Montgomery, Alabama, Dec. 19 (Bloomberg) - Exxon Mobil Corp. was ordered by a jury to pay $3.5 billion, one of the largest punitive damage awards, for defrauding Alabama of royalties from natural gas wells in state waters.

Exxon, which acquired Mobil last year to become the world's largest publicly traded oil company, said it will take all legal steps to challenge the verdict." The company has yet to pay a $5 billion punitive damage award stemming from the 1989 Exxon Valdez oil spill in Alaska.

Today's verdict, $87.7 million in compensatory damages and $3.42 billion in punitive damages, may not survive, experts say.

The vast majority of mammoth verdicts are greatly reduced on appeal," said Tom Harrison, publisher of Lawyers Weekly USA which has tracked large jury verdicts for 12 years. You can argue that the jury was irrational, swayed by passion and prejudice."

Governor Don Siegelman of Alabama said Exxon Mobil defrauded the state. What is even more appalling is that this company stated that they believed they could get away with their scheme because the people of Alabama were too inexperienced to understand they were being cheated," he said.

The verdict is the fourth largest punitive damage award by a jury against a company. Two are now on appeal, and the third, against General Motors Corp. in 1999, was reduced by the trial judge.

Conscious and Deliberate

In today's case, Irving, Texas-based Exxon Mobil was accused of deliberately underpaying royalties to the state since 1993.

Exxon Mobil, which is largely self-insured, strongly disagrees with the jury's verdict" and will appeal, the company said in a statement. The company said it has always endeavored to fully comply with the requirements of our leases" and denied it engaged in fraud or that the jury considered any evidence of fraud.

We had numerous internal documents that demonstrated their conscious, deliberate decision to underpay royalties to the state," said Alabama state attorney Robert T. Cunningham Jr. If the jury was inflamed, they were inflamed because of the mounds of evidence of fraudulent conduct by Exxon.

The 12-member jury heard more than 11 days of testimony in circuit court in Montgomery, Alabama, and deliberated for less than two hours before delivering its unanimous verdict.

It arrived at the punitive damages award by tripling the company's annual production from the natural gas wells along the Alabama coast.

In a state known for substantial damage awards, the penalty for Exxon Mobil is six times Alabama's previous record in a civil damages case, the Associated Press said. A jury in 1999 awarded $581 million against Whirlpool Financial National Bank over purchase of a satellite dish.

I think it reflects the tenor of the times," said Harrison. Large verdicts have gotten devalued. Jurors often don't think they're giving away real money."

Other Cases

Exxon Mobil recently lost a U.S. Supreme Court bid to overturn a $5 billion punitive damage award in 1994 over the Exxon Valdez oil spill.

In 1996, the company settled litigation with the Lloyd's of London syndicate and other insurers over the Exxon Valdez oil spill for $480 million. However, the company has yet to pay the punitive portion of the award, assessed after the Valdez dumped 11 million gallons of crude oil into Alaska's Prince William Sound.

Exxon Mobil said in a filing with the Securities and Exchange Commission that it has a $6.75 billion line of credit to cover any damages it might be forced to pay in the Valdez case.

In a separate case, the Supreme Court will decide by the end of June how much power appeals courts have to reduce or reinstate jury awards of punitive damages. At issue is the power of state or federal appeals courts to overrule a trial judge's decision to uphold or strike down a jury verdict.

That case will be the high court's first look at punitive damages since it ruled in 1996 that a $2 million award for a BMW paint flaw was excessive.