Looking to reverse the largest punitive damages award in Alabama’s history, ExxonMobil Corp. said it has asked the state’s supreme court to overturn the $3.5 billion award that resulted from a lawsuit regarding payment of Mobile Bay Project royalties to the state. The company asserts that the state “improperly turned a contract dispute into a fraud action.”

The legal wrangling has been ongoing for approximately six years. Following the $11.8 billion damage award to the state last year, an Alabama circuit court judge in March 2004 reduced the award against ExxonMobil by 75% to $3.5 billion (see Daily GPI, March 30, 2004). The company first announced its intentions to seek reversal of the decision in April 2004 (see Daily GPI, April 28, 2004).

The original l999 lawsuit against predecessor company Exxon Corp. alleges it was underpaid royalties due from gas wells drilled in state waters around Mobile Bay. The original damage award was the largest award handed down by a jury in the United States in 2003.

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.

“The $3.5 billion punitive award is based on the state’s unproven allegations of fraud,” said Charles Matthews, ExxonMobil’s general counsel. “We are appealing to have it reversed.”

ExxonMobil maintains the evidence clearly shows there was no fraud. “This is a contract dispute that the state, for tactical reasons, chose to dress up as a fraud claim,” the company wrote in its appeal. “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. Like the state’s lawsuits against other Mobile Bay producers, this case is a contract dispute masquerading as a fraud action.”

ExxonMobil also pointed out that the underlying lease interpretation issues remain unresolved. “This Court’s resolution of these issues will also determine how to compute royalties under the leases going forward.”

The company said it believes the size of the punitive damage award is clearly unconstitutional, grossly excessive and arbitrary. The punitive damages award is 149 times the compensatory award, and, in its brief, ExxonMobil noted that in 2003, the U.S. Supreme Court reversed a $145 million punitive damages verdict against State Farm Mutual Automobile Insurance Co., in which there were $1 million in compensatory damages. ExxonMobil said the court’s ruling in that case was intended to prevent large punitive damages awarded by juries that bear little resemblance to actual damages.

Punitive damages, when they are appropriate, must be both reasonable and proportionate to the amount of harm to the plaintiffs and to the general damages recovered, Justice Anthony M. Kennedy wrote for the court in that case. “We have no doubt that there is a presumption against an award that has a 145-to-1 ratio,” he said.

ExxonMobil said that since production began at Mobile Bay, the company has paid more than $1 billion in royalty and lease payments directly to the state. The company’s total capital investment in Alabama currently exceeds $3 billion and the company employs more than 200 people and thousands of contractors.

©Copyright 2005Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.