The high court said the award should be reduced to the amount of compensatory damages in the case – $507.5 million.
Until Wednesday's announcement, the $2.5 billion award was the largest punitive damages award ever upheld by the US courts. But the Supreme Court ruled 5 to 3 that the punishment was excessive.
Writing for the majority, Justice David Souter said punitive damages could be awarded under maritime law, but the verdict against Exxon "under the circumstances of this case" should be limited to an amount equal to the damages already paid by Exxon to compensate victims of the oil spill.
The ruling marked a significant victory for Exxon which has been waging legal battles related to the 1989 oil spill for 19 years. Business groups also praised the opinion as a move by the high court toward reducing the level of uncertainty in punitive damages cases.
"This is good news for companies concerned about reining in excessive punitive damages," said Tom Donohue, president of the US Chamber of Commerce. "For years the Chamber has argued that punitive damages are too unpredictable and unfair, and today the court agreed."
Environmentalists and other analysts said the court got it wrong. "Exxon was responsible for one of the greatest environmental disasters our country has ever seen, and the Supreme Court let them off with a slap on the wrist," said Kathryn Kolbert, president of People for the American Way Foundation, a liberal advocacy group.
"The award is a drop in the bucket of Exxon's enormous profits, and it certainly provides no disincentive for them to avoid another accident in the future," Ms. Kolbert said.
Only eight justices of the nine-member court participated in the case. Justice Samuel Alito recused himself because he owns ExxonMobil stock.
The case, Exxon Shipping Company v. Baker, stems from the March 24, 1989, grounding of the Exxon Valdez supertanker. Some 258,000 barrels of crude oil poured from the tanker into the pristine waters of Alaska's Prince William Sound. The name of the tanker has since become synonymous with environmental disaster.
After the spill, the owner of the tanker, Exxon Shipping Company, spent $3.4 billion to try to clean up the mess and compensate thousands of commercial fishermen and other Alaska residents hit by the catastrophe.
In 1994, a group of 32,677 Alaskans harmed by the oil spill sued Exxon seeking compensation and additional punishment for the company.
Their lawyers alleged that Exxon managers assigned a relapsed alcoholic, Capt. Joseph Hazelwood, to command the supertanker. The jury found that Captain Hazelwood acted recklessly. But the jury found that Exxon acted recklessly, too.
Hazelwood was ordered to pay $5,000 in punitive damages, and Exxon was ordered to pay $5 billion.
The Exxon verdict was later reduced to $2.5 billion.
In reducing that award, Justice Souter cited studies reflecting the median ratio of punitive to compensatory damages in thousands of examined cases. "The data in question put the median ratio for the entire gamut at less than 1:1, meaning that the compensatory award exceeds the punitive award in most cases," Souter wrote.
"In a well-functioning system, awards at or below the median would roughly express jurors' sense of reasonable penalties in cases like this one that have no earmarks of exceptional blameworthiness," Souter wrote.
Justices John Paul Stevens, Ruth Bader Ginsburg, and Stephen Breyer dissented. Justice Stevens said Congress, rather than the Supreme Court, should make the empirical judgments outlined in Souter's opinion.
The Exxon maritime case could hold broader implications for cases in state courts involving large punitive damages awards, analysts say. Some legal analysts suggest the same rationale used by the majority justices to winnow down the Exxon damages might also be applied in the state courts.
The Supreme Court has been sharply divided on the issue of how best to determine when a punitive damages award is too large.
"The decision could have an effect far beyond federal maritime law," said Robin Conrad, of the National Chamber Litigation Center. "Limiting punitive damages to no more than the amount of a compensatory award will go a long way in cabining unpredictable punitive damages," she said.
Other analysts say Exxon got off easily. "For the court to require a company that recorded a 2007 profit of $40.6 billion and that posted the highest quarterly results in US corporate history in February to pay a mere $500 million in punitive damages to the affected Alaskans makes a mockery of justice," said John Passacantando, executive editor of Greenpeace USA.
Fordham law professor Benjamin Zipursky saw the court's action as the epitome of a high court compromise. "Four of the justices wanted no damages at all and at least three wanted $2.5 billion," he said. "The court ended up giving Exxon an 80 percent reduction, and permitting just over $500 million in punitive damages."
Professor Zipursky added, "The case reflects a combination of the court's pro-business willingness to cut punitive damages quite sharply, its disinclination to spare Exxon all punitive damages in today's political environment, and its occasional capacity to resolve disagreement by striking a bargain."