Business Alabama Feature Article


Crowder says he spent days in a small room going through piles of internal Exxon documents the Montgomery trial court judge had ordered the company to turn over and found a 1993 letter from an Exxon in-house counsel conducting a risk assessment of the consequences of taking any deductions not allowed under the state's gas lease.

Jurors were shown the Exxon lawyer's letter, which said, "A risk decision will be necessary to implement anything beyond the minimal cost netting clearly authorized in the Alabama lease form."

The company lawyer went on to set out scenarios, opining that the state would have a "substantial chance of success in litigation; however, a number of reasonable arguments may be raised against it."

The letter said that information from Shell Oil indicated they weren't taking deductions against residue gas sales, consistent with the state's interpretation.

In a paragraph titled "Consequences of Underpayment," the Exxon lawyer wrote, "Our exposure is 12 percent interest on underpayments calculated from the due date and the costs of litigation."

"He completely forgot," says Crowder, "that the laws of all 50 states permit the imposition of punitive damages for intentional fraud."

If the ExxonMobil punitive verdict stands, it will dwarf the previous state record of $581 million returned by a Hale County jury in 1999 over the purchase of a satellite dish.

The jury's multi-billion dollar verdict represents "chump change" for ExxonMobil, according to Crowder, who says, "If an individual stole this much money, they would be in prison for life. ExxonMobil was only penalized the value of three years of their gross production."

In response to those who say the huge jury award sends the wrong message to companies looking to do business in Alabama, says Crowder, "I think it sends the right message: Alabama is open for business, but we're minding the store, and shoplifters are going to be prosecuted."

Following the trial, Siegelman commented to the press, "This company stated they believed they could get away with their scheme, because the people of Alabama were too inexperienced to understand they were being cheated."

ExxonMobil contends no fraud was involved and that the remarks by Alabama officials and the verdict "amount to a personal attack on the integrity of ExxonMobil and should be a frightful message to the business community."

After the big verdict, an ExxonMobil press spokesman issued a statement on the nation's business wires saying, "No evidence of fraud was offered by the state at trial and none was considered by the jury."

Dorman says, "Fraud was alleged and fraud was proved."

Anyone who says no fraud was involved in the case must have been in a different courtroom, says Robert "Bobo" Cunningham, another lawyer in the firm the state hired.

Their firm, known for winning big jury verdicts in the millions, is located on oak and palmetto-lined Dauphin Street in Mobile where the two-story brick law offices with flanking wings take up the front of a city block.

New white SUV's are parked outside and inside a Waterford crystal chandelier with prisms as big as your hand hangs in a spiral staircase. Working on a 14 percent fee, the lawyers stand to earn $490 million out of the judgment, if it stands. Excessive as that sounded to critics and most of the Alabama media, firm lawyers quickly pointed out that 14 percent is less than the firm's standard one third of an award for contingency cases. The firm also spent $230,000 of its own money to hire consultants to help make the case, they noted.

The state's suit was filed against ExxonMobil shortly before Alabama's punitive damages were capped at $500,000 or three times compensatory damages, whichever is greater. The new legislation was on the books, but it had not taken effect when the state took ExxonMobil to court.

Interests critical of Alabama's reputation for "jackpot justice" take issue with the trial lawyers' involvement.

Bill O'Connor, president of the Business Council of Alabama, which backs tort reform, says whether there should be any damages at all is a question that remains to be resolved as the ExxonMobil case goes through appeals. "But under no circumstance, given the facts in this case, is a punitive damage award of $3.4 billion warranted or a payment of nearly a half a billion dollars to the trial lawyers involved justifiable," says O'Connor. "I'm confident common sense will prevail in this case as it moves through the judicial process."

Speaking just before Judge McCoovey denied the motion for a new trial, Balagia said he couldn't say what ExxonMobil would do if the judge doesn't rule in favor of the company. "If she denies the motions, we will look at every option available to us," he said.

It wouldn't be unexpected for ExxonMobil-which rejected a $600 million settlement offer by the state before going to trial-to move the Alabama case through the court system for a long time.

ExxonMobil is still appealing $5 billion in punitive damages a jury awarded in 1994 for environmental damage caused by the 1989 Exxon Valdez oil spill that affected 1,300 miles of shoreline. ExxonMobil reached a $1.1 billion settlement with federal and state governments in 1991, and an Anchorage court in 1994 ruled that $300 million ExxonMobil voluntarily paid to claimants soon after the spill covered most compensation claims. The company estimates it has spent $2.2 billion on the cleanup. The question of punitive damages, however, remains on appeal.

The State of Alabama's alleged damages are not as tangible as oiled beaches, but Alabama is not alone in asking for punitive damages in a purely financial dispute with ExxonMobil.

In early January the state of Texas sued ExxonMobil in a Houston federal court for punitive damages. The Texas attorney general's office says the company has failed to pay the state tens of millions of dollars in gas and oil royalties it owes. Texas claims ExxonMobil and its predecessors pumped oil and natural gas from about 50 acres of state highway land for more than 25 years without paying any royalties. The oil giant says it wrote Texas officials explaining its position in 1996 and didn't get a response.

"It appears we must now add officials of the state of Texas to the growing list of litigious public officials more interested in headlines than meaningful resolution to business matters," ExxonMobil said in a press release.

At the federal level, hefty fines are not unprecedented in issues of royalty disputes. The same week that Texas sued the company, ExxonMobil agreed to pay the U.S. government $7 million to settle Justice Department claims that Exxon failed to pay royalties it owed on oil drilled on federal leases around the country. That settlement, covering a decade of underpayments since 1988, resulted from a whistle-blower suit that has yielded the government a total of $282 million in similar settlements with I I energy companies.

New federal rules now require that gas and oil companies base royalties on the actual market price and not the internal prices they post themselves.

A similar provision in the original lease that Exxon signed with Alabama was one of the issues in the Montgomery trial. The state claimed ExxonMobil owed $20 million or more for failing to pay the required royalty rate based on the gross proceeds from the

price received for the gas or the best price realizable in reasonable diligence, whichever is higher.

Afterward ExxonMobil said the State of Alabama knew exactly how much the company was going to pay in royalties under "this ambiguous lease form" before the first royalty payment was made.

While the state, which drew up its own lease, said ExxonMobil owed royalties on the gross gas production from the 13 wells it has drilled in state waters, the company contends the lease allowed deductions for production costs as well as gas used to fuel its cleaning and processing plant in south Mobile County.

ExxonMobil, as it's now known, is the biggest of the world's three supermajor energy companies and the only one headquartered in the United States.

Since 1993 Exxon has paid Alabama more than $1 billion dollars in royalties and bonus payments. The gas drilling companies also paid royalties to private waterfront landowners in Mobile and coastal Baldwin County.

Any recovery from the ExxonMobil case is expected to go into the Alabama Trust Fund, a repository for the state's offshore gas revenues. That fund and the state's Heritage Trust Fund, another trust for state offshore gas funds, hold a combined $1.8 billion in assets.

And how does the winning Mobile law firm plan to spend their potential $490 million fee from ExxonMobil, which has had annual incomes greater than the GNP of all but some 20 countries in the world?

"We'll worry about that when we get it," says Dorman.

Most sideline observers are betting that the paycheck for the attorneys, as well as the state, will be significantly reduced. And no one is underestimating ExxonMobil's wherewithal for extending the court battle.

"Exxon continues to believe that this verdict is not supported by the law or the facts presented in this case," said ExxonMobil chief spokesman Cohen after McCoovey's denial of a new trial.

And if there were a question in anyone's mind, he added, "We will continue to pursue all avenues of appeal regarding this matter."

Cathy Donelson is a frequent freelance contributor to Business Alabama. She lives in Fairhope.