By James Sneeringer

The Supreme Court announced its decision today that the punitive damages award against Exxon was too large to be justified, sending the case back to lower courts to determine a punitive award that does not exceed $500 million. This number is based on the idea that the ratio of punitive to compensatory damages should be pretty tight--in this case, a "1 to 1" ratio. While the decision is specific to maritime law, it does point the way toward a more predictable and common-sense approach to punitive damages in lawsuits.

A major reason that lawsuits are such threats to businesses is the unpredictability and unfairness of punitive damages. It's extremely difficult to manage a risk that can't be quantified, and it is inherently unfair that businesses can be killed by huge punitive damages, even in a case that otherwise involves relatively small sums of money. The 1 to 1 ratio makes sense and we hope it sees broader application.

Robin Conrad, executive vice President of the National Chamber Litigation Center, the public policy law firm of the U.S. Chamber, put it this way:

"The decision could have an effect far beyond federal maritime law. Limiting punitive damages to no more than the amount of a compensatory award will go a long way in cabining unpredictable punitive damages."

And Chamber President and CEO Tom Donohue weighed in:

"This is good news for companies concerned about reining in excessive punitive damages. For years the Chamber has argued that punitive damages are too unpredictable and unfair, and today the Court agreed."

The Chamber is certainly not the only business group applauding this decision. See for example what the National Association of Manufacturers had to say.