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ExxonMobil Continues to Fight $3.5B Mobile Bay Punitive Damages Award

Eight years after an original royalties lawsuit was filed by the state of Alabama against predecessor company Exxon Corp. for unpaid gas royalties and three years after the verdict went against the company, ExxonMobil continues to argue that the $3.5 billion punitive damages award should be overturned.

Asserting the state improperly turned a contract dispute into a fraud action, ExxonMobil on Tuesday urged the Alabama Supreme Court to overturn the penalty. In July of 2005, Alabama's state attorneys charged ExxonMobil with a "secret scheme to cheat the state out of its bargained-for royalties." They asked the Alabama Supreme Court to uphold the $3.5 billion judgment against the oil major, considerably above and beyond the amount of royalties in dispute of between $55 and $102 million (see Daily GPI, July 6, 2005).

"This entire case stems from a contract dispute over a poorly drafted lease agreement. Fraud had no part in the dispute," said Charles Matthews, ExxonMobil's general counsel. "It's a dangerous precedent for a state to be able to charge someone with fraud if you don't agree with their interpretation of a contract."

Alabama filed the original lawsuit in 1999 against Exxon, alleging under-payment of royalties due from gas wells drilled in state waters around Mobile Bay. Exxon has argued that the estimated royalties in dispute are only $55 million, but Alabama has put the figure closer to $102 million, including interest. In the original case, the Alabama Supreme Court reversed the $3.5 billion punitive judgment and sent it back for a retrial (see Daily GPI, Dec. 23, 2002).

In 2003, a jury found that ExxonMobil committed fraud in the calculation of royalties it paid the state on production from its Mobile Bay natural gas wells. The jury had to find that the company committed fraud in order to award punitive damages (see Daily GPI, April 26, 2002).

During oral arguments Tuesday, Chris King and Sam Franklin, outside counsel for ExxonMobil, maintained that the evidence clearly showed that the state, for tactical reasons, had tried to turn a contract dispute into a fraud claim. In its appeal, the company wrote, "The jury and the trial court rewarded those tactics with a giant punitive damages award. But there was no evidence of fraud, and no basis for any punitive damages. The state could not prove and the evidence they submitted does not prove fraud. That's because there was no fraud."

ExxonMobil said the size of the punitive damage award is "clearly unconstitutional, grossly excessive and arbitrary," noting that the punitive damages award is 149 times the compensatory award. Citing legal precedent, ExxonMobil noted that the U.S. Supreme Court in 2003 reversed a $145 million punitive damages verdict against State Farm Mutual Automobile Insurance Co., in which there were $1 million in compensatory damages. The court's ruling was intended to prevent large punitive damages awarded by juries that bear little resemblance to actual damages. Justice Anthony M. Kennedy wrote for the court, "We have no doubt that there is a presumption against an award that has a 145-to-1 ratio."

Early in the royalty payment process, ExxonMobil and the state of Alabama disagreed over the proper method of determining royalty payments and agreed the issue would be resolved on audit. In its appeal, ExxonMobil cited a virtually identical case with the same "poorly drafted" lease language, also decided by the Alabama Supreme Court, in which the court said there could be no fraud because the state intended to audit and independently verify every month's payment and production.

Since production began at Mobile Bay, the company said it has paid more than $1 billion in royalty and lease payments directly to the state.

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