In Re the Exxon Valdez: the Danger of Deception in a Novel Mary Carter Agreement

• Publication year: 1997
• Citation: Vol. 21 No. 01

SEATTLE UNIVERSITY LAW REVIEWVolume 21, No. 2FALL 1997

In re the Exxon Valdez: The Danger of Deception in a Novel Mary Carter Agreement

Amy Edwards Wood(fn*)

Introduction

On March 24, 1989, the Exxon Valdez ran aground on Bligh Reef in Alaska's Prince William Sound, disgorging eleven million gallons of North Slope crude(fn1) and causin2g the worst oil spill in American history.(fn2) In fewer than five hours the spill devastated one of the country's most sensitive ecosystems.(fn3) By August 1989, the oil had spread over nearly ten thousand square miles, soiling more than twelve hundred miles of shoreline.(fn4)

Following the spill, lawsuits for compensatory and punitive damages were filed against Exxon(fn5) and Captain Joseph Hazelwood, the skipper of the Exxon Valdez, by more than 32,000 people, including fishermen, Alaska Natives, business operators, and landowners.(fn6) Similar lawsuits were also filed against Exxon and Captain Hazelwood by seven Seattle-based seafood processors, known collectively as the "Seattle Seven."(fn7)

On January 8, 1991, two years after the spill and three years before the beginning of the trial, Exxon and the Seattle Seven entered into a comprehensive agreement, settling the lawsuits filed by the Seattle Seven.(fn8) Learning of the settlement, plaintiffs'(fn9) attorneys requested information on the terms of the agreement.(fn10) The Seattle Seven's attorneys, however, declared that the terms of their agreement were confidential and that they would not reveal them to the plaintiffs.(fn11)

On April 15, 1994, U.S. District Judge H. Russel Holland, at Exxon's request, consolidated all of the lawsuits into one mandatory punitive damages class.(fn12) He then divided the trial into three phases.(fn13) In Phase I, the jury determined that Exxon and Captain Hazelwood acted recklessly in allowing the Exxon Valdez to run aground in Prince William Sound, thus opening the door for plaintiffs to claim punitive damages.(fn14) In Phase II, the jury awarded the plaintiffs $287 million in compensatory damages.(fn15) And in Phase III, the jury, determining that it was necessary to punish and deter Exxon, awarded the plaintiffs $5 billion in punitive damages, the largest such award in history.

Following the trial, plaintiffs' attorneys began the task of creating a plan to allocate the judgment among the members of the mandatory punitive damages class.(fn16) As part of this process, plaintiffs again contacted the Seattle Seven's attorneys to determine whether they planned to claim a portion of the punitive damages award.(fn17) Attorneys for the Seattle Seven responded that "[they] had released their punitive damage claims when they settled with Exxon in 1991 and that they did not believe the Seattle Seven were entitled to obtain any portion of the punitive damage award."(fn18) In reliance on these statements, the plaintiffs did not allocate punitive damages to the Seattle Seven.(fn19)

On January 12, 1996, plaintiffs sought approval of their Plan of Allocation.(fn20) Despite earlier statements, however, attorneys for the Seattle Seven filed a motion, objecting to the Plan of Allocation and contending that fifteen percent of the punitive damages award should be allocated to them.(fn21) Their supporting documents made public for the first time the terms of the two settlement agreements between Exxon and the Seattle Seven.(fn22)

These secret agreements required the Seattle Seven, in return for a settlement of $70 million, to claim entitlement to allocated portions of any punitive damages.(fn23) According to the agreements, should the Seattle Seven obtain any punitive damages, they would return the damages to Exxon, thereby reducing Exxon's overall damages by what turned out to be $745 million.(fn24)

While counsel for Exxon had revealed to the jury during Phase III that Exxon had voluntarily paid damages to the processors, the jurors were not told that Exxon, through the Seattle Seven, intended to reduce its punitive damages by any amount awarded to the processors.(fn25) What is more, Exxon had affirmatively represented that it had sought nothing in return for its payments to the Seattle Seven. According to the court, "Exxon asked the jury to consider for purposes of mitigation, that Exxon paid $113,500,000 to seafood processors, including the Seattle Seven . . . and that in return Exxon asked for nothing more than a receipt."(fn26)

The Seattle Seven's revelation outraged Judge Holland, who called it an "astonishing ruse" and "deception" on the court and denied the Seattle Seven (and Exxon) an allocation of any punitive damages.(fn27) He stated that "the court had not identified any policy which rendered the settlement agreements per se unenforceable; rather, it was the use and in particular the misrepresentation of the substance of those agreements to the court and jury that the court found to be contrary to strong public policy."(fn28) Judge Holland further asserted that the court might have allowed the agreements had Exxon and the Seattle Seven kept their agreement confidential, without any misrepresentation.(fn29)

Judge Holland's opinion has sparked much debate over the ethics and legality of the attempt by Exxon and the Seattle Seven to reduce punitive damages. Legal ethicists and other experts agree, however, that this "bold tactic was novel, saying they had never before come across such an agreement."(fn30)

This Note addresses the legality and ethics of the secret agreement between Exxon and the Seattle Seven by analogy to a similar type of collusive agreement, called a "Mary Carter" agreement.(fn31) Part I of this Note looks at the terms of the Exxon/Seattle Seven agreements. Part II examines Judge Holland's controversial decision with respect to the Exxon/Seattle Seven agreements. Part III describes the nature of a Mary Carter agreement and the factors used to determine whether such an agreement exists. Then Part IV argues that, like Mary Carter agreements, the Exxon/Seattle Seven agreements undercut the jury system, prolong litigation, contravene legal ethics, and run afoul of public policy. Part IV further argues that, while Judge Holland's ultimate conclusion was correct, he was wrong in stating that had there been no misrepresentation the Exxon/Seattle Seven agreements would have been valid. This Note concludes that secret assignment of punitive damages, being even more egregious than Mary Carter agreements, must be disclosed to the court.

I. The Exxon/Seattle Seven Agreements

Exxon and the Seattle Seven entered into their first settlement agreement early in the litigation. In exchange for $63,675 million, the Seattle Seven surrendered all of their claims alleged in their 1989 complaint against Exxon, specifically including any claims to punitive damages.(fn32) The agreement provided that "by entering into this Agreement [the Seattle Seven] and Exxon intend to compromise and settle all presently existing claims for actual damages and all claims whatsoever for punitive damages."(fn33)

The primary purpose of the agreement was not to settle the claims of the Seattle Seven, however, but instead "to achieve setoffs and reductions, including setoffs and reductions to punitive damages. . . for the benefit of Exxon."(fn34) The "centerpiece"(fn35) of the agreement provided as follows: 4.b. As consideration for Exxon's Payments, [the Seattle Seven] agree to take all reasonable, lawful and ethical (under the Rules of Professional Conduct) actions to assist Exxon so that Exxon may recapture or obtain a credit or offset for any punitive damages, awards, settlements, and claims against Exxon . . . to which [the Seattle Seven] may have been entitled. If Exxon requests, [the Seattle Seven] will undertake to participate in any consolidated or class proceeding against Exxon . . . in which plaintiffs seek punitive damages, and will assert [the Seattle Seven's] entitlement to allocated portions of any punitive awards or settlements on the same basis as all other plaintiffs to that action. [The Seattle Seven] also hereby assign . . . to Exxon . . . any rights they may ultimately obtain to a punitive damages award against Exxon, . . . [the Seattle Seven's] and Exxon's intent being that any such punitive damage proceeds to which [the Seattle Seven] become entitled will inure to Exxon's . . . benefit. . . . If Exxon requests [the Seattle Seven] to take any of the actions described in this Part 4.b., Exxon Corporation agrees to reimburse [the Seattle Seven] for all reasonable costs and expenses and attorneys' fees incurred in complying with Exxon's requests.(fn36)

Finally, the agreement included several provisions, which reflected the parties' awareness of the questionable nature of the agreement.(fn37) The most significant of these provisions provided that "the terms of the Agreement shall be deemed strictly confidential and shall not be disclosed to any person or entity."(fn38)

At no time during the trial did Exxon reveal to the court or the jury any of the provisions of its agreement with the Seattle Seven.(fn39) In fact, during Phase III Exxon attempted to convince the jury that it had been generous in paying the Seattle Seven and other plaintiffs over $300 million and obtaining only "receipts."(fn40) Exxon asked the jury to "consider this 'fact' as a mitigating factor in determining punitive damages."(fn41) Thus, the jury was told that...