Exxon Corp. v. DEPARTMENT OF CONSERVATION AND NATURAL RES.

• Decision Date: 20 December 2002
• Citation: 859 So.2d 1096
• Parties: EXXON CORPORATION v. DEPARTMENT OF CONSERVATION AND NATURAL RESOURCES et al.
• Court: Alabama Supreme Court

859 So.2d 1096

EXXON CORPORATION v. DEPARTMENT OF CONSERVATION AND NATURAL RESOURCES et al.

1001053.

Supreme Court of Alabama.

December 20, 2002.

Order Overruling Rehearing Applications April 11, 2003.

David R. Boyd and W. Joseph McCorkle, Jr., of Balch & Bingham, L.L.P., Montgomery; Sam C. Pointer, Jr., and M. Christian King of Lightfoot, Franklin & White, L.L.C., Birmingham; Joseph C. Espy III and Suzanne D. Edwards of Melton, Espy, Williams & Hayes, P.C., Montgomery; William D. Scruggs and E. Allen Dodd, Jr., of Scruggs, Dodd, Dodd & Bazemore, Attorneys, P.A., Fort Payne; and Walter E. Dellinger, John F. Daum, and Charles C. Lifland of O'Melveny & Myers, L.L.P., Washington, D.C., for appellant.

Charles J. Cooper, deputy atty. gen., and Vincent J. Colatriano, Hamish P.M. Hume, and Derek L. Shaffer of Cooper & Kirk, P.L.L.C., Washington, D.C.; William H. Pryor, Jr., atty. gen.; Charles W. Gamble, deputy atty. gen., Tuscaloosa; John T. Crowder, deputy atty. gen.; and Robert T. Cunningham, Jr., Richard T. Dorman, David G. Wirtes, Jr., and George M. Dent of Cunningham, Bounds, Yance, Crowder & Brown, L.L.C., Mobile, for appellees. Sally S. Reilly, Birmingham, for amicus curiae American Corporate Counsel Association.

Mike Moore, atty. gen., Mississippi; John Cornyn, atty. gen., Texas; W.A. Drew Edmondson, atty. gen., Oklahoma; Richard P. Ieyoub, atty. gen., Louisiana; Richard Blumenthal, atty. gen., Connecticut; Thomas J. Miller, atty. gen., Iowa; Frankie Sue Del Papa, atty. gen., Nevada; Patricia A. Madrid, atty. gen., New Mexico; Mark Barnett, atty. gen., South Dakota; Mark L. Shurtleff, atty. gen., Utah; Darrell V. McGraw, Jr., atty. gen., West Virginia; and Anabelle Rodriguez, atty. gen., Commonwealth of Puerto Rico, for amici curiae states of Mississippi, Texas, Oklahoma, Louisiana, Connecticut, Iowa, Nevada, New Mexico, South Dakota, Utah, and West Virginia, and the Commonwealth of Puerto Rico.

PER CURIAM.

This case involves an adverse judgment against Exxon Corporation regarding royalty payments it owes the Alabama Department of Conservation and Natural Resources ("DCNR") for gas Exxon extracted from Mobile Bay. The jury awarded the State $87.7 million in compensatory damages and $3.42 billion in punitive damages on breach-of-contract and fraud claims. We reverse and remand.

I. Factual Background

Mobile Oil Company discovered oil in Mobile Bay in 1979. In 1981, DCNR began a major sale of oil leases in Mobile Bay. In preparation for the sale of the leases, DCNR performed a comprehensive review of its standard lease agreement, and its chief legal counsel, Robert Macrory, drafted a new standard oil-and-gas form lease agreement for DCNR. DCNR awarded seven leases to Exxon in 1981. In 1984, using the same standard lease forms, DCNR awarded Exxon 15 more leases. Exxon paid the State an initial price of approximately $585 million for all of its leases in Mobile Bay.

In mid-1993, when Exxon was completing construction of its infrastructure at the drilling sites in Mobile Bay and preparing to shift responsibility of the Mobile Bay project to its operations division, R.J. Mertz, Exxon's accounting manager on the Mobile Bay project, asked Exxon's in-house counsel Charles Broome to perform a legal analysis of the royalty provisions of the lease agreement "to ensure that royalties were paid in accordance with the terms of the mineral lease" and to evaluate potential areas of cost recovery for Exxon in the production and treatment process. Broome offered three different interpretations of the lease language concerning the payment of royalties, along with the likelihood of success of each interpretation in litigation. Using his analysis, R.J. Kartzke, the Mobile Bay project manager and Broome's chief supervisor; Mertz; and other Exxon executives adopted an interpretation of the lease and began paying DCNR royalties based upon that interpretation after production began that year.

In 1996 DCNR hired outside auditors to audit Exxon's royalty payments. When the audit was completed, DCNR made a demand for reimbursement, plus interest, of what it alleged were millions of dollars in royalties that, it said, according to the royalty provisions in the lease agreement should have been paid but were not. Exxon refused to pay, and DCNR officials informed Exxon that the State was planning to sue to recover the royalty payments. Soon after, on July 28, 1999, Exxon filed a declaratory-judgment action to determine the rights of the parties under the lease agreement. The next day, the State filed a separate action against Exxon, alleging breach of contract and fraud; it later dismissed that complaint and brought the same claims as compulsory counterclaims in Exxon's declaratory-judgment action. The trial court granted the State's motion to realign the parties, and the State became the plaintiff and Exxon the defendant.

The State presented its evidence of the purported breach of contract and fraud, while Exxon maintained throughout trial that the entire case simply involved a disagreement over the interpretation of ambiguous provisions in the lease agreement. The jury returned a verdict in favor of the State, finding Exxon liable for breach of contract and fraudulent underpayment of royalties, awarding both compensatory and punitive damages. Exxon filed a motion for a hearing on the excessiveness of the punitive-damages award based on § 6-11-23, Ala.Code 1975, and in accordance with Hammond v. City of Gadsden, 493 So.2d 1374 (Ala.1986). The trial court concluded that the jury's award was not excessive based upon the potential harm Exxon's behavior could have cost the State and the need to impose a stiff punishment that would serve as an effective deterrent to underpaying in the future by a large corporation such as Exxon.

Exxon appeals, challenging the sufficiency of the evidence on the issue of fraud, the availability of a fraud claim in light of the statute of limitations, the propriety of the State's receiving a punitive-damages award, several rulings by the trial court at trial, and the punitive-damages award, based upon standards set forth by the United States Supreme Court, Alabama statutes, and this Court.

II. Analysis

Exxon first argues that the two-year statute of limitations for a fraud action (Ala.Code §§ 6-2-3 and 6-2-38(l)) bars the State's fraud counterclaim. Exxon contends that the statutory limitations period on the State's fraud counterclaim had run when Exxon's declaratory-judgment action was filed in July 1999. The State responds by stating that its counterclaim is compulsory and, therefore, as this Court held in Romar Development Co. v. Gulf View Management Corp., 644 So.2d 462, 470-73 (1994), a compulsory counterclaim is not subject to the defense of limitations. Exxon answers this argument by citing Ala.Code 1975, § 6-8-84, which provides:

"When the defendant pleads a counterclaim to the plaintiff's demand, to which the plaintiff replies the statute of limitations, the defendant is nevertheless entitled to his counterclaim, where it was a legal subsisting claim at the time the right of the action accrued to the plaintiff on the claim in the action."

Exxon claims that the State conceded at the trial level that Exxon could have gone to court to obtain a declaration of its contractual royalty obligations as early as 1988 or 1989. Exxon also asserts that the earliest point at which the State could have asserted a fraud claim was December 1993, when Exxon made its first royalty payment. Exxon concludes that because the fraud claim accrued after Exxon's claim for declaratory judgment accrued, the fraud claim was not a "legally subsisting claim" within the meaning of § 6-8-84 at the time Exxon's claim accrued; therefore, it argues, the statute of limitations bars the State's fraud claim.

In support of this argument Exxon cites Sharp Electronics Corp. v. Shaw, 524 So.2d 586 (Ala.1987), in which this Court held that when a counterclaim accrues after the date of the accrual of the plaintiff's action, but becomes time-barred before the plaintiff's action is filed, the counterclaim cannot be used offensively, i.e., it cannot exceed the amount of the plaintiff's recovery, if any. Sharp, 524 So.2d at 591. However, this reading of § 6-8-84 and the Sharp rule are in contravention to the holding in Romar, which expressly overruled Sharp. In Romar, this Court ruled that all compulsory counterclaims, whether offensive or defensive, are not subject to the statute-of-limitations defense. The trial court denied the statute-of-limitations defense on the basis of Romar, and the State insists that we should as well. Exxon asks us to overrule Romar. The State contends that Exxon waived this argument by failing to preserve it in the trial court.

Yet, even if we elected, as Exxon urges, to overrule Romar and follow the Sharp rule, whether Exxon's limitations argument would entitle it to a summary judgment or a judgment as a matter of law is problematic. If we were to apply Sharp, as Exxon insists, we would have to agree with Exxon that the statutory period of limitations on the State's claim for fraud had run, as a matter of law, as of July 1999 when Exxon filed its declaratory-judgment action. The State contends that the fraud was ongoing until shortly before the trial.

Even if we were satisfied that the issue had not been waived, Exxon faces the formidable hurdle of stare decisis in its effort to obtain what might, even under Sharp, be at best a jury determination on the limitations defense. We note at the outset that we are not here dealing with a constitutional issue where the doctrine of stare decisis is often given diminished deference. See, e.g., Marsh v. Green, 782 So.2d 223, 232 (Ala.2000)

. As Justice Somerville observed in his dissent in Bolden v. Sloss-Sheffield Steel & Iron Co., 215 Ala. 334, 340, 110 So. 574, 580 (1925), "The doctrine of stare decisis, though not without its limitations, is the only...