When Big Oil Gets Too Slick

Exxon Mobil (XOM ) has few peers when it comes to angering jurors. In 1994, a panel of 11 Alaskans decided the company should pay $5 billion in punitive damages for the Exxon Valdez oil spill--the second-largest award in history. On Dec. 19, a jury in Alabama socked the company with $3.4 billion in punitives for trying to cheat the state out of oil royalties--the third-biggest verdict ever.

To Exxon, these decisions are symptoms of a sick legal system. Convinced the Valdez jury unfairly punished the company for its size, executives have exercised every possible appeal to get it overturned--even though that strategy has made them appear unrepentant. After the Alabama decision, the company once again came out fighting. Denouncing the jury's decision as "meritless," Exxon pledged to "take all legal steps to challenge the verdict."

ENOUGH MUSCLE? The company's outrage is, to a certain extent, understandable. Politicians, pundits, public-interest groups, and plaintiffs' lawyers love to demonize Exxon. And the Alabama verdict is way out of proportion to its alleged misbehavior, given that the jury only found the company had cheated the state out of $87.7 million. Ultimately, the punitive damages award will probably get reduced.

So why was it awarded in the first place? Jurors were inflamed by internal corporate documents that indicated Exxon was aware it was shortchanging the state but thought it had enough muscle to get away with it. "They knew what they were doing wasn't right, but they did it anyway," says jury foreman Shae Fillingim.

The Alabama case raises a serious question: Does the world's biggest and richest company think it's above the law? That's certainly the view of many attorneys who run into Exxon's scorched-earth litigation tactics. They "don't have much respect for the civil justice system. They fight over everything. They don't concede the obvious," says Eugene E. Stearns, a Miami commercial litigator who in February won a $1 billion judgment against the company on behalf of gas station dealers who claimed they had been overcharged.

The Alabama lawsuit revolved around a series of natural-gas wells that Exxon drilled in state-owned waters. After signing several leases in 1979 obligating Exxon to share revenues with Alabama, the company decided it didn't like the terms of the agreements. Among other things, Exxon wanted to deduct several different types of processing costs before paying the state any royalties.

Problem was, the lease clearly barred these deductions. In a 1993 memo, in-house attorney C. Charles Broome analyzed whether the company had any grounds to take the deductions. He noted that Royal Dutch/Shell (RD ), which had signed a similar lease, interpreted it "in the same manner as the State." He then laid out two arguments the company might use to claim the deductions. The odds of the first approach succeeding? "Less than 50%," wrote Broome. As for the second argument, he said, "I believe it has little chance of being upheld."

Under these circumstances, most companies probably would have simply paid up. Not Exxon. Broome proceeded to subject the issue of whether the company should obey the law to dispassionate cost-benefit analysis. "If we adopt anything beyond a `safe' approach, we should anticipate a quick audit and subsequent litigation," he wrote. "Our exposure is 12% interest on underpayments calculated from the due date, and the costs of litigation."

Exxon claims its interpretation of the lease is valid and is appealing the decision. "Alabama is notorious for excessive punitive damages, and unfortunately we are the latest in the saga," says Kenneth P. Cohen, vice-president for public affairs. So the company is once again bashing the American legal system. But the oil giant seems to be missing the broader point: that its own arrogance may be as much to blame for the big verdicts as irrational jurors.

By Mike France in New York

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