Attorneys for the state of Alabama and ExxonMobil Corp. plan to argue before the state Supreme Court on Tuesday in appeal of a jury’s verdict that Exxon owes the state $3.6 billion. The two-hour hearing is scheduled to start at 9 a.m., more than 2 ½ years after Exxon appealed the verdict.

A Montgomery County jury in November 2003 found that Exxon violated lease contracts signed with the state the entitled the company to pump and sell natural gas from Mobile Bay. The Jury said Exxon owed the state $102.8 million in additional royalties, plus interest, for gas Exxon pumped from the bay in 1993-2002.

The jury also imposed punitive damages of $11.8 billion on Exxon, finding the company committed fraud.

Montgomery County Circuit Judge Tracy McCooey in March 2004 reduced the punitive-damages awarded $3.5 billion, for a total verdict of $3.6 billion, and Exxon appealed to the Alabama Supreme Court.

Attorneys on both sides said they hoped the Supreme Court would rule on the case within two or three months of the hearing, but there’s no guarantee that it will. There’s also no guarantee that a ruling the Alabama Supreme Court would be final, since its decision might be appealed to the U.S. Supreme Court.

David Boyd, one of Exxon’s attorneys, said the company and the state disagree over how to interpret lease contracts, but that Exxon never committed fraud. No punitive damages could be awarded in a contract dispute under Alabama law without finding a fraud.

“This case if a contract dispute masquerading as a fraud action,” Boyd and other attorneys for Exxon wrote in their brief to the Supreme Court.

Boyd said Exxon never hid from the state that it interpreted the contracts to mean the companies owed less in royalties than the state believed it did. He also said the state always intended to audit Exxon’s production and payment records, and that Exxon knew that.

“It’s an amount so astronomical as to be just mind-boggling,” Boyd said.

He and other attorneys in their brief said the U.S. Supreme Court in recent years has said that few punitive damage awards 10 times or more greater than actual damages would be viewed as fair, as satisfying the U.S. Constitution’s guarantee of due process law.

But Jere Beasley, one of the attorneys for the state, said the U.S. Supreme court never has set a hard and fast rule against large punitive damages awards.

“There’s no magic formula,” Beasley said.

Noting that ExxonMobil reported earning profits of $39.5 billion last year, he said a verdict smaller than $3.6 billion wouldn’t sting Exxon enough to change its behavior.

Beasley also disputed Boyd’s view that Exxon never hid from the state its different interpretation of the lease contracts, and the royalties owed under them.

“We think the entire decision should be upheld,” Beasley said.

One of the disagreements in interpretation of the contracts centers on the value of natural gas from Mobile Bay on which Exxon pays royalties to the state.

The state says Exxon must pay royalties on the value of gas sold from Exxon’s Onshore Treating Facility in Theodore, which among other things, removes hydrogen sulfide form the gas to make it marketable.

Exxon says that, when valuing the gas it sells, it can deduct the cost of transporting the natural gas from drilling platforms to the treating facility and of purifying the gas there.

Also, Exxon says it doesn’t have to pay royalties to the state on gas it pumps from Mobile Bay and the burns to operate the treating facility. The state says Exxon must pay royalties on that gas, too.

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