave respondents an approximately $48

million windfall. So arbitrary an award is inconsistent

with the constitutional guarantees that de novo judicial

review is supposed to protect. The Court should grant

the petition and reverse this arbitrary award.

25

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

HARRY M. NG DOUGLAS HALLWARD-DRIEMEIER

STACY R. LINDEN AARON KATZ

AMERICAN PETROLEUM EMILY DERR

INSTITUTE ROPES & GRAY LLP

Counsel for amicus curiae

NOVEMBER 2010