When a zebra is not a horse

posted on:
February 9, 2004

author:
David Hechler

category:
Fraud

Plaintiffs’ lawyer Robert Cunningham is a serious fisherman. Last summer, he said, after three years of trying and hearing that it couldn’t be done, he landed the first fly-caught tarpon in Louisiana.

The 130-pounder was no bugger than tarpon he’d caught it Florida. But the clear, shallow waters in the Sunshine State are nothing like the murky depths off Louisiana, which makes fly fishing there so hard.

“If you have a tendency to give up,” Cunningham said of the effort, “you never get past the first year or so.”

In the legal arena, Cunningham and his partners in Mobile, Ala.’s, Cunningham, Bounds, Yance, Crowder & Brown landed the third-largest jury verdict in 2000: $3.5 billion. They represented the state of Alabama against Exxon Mobil Corp. over a gas and oil lease.

Unlike the tarpon, that one got away on appeal. But with a little help from a zebra whose picture he showed to a jury, Cunningham managed to get it back.

The Alabama Supreme Court overturned the verdict in 2002, ruling that a key Exxon document was privileged and should not have been admitted. Cunningham and company didn’t give up.

“If you can’t learn from failure and keep butting your head against the wall,” Cunningham said, “then you will never succeed.” Trial lawyers and fly fisherman are alike that way he said: “You have to have a high level of butt-headedness for both.”

Last November, he netted the big one, the largest jury verdict of 2003. In a retrial against Exxon, a jury awarded the state $11.9 billion, more than three times the first verdict. State of Alabama v. Exxon Mobil Corp. No. CV-99-2368 (Montgomery Co., Ala., Cir. Ct.)

Cunningham said it was the largest fraud verdict ever, and the largest punitive sum awarded to a single plaintiff.

The verdict bucked one trend of last year. Awards were down in 2003, according to the 100 largest jury verdicts gathered by VerdictSearch, an affiliate of The National Law Journal.

In 2001, the first year the NLJ published a top 100 list, the awards totaled $11.9 billion. The figure grew to $38.7 billion in 2002 but slipped to $19.6 billion in 2003. Throw out each year’s top verdict as an aberration and the downward trend is even more pronounced: $8.7 billion, $10.2 billion, and $7.6 billion, respectively. The median verdicts for the three years were $45.7 million, $51.1 million and $34.7 million.

Punitive damages for the top 50 verdicts went from $6.4 billion to $33.2 billion to $13.5 billion. Again, eliminate the top verdicts and you get $3.3 billion, $4.8 billion and $1.7 billion, respectively. (Numbers from 2001 and 2002 were adjusted for inflation.)

Alabama was prominently featured as recently as 2002 on the American Tort Reform Association’s annual list of “judicial hellholes,” places with juries supposedly generous to a fault. But it wasn’t on last year’s list. In 1999, the state adopted a law capping punitive damages at three times compensatories. The new law did not apply to Cunningham’s suit because it was in progress before the statue passed.

Underpaid royalties

Alabama claimed that Exxon had intentionally underpaid royalties on the lease it signed to develop natural gas from reserves discovered in Mobile Bay. The key to the state’s claim was its assertion that its lease was not the standard contract used by the industry.

Cunningham had also represented the state in suits against Shell Oil Co., Amoco Corp. Each of them had agreements using the same lease as Exxon, though the others produced much less gas.

Shell and Amoco settled in 2002 fir $33.5 million and $29 millions, respectively. The Hunt suit went to trial, producing a $24.6 million verdict in 2001 (No. 82 on the top verdict list). State of Alabama v. Hunt Petroleum Corp., No. CV-99-00-0391 (Mobile co., Ala., Cir Ct.).

In last year’s Exxon retrial, Cunningham, partner Richard Dorman and co-counsel Jere Beasley of Montgomery, Ala.’s Beasley, Allen, Crow, Methvin, Portis & Miles established that a lawyer at the state’s Department of Conservation and Natural Resources spent a year writing a contract favorable to the state.

The industry boilerplate contract permits oil and gas companies to deduct a host of expenses. Alabama’s does not. But Exxon did it anyway.

Internal documents introduced into evidence showed that Exxon understood that the state might realize it was being underpaid, Cunningham said. But Exxon decided to deduct the expenses, reasoning that Alabama’s auditors were inexperienced in this field and, even if the state demanded additional payments, the company would only have to pay the balance plus 12% interest, he said.

They forgot about punitive damages.

“We won because of the overwhelming evidence supporting the state’s position,” not the brilliance of the lawyers, Cunningham said. The strongest evidence, in his opinion, was Exxon’s internal documents.

A problem was presenting a complicated case of financial fraud in terms that the jury could understand. One way Cunningham solved it was with homespun analogies.

“What they’ve done in this case,” he said in his closing statement, “is no difference than somebody driving up to an Exxon gas station with $10 in their pocket and pumping $20 worth of gas knowing that they’re going to walk inside and they’re going to put $10 on the counter and walk out and hope nobody catches them.

“Only it’s worse, because they calculated that the clerk at the convenience store was inexperienced, which made the odds a little better.”

The zebra

Cunningham devised a visual analog of the contract to use during his closing argument. He compared Exxon’s industry-favorable version to a horse and Alabama’s to a zebra.

“What they’re doing,” he told jurors while projecting a picture of a zebra on a screen, “is the equivalent of saying, ‘well, yeah, you know that head may not look like a horse exactly, but it’s close….Maybe it’s a birth defect. But this is really a horse….’ And then when you look at them and say, ‘Well, what about those stripes?’ They say, ‘Oh, well, his mama was a black horse and his daddy was a white horse.’”

Sam Franklin of Birmingham, Ala.’s, Lightfoot, Franklin & White, who represented Exxon, acknowledged that the analogies connected with jurors.

“One of them almost burst out laughing about the picture of the zebra,” Franklin said. At the time he thought it understated the seriousness of the case. But analogies did seem to bring the state’s themes to life, he said.

Exxon had state documents that were consistent with its own interpretation of the lease, Franklin said, but wasn’t able to use them as effectively.

“I guess that’s just a harder story to tell,” he said. “It’s a lot easier to stand up and say that somebody’s cheating.”

The foreman

The most important evidence, according to jury foreman Joseph King, was an Exxon lawyer’s analysis that Alabama was unlikely to accept the deductions the company was contemplating, and a top executive’s memo declaring that they would take them anyway. The jury concluded “that he was very arrogant and the he thought the people of Alabama were stupid,” Kind said.

“The type of deductions they were talking were just absurd,” King said, 40, a third-grade teacher. “They had nothing to do with the gas.” One deduction was for a “family picnic” at a Biloxi, Miss., casino, he recalled.

Exxon’s witnesses didn’t help its cause, King said. Under cross-examination, Alabama’s lawyers “seemed to discredit every one of them,” he said.

As for how the jury arrived at the punitive figure, King said: “We wanted to award an amount that would get their attention. We knew that if we gave even a couple of billion dollars, they would just laugh at it.”

He suggested an
amount half again as large as the plaintiffs requested. “Almost everyone wanted to go higher,” but he knew that a previous verdict had been overturned, so he counseled moderation. In the end, the panel agreed on an award 25% higher than the request.

“I just wanted to make sure that it wasn’t thrown out again,” he explained.

That is what Exxon is trying to make happen. It has raised a host of issues in post-trial motions, including that $11.8 billion punitive award, compared to the $63.6 million in compensatories.

Seven months before the verdict, the Supreme Court warned that “few awards exceeding a single-digit ratio between punitive and compensatory damages…will satisfy due process.” State Farm Mut. Auto Ins. V Campbell, 123 S. Ct. 1513.

The court added: “When the compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” The Exxon ratio was 186-to-1.

To Franklin, it was inexplicable. Aside from the ratio, State Farm emphasized that large punitives are reserved for reprehensible behavior. That usually entails threats to property or safety-or, Franklin said, a vulnerable plaintiff pitted against a powerful defendant. “They’re absent from this case,” he said.

Rationale for punitives

Cunningham argued, over Exxon’s objection, that punitives should be based not on actual damages but on the defendant’s anticipated gain.

“You don’t just look at what somebody cheated somebody out of…” he told the jury. “What you look at is what they…would have defrauded them out of had they not been caught.”

Over the life of the lease, the evidence showed, Exxon stood to gain between $386 million and $950 million, he said. He suggested that jurors pick a sum in that range and multiply by a number between one and 10 to calculate punitives. They exceeded his request. Even by this formula, the ratio is more than 12-to-1.

Cunningham relied on a 1993 Supreme Court opinion. TXO Production Corp. v Alliance Resources, 113 S. Ct. 2711.

Coincidentally, so did the plaintiffs in the second-largest jury verdict. In that case, actual damages were about $3 million; punitives, more than $930 million. Beckman Coulter v. Dovatron Int’ll, No. 01CC08395 (Orange Co., Calif., Super. Ct.)

What would have been a 310-to-1 ratio was, in the TXO formulation of punitive to potential damages, a more palatable 4-to-1. The case settled in November for $23 million.

The lead lawyer in that case, Daniel Callahan pf Santa Ana, Calif.’s Callaham & Blaine, pointed out that the three most important Supreme Court decisions on punitivies-State Farm, TXO and BMW of North America v. Gore, 116 S. Ct. 1589 (1996)- all acknowledge that likely or potential harm can be taken into account when considering the appropriate amount of punitive damages.

But Callahan agrees with Cunningham when the Alabama lawyer says that “someday some court” will have to reconcile TXO and State Farm.

“And frankly, I don’t know of a case that would be a better candidate for that than this case,” Cunningham said of the big one that he landed last year.

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