Exxon Mobil Corp. (NYSE:XOM-news) is set to argue in front of Alabama Supreme Court on Tuesday that a $3.6 billion fraud judgment against the company is unconstitutional and should be overturned.

Alabama sued Exxon in 1999 claiming the company fraudulently underpaid millions of dollars in royalties from natural gas wells off the state’s coastline.

Two juries agreed the company illegally reduced their payments to the state by claiming inappropriate expenses as deductions from their royalties. The juries awarded the state compensatory damages as well as billions of dollars in punitive damages.

The company plans to argue that the state has not proven any fraud on the company’s part and that the suit should be thrown out.

“The state, for tactical reasons, (has) tried to turn a contract dispute into a fraud claim,” said Exxon Mobil spokeswoman Susan Reeves.

But Alabama is steadfast in its belief that the company cheated it out of payments.

“They took families to casinos, paid for uniforms, landscaping, promotional T-shirts, you name it, the deducted it,” according to attorney Jere Beasley, of the law firm Beasley, Allen, Crow, Methvin, Portis & Miles, P.C., who represented the state.

“They think they are above the law,” said Beasley.

In the second trial of the case, a jury handed down $11.8 billion of punitive damages-the largest award handed down by a jury in 2003. It was later reduced to $3.4 billion by a circuit court judge. If the court does not overturn the charges, the company is asking that it reduce the punitive damages against Exxon.

“It is up to the stratosphere right now-far from anything that we feel could be upheld constitutionally,” David Boyd, the company’s outside counsel, said. Boyd is a partner with Balch and Bingham in Montgomery, Ala.

Last week, Exxon Mobil reported the largest ever annual profit in U.S. history- $39.5 billion 2006. Its full year revenue was about $377.64 billion, larger than the economy of Switzerland, the seventeenth largest economy in the world in 2005.

Arguments in the case are scheduled to begin at 0900 local time (1500 GMT) Tuesday morning.

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