By Phillip Rawls
The Associated Press

The largest verdict in Alabama history went before the Alabama Supreme Court on Tuesday with Exxon Mobil arguing that the $3.6 billion judgment is unjustified because the oil company committed no fraud against the state.

"Of course, this case is notorious. It's notorious because it involved an outrageous award of punitive damages," Exxon Mobil attorney Chris King told the court.

The state's attorney defended the verdict, saying Exxon Mobil intentionally shortchanged the state on royalty payments from offshore wells because its executives knew Alabama was inexperienced in the natural gas business.

"Exxon decided plainly and simply to cheat the state out of this money," Charles Cooper said.

The state conservation department sued Exxon Mobil in 1999, contending it underpaid royalties to the state from natural gas wells the company drilled in state-owned waters off the Alabama coast.

In 2003, a Montgomery jury agreed with the state's arguments and returned a verdict of $102.8 million in compensatory damages and $11.8 billion in punitive damages. A Montgomery judge cut the punitive damage award to $3.5 billion, which made the total judgment $3.6 billion.

The judgment was not only the largest ever in Alabama, it was the largest in America for 2003 -- even after it was cut.

The Supreme Court did not indicate when it would rule, but the importance of the case was reflected by the court's clock and its audience.

The court rarely devotes more than one hour to oral arguments in cases, even those involving the death penalty. But it listened to arguments in the Exxon Mobil case for two hours and 45 minutes.

Gov. Bob Riley and state Attorney General Troy King attended the hearing, with Riley noting that it was a first for him to witness the state's highest court in action.

Exxon Mobil's attorneys said the huge verdict would put Alabama outside the mainstream of states. But Riley said it never has been an issue when he recruits industry.

"I cannot think of any time anyone has ever mentioned it," he said in an interview.

The state's lawyer told the court that the $3.6 billion verdict may seem large, but it must be put in perspective against the size of the company, which reported a record $39.5 billion in net income for 2006.

"That's enough to get Exxon's attention, but not for long," Cooper said.

Franklin said that if the court upholds the judgment, it would amount to the state "literally confiscating" the entire $3 billion investment Exxon Mobil has made in the state's oil and natural gas industry.

Exxon Mobil's attorneys argued that the case is a simple disagreement over how to interpret the company's contract with the state, including what expenses it could deduct before paying royalties to the state.

The company's attorneys said that the state's own records show it was aware of the disagreements affecting the royalty payments. They argued that nothing was hidden from the state and there was no fraud, which is necessary to have punitive damages.

Cooper argued that Exxon Mobil filed no royalty reports with the state for the first 11 months after the wells went into production. The company's own internal documents described an "inexperienced regulatory staff and processes" in Alabama, and they explained that if the underpayments were caught, Exxon Mobil's exposure was only the underpayments plus 12 percent interest, he said.

Exxon Mobil's attorneys argued that the Supreme Court should do the same thing it did in April 2004, when it threw out a $24.6 million punitive damage verdict the state won in a similar -- but much smaller -- royalties dispute with Hunt Petroleum over natural gas wells along the coast.

The Supreme Court ruled that punitive damages weren't justified because the state government failed to prove that it relied to its detriment on monthly royalty reports from Hunt Petroleum.

Exxon Mobil's attorneys argued there was no reliance because the state's own documents showed it did not accept the company's monthly royalty payments as being absolutely accurate and that it had planned to audit the payments from the beginning.

But Cooper said the state relied on the payments "as true and accurate," and it would have brought in lawyers and auditors years earlier if it had known there were problems.

Lawyers Involved: