ExxonMobil Corp. v. Alabama Department of Conservation and Natural Resources (2007)

Case facts

After the 1979 discovery of the Mobile Bay gas fields, the state of Alabama held competitive bidding for the rights to lease and develop the oil fields. For the first time, the state drew up its own lease agreement, which changed key provisions on calculating the royalty payments. Exxon won the bidding process and signed multiple long-term leases in 1981 and again in 1984.

In 1994, the state took exception to royalty calculations by oil companies and hired a revenue analyst to oversee payments; the payment discrepancies were the result of a lack of any State-prescribed reporting format. Not until late 1996 did the state determine there were disputes related to Exxon. The state and Exxon would negotiate for two years from early 1997 to July 1999.

Exxon filed suit against the state to obtain judicial resolution to the dispute over how to calculate royalties. A month later, the state filed a counterclaim alleging breach of contract and fraud dating back to 1993. Over Exxon's objection, the trial court realigned the parties, naming the State as the plaintiff and Exxon as defendant.

The trial court initially ruled on December 19, 2000, awarding punitive damages of $3.42 billion. Exxon appealed, having had its post-trial motions denied and the Supreme Court on December 20, 2002 reversed and remanded. The 14-day retrial in October 2003 resulted in excess of $100 million in compensatory damages and $11.8 billion in punitive damages, which was subsequently reduced upon a motion for a remittitur to $3.5 billion. Exxon appealed on the legal sufficiency of the evidence supporting the verdict - specifically, the state's evidence that Exxon had committed fraud.

The Supreme Court ruled in November 2007 that for the State to be awarded $3.5 billion in punitive damages relating to a fraud claim regarding disputed contractual royalty fees, the State had to prove 1) the defendant had a duty to disclose material facts that 2) were concealed or not disclosed by the defendant, which 3) induced the plaintiff to act 4) to the plaintiff's injury, resulting 5) in actual damage to the plaintiff. On this burden the State failed on multiple grounds, necessitating the reversal of the punitive damages; the State still collected compensatory damages owed to it.