TXO Production Corporation v. Alliance Resources Corporation

PETITIONER:TXO Production Corporation
RESPONDENT:Alliance Resources Corp. et al.
LOCATION:Austin’s Auto Body Shop and mobile home

DOCKET NO.: 92-479
DECIDED BY: Rehnquist Court (1991-1993)
LOWER COURT: Supreme Court of Appeals of West Virginia

CITATION: 509 US 443 (1993)
ARGUED: Mar 31, 1993
DECIDED: Jun 25, 1993

ADVOCATES:
Carter G. Phillips – on behalf of the Petitioner
Carter Phillips – for petitioner
Laurence Tribe – for respondents
Laurence H. Tribe – on behalf of the Respondents

Facts of the case

Question

Audio Transcription for Oral Argument – March 31, 1993 in TXO Production Corporation v. Alliance Resources Corporation

William H. Rehnquist:

We’ll hear argument first this morning in No. 92-479, TXO Production Corporation v. Alliance Resources Corporation.

Mr. Phillips.

Carter G. Phillips:

Thank you, Mr. Chief Justice, and may it please the Court:

Well, the Court may begin its opinion in this case in much the same way that it began its opinion in Haslip, that is, that this case is yet another challenge to a punitive damages award.

To be sure, this case does not involve just any old punitive damages award.

The award here of $10 million for the tort of slander of title is beyond rational explanation by reference to any legitimate interests asserted by the State of West Virginia and is the product of a procedural scheme that bore no discernable relationship to the procedural scheme that this Court reviewed and approved in Haslip.

Indeed, the West Virginia Supreme Court’s judgment ultimately rests on a wholly arbitrary, really mean versus really stupid, classification of defendants that even the respondents do not defend in this Court.

Accordingly, that judgment should be reversed.

TXO was an oil and gas exploration company based in Texas that opened an office in West Virginia in the early 1980’s.

In 1984, it first became interested in the Blevins tract in McDowell County, West Virginia, and sought to obtain the oil and gas development rights to that tract.

Those rights were held by Respondent Tug Fork… or excuse me.

The title to the oil and gas was held by Respondent Tug Fork, and the development rights were held by Respondent Alliance Resources.

An agreement was reached between Alliance and TXO that granted the latter the rights to the development.

TXO received a title opinion that indicated that there was question as to whether or not a 1958 deed had, in fact, conveyed Tug Fork’s interest to a third party.

The question then was how to resolve that problem, and TXO obtained a quitclaim deed from the recipient of the rights in order to be in a position to ensure that if it began to drill well… drill a well on that property and, in fact, successfully uncovered oil or gas, that it would be able to take that oil and gas free of any claims by this third party.

So, TXO filed its quitclaim deed, and then filed a declaratory judgment action seeking to have the respective rights of the parties resolved.

Respondents counterclaimed in that lawsuit for slander of title based solely on TXO’s action in recording the quitclaim deed and sought both compensatory damages and the punitive award.

The case was tried exclusively on respondents’ claim of slander of title.

Respondents did not seek compensatory relief on any other theory of the case, and they did not submit an instruction to the jury with respect to any claim other than the straight slander of title claim.

The jury was instructed with respect to the punitive award that it could enter an award for three purposes: to punish the wrongdoer, to serve as an example to others not to engage in such conduct, and to provide unspecified, quote, additional compensation.

And then in arriving at a punitive amount, the jury should consider the nature of the wrongdoing, the extent of the harm inflicted, the intent of the defendant, the wealth of the perpetrator, as well as any mitigating factors, which were unspecified by the court.

Sandra Day O’Connor:

Mr. Phillips, the respondent has come back with a proposal that suggests that the evidence in this case meets all those standards.

Are you going to address that argument?

Carter G. Phillips:

Meets all… well, actually what they argue is that it meets the standards that the Court sort of noted in Haslip as the Green, Alabama factors.

In truth, I think if you were to look at the four factors that the jury was asked to look at, it would be very difficult to reach the conclusion that the jury could have come to a $10 million verdict based on these factors.

If you consider the nature of the wrongdoing, what we are talking about here is slander of title, nothing more.

No physical injury was a possibility.

We are talking about a pure economic tort.

The entire extent of the injury that was actually caused to the plaintiffs as a consequence of this particular economic activity was $19,000.

William H. Rehnquist:

Well, the Supreme Court of West Virginia gave the impression I thought in its opinion not that there was any physical… but that your client acted with malice in the really nasty sense of the word.

Carter G. Phillips:

The West Virginia Supreme Court certainly seemed to indicate that, although it is a little difficult to understand on this record on what basis you would reach that conclusion in light of the slander of title claim.

You will recall that in the trial of this case, there was–

Byron R. White:

Yes, but if the case comes to us, we should… I suppose we would not quarrel with that judgment of the… that there was malice.

Carter G. Phillips:

–Well, there is no basis in the jury’s verdict necessarily to find malice because the jury was told that it could award punitive damages simply for reckless disregard and without malice.

So, that… it’s not clear to me that as it comes to this Court, that there is necessarily a jury finding of malice.

There is an appellate finding.

Byron R. White:

Yes, but do you lose the case if we assume there’s malice?

Carter G. Phillips:

Oh, no, of course not.

We don’t lose the case on that basis.

Byron R. White:

Well, that’s what I thought.

So–

Carter G. Phillips:

My basic point–

[Laughter]

We’re in agreement on that, Justice White.

But my basic point is that as you evaluate the relationship of the $10 million award, which is really where I think you have to start the legal analysis against what is going on here, in truth there isn’t all that much that is going on here.

William H. Rehnquist:

–Well–

Carter G. Phillips:

And even if you accept that it gets you over the threshold of some punitive award, it certainly doesn’t take you into the $10 million range for this kind of tort.

William H. Rehnquist:

–But certainly if you’re looking for reasons why the jury might have found $10 million, it’s more likely that they found malice than that they simply found reckless disregard.

Wouldn’t you agree with that?

Carter G. Phillips:

I would agree with that, Mr. Chief Justice.

I would also, however, conclude that if you are looking to how the jury got to a $10 million award in this case, it is quite clear.

The question… the jury was provided with evidence of the wealth of the defendant in the case, TXO, and was asked by counsel in closing argument to award some percentage of that wealth over as a punitive award, that that would be the fair way to proceed.

And that is the only numerical evidence in this record, frankly, that can you get anywhere near $10 million.

David H. Souter:

Mr. Phillips, on that point, if the State of West Virginia had had, prior to your client’s conduct here, a clear rule, whether it be a rule of statute or previously announced common law, to the effect that punitive damages may be awarded by reference not merely to the verdict in the tort action, but by reference to the extent… the economic extent of the harm either intended or potentially threatened by the tort, even though not realized, would you say that there was either a procedural or a substantive due process violation in applying that rule?

Carter G. Phillips:

The… if that rule, which is obviously the rule that respondents in a sense urge the Court to adopt–

David H. Souter:

That’s how you get a basis for $10 million, if there is one, yes.

Carter G. Phillips:

–Right, and their… and that is part of their quest to come up with a number of $5 to $8 million because that is the potential gain.

We would still have a problem with that because you still have an extraordinary award that is difficult to justify by reference to the underlying conduct involved here, and–

David H. Souter:

Well, but let me start just with the general proposition, which is what I was trying to get at with my question.

Would there be as a general judgment… would there be a procedural or substantive due process defect in that rule?

Carter G. Phillips:

–It is hard to evaluate it in the abstract.

I think there would be a substantive problem that could arise with that rule because in a situation like this where you have a plaintiff, defendant dealing in a particular transaction, the economic theory that tells you that you are going to deter this conduct says you look at the transaction and the actual profit, and you take away all of the actual profit and then some multiple for any instances in which engaging in this same conduct might not actually be uncovered.

If you do that, as we explained in the reply brief, you take away all possible incentive for providing… for going forward with that kind of conduct, and you should, thereby, completely deter.

Our position is whenever you get to the point where you have put in all that retribution permits and you put in all that deterrence will permit and you go beyond that, that then you are, in effect, punishing the innocent.

So, there is a substantive problem even at that level.

The difficulty, obviously, is where you draw the line, and if you had a situation, like you pose, where a legislature has come in and tried to make some kind of an assessment, I suspect the court ought quite rightly to be somewhat deferential in how it evaluates whether or not you’ve still crossed that line.

But I think there is still an excessiveness problem.

David H. Souter:

Well, if you had complete… if you had adequate knowledge of the rule in advance, why would it make any difference even if it were a common law rule?

Carter G. Phillips:

Oh, I don’t think it would make any difference if it were a common law rule.

I’m not… this is not a notice problem.

I still think you have a problem of excessiveness.

David H. Souter:

So, your quarrel here is not with the general proposition that the other side advances, that in fact, it’s the risk of harm threatened that should be the basis for engaging in a proportionality analysis, if that’s what we’re going to call it, but your objection is to its application here.

And is it your objection that you did not have adequate notice that such was your exposure?

Carter G. Phillips:

Well, we clearly wouldn’t have had any notice of it because this is an argument that didn’t arise until the briefs in this Court.

We were never tried on that basis in the courts below.

David H. Souter:

Of course, did you have any… were you on notice that there was, in fact, a different and more favorable theory of punitive damages in West Virginia?

Carter G. Phillips:

At the time of the trial?

David H. Souter:

Yes.

Carter G. Phillips:

Or at the time of the conduct at issue?

David H. Souter:

Well, actually I suppose it ought to be at the time of the conduct.

Carter G. Phillips:

It’s sort of difficult… at that stage in the process, to be sure, the procedures were less well formulated than they have since become, but to the extent that Garnes, the decision of the West Virginia Supreme Court subsequent to this Court’s decision in Haslip, reflects basically the West Virginia Supreme Court’s analysis of the appropriate inquiry that ought to be undertaken, the rules presumably would have been quite favorable as they ultimately played out.

We just weren’t the beneficiary of any of those rules in this particular case.

Antonin Scalia:

Of course, on that theory, you can never develop a common law of punitive damages because the first case would be unconstitutional, there being no notice of it.

I mean–

Carter G. Phillips:

Well, you could clearly have… there’s no quarrel about whether or not a punitive award could be imposed in a particular circumstance.

The question is–

Antonin Scalia:

–Without notice.

You’re dealing with a bad actor who has committed an intentional tort, and a common law court says for the first time, we are going to adopt within this jurisdiction a theory of punitive damages.

That would be okay, wouldn’t it?

Carter G. Phillips:

–I think that would be fine.

Carter G. Phillips:

My problem with the notice issue… there’s a different notice issue involved with respect to the potential gain theory that the respondents put forward here, which is that wasn’t the theory in the State of West Virginia at the time of the conduct.

That wasn’t the theory put forward by the trial court in the instructions to the jury.

The instructions to jury say harm inflicted, not potential gain to the defendant.

That was not the theory on which the matter was defended in the trial court and post-judgment.

That was not the theory on which the decision was defended in the West Virginia Supreme Court, and now it comes here.

The other part of the problem with this argument, as it comes to this Court is, there is no evidence that would support an expected gain analysis in this case.

Antonin Scalia:

Why is the new adoption of a theory any worse than the new adoption of the whole doctrine?

Suppose there had been… never been a punitive damages case in West Virginia before, although there had been in other jurisdictions.

And it comes before the West Virginia Supreme Court and the West Virginia Supreme Court says, yes, we adopt the theory of punitive damages.

Carter G. Phillips:

But what you don’t do–

Antonin Scalia:

Why is it… why is adopting a theory of punitive damages any worse than adopting the whole thing?

Carter G. Phillips:

–It’s the timing of adopting the theory of punitive damages.

You don’t… after the jury, which is supposedly the sentencer in this context, you say to the jury this is the basis on which you should decide how much money to take from the defendant, okay.

And they make a $10 million award on a set of facts.

You don’t then come back in and say if we took those facts, as it comes to us, if we take it on its own terms, we could not conceive of getting to $10 million.

But even though the jury never had this in front of it, even though it could not conceivably have based the award on this, we will now come in and urge you to affirm that verdict on that basis.

If this had been the issue in front of the jury, we would have tried that issue and the expected gain would not have been anywhere near the fabricated number that respondents’ counsel put forward.

Antonin Scalia:

It’s not a notice problem.

It’s not notice at the time of your conduct.

It’s a jury instruction problem.

Carter G. Phillips:

Yes, and a procedural trial problem.

David H. Souter:

Does the case boil down then to the fact that you really do not dispute the position as a general matter put forward by the other side that the expected or anticipated harm, even though not realized, can be the base for… the baseline, as it will, for the award, that we are really here to review the question whether, in fact, there was adequate evidence to support the instructions as given?

Carter G. Phillips:

Exactly, Your Honor.

David H. Souter:

That’s it.

Carter G. Phillips:

Yes.

David H. Souter:

It’s a fairly narrow case then.

Carter G. Phillips:

Well, we brought this case on the theory that the West Virginia courts imposed the verdict on us, and we defended it and presented it to the Court under those terms because it may be a narrow theory, but it’s an important one.

The question here is, is there a limit based on excessiveness?

And if this Court holds that as tried before the West Virginia courts–

David H. Souter:

Yes, but that isn’t what you would have us decide.

David H. Souter:

You would not have us decide whether there’s a limit based on excessiveness.

You would have us decide whether there was an adequate evidentiary foundation for the jury to return the verdict it did given the instructions it had.

Carter G. Phillips:

–Right.

But that still requires you to make an analysis of whether there’s a reasonable means-ends fit in this case, as the case was tried, as the jury had the evidence.

David H. Souter:

Well, I think you’re telling us that we’re supposed to decide whether there is an evidentiary instruction-verdict fit, which is a different concept of fit.

Carter G. Phillips:

Well–

David H. Souter:

And it may well be a… for $10 million, it may well be a very worthy exercise, but I think it’s a little bit narrower than what you were saying a minute ago.

Carter G. Phillips:

–But see, I think the reason for the way we view this I suppose in somewhat different terms is we came to the case with what was in front of us in West Virginia and brought that to the Court’s attention as an important issue on its own terms.

The respondents, because they cannot defend the issue as it comes on its own terms, have now tried significantly to shift the Court’s focus from the way it was decided below.

In responding to that point, what I am suggesting to you is that there are procedural obstacles to taking into account that argument.

I’m not saying… and we have never argued categorically that you cannot have a $10 million punitive damage award.

There’s certainly going to be a lot of instances in which that would be an appropriate award in a particular case.

But what I’m saying is that for slander of title with no potential harm, with gross over-deterrence as the ultimate effect of the $10 million verdict, this Court ought to declare that, under these circumstances, that award is excessive, and therefore violates substantive due process.

John Paul Stevens:

Mr. Phillips, why do you say no potential harm?

The West Virginia Supreme Court referred… of course, they were talking about Garnes and so forth, but it could potentially cause millions of dollars in damages to other victims.

Carter G. Phillips:

To other victims.

John Paul Stevens:

Well, but is that part of the calculus or not?

Carter G. Phillips:

Well, I think that… to my mind that reflects more the passion and prejudice problem that’s inherent in the bad acts evidence that was put into this case because if you read that language carefully, it cannot possibly be that he reaches that conclusion based on the slander of title claim in West Virginia alone because he’s talking about a pattern of fraud.

Well, a slander of title case, even if done maliciously, doesn’t constitute a pattern of fraud.

It’s a single point.

So, in order to get to a pattern of fraud, you have to go to all the bad acts evidence that was brought in and say that somehow all of that can be used to upgrade the quantity of the punitive award.

And our position is that all is way beyond the jurisdiction of the West Virginia Supreme Court to take into account–

John Paul Stevens:

You don’t–

Carter G. Phillips:

–and could not have been the basis for the jury’s verdict.

John Paul Stevens:

–You don’t think there’s any basis in this record for figuring out how much harm might have been caused to this particular litigant if the program had been successful.

Carter G. Phillips:

I think it would be perfectly acceptable for that inquiry to be undertaken on remand after this verdict is set aside.

Go back to the jury, start over again, if they wish to, see whether or not… see, one of the problems you’ve got, if you go back to a new jury, is Garnes… in the Garnes case, the West Virginia Supreme Court exhaustively analyzed what factors ought to go into the determination of an appropriate jury award.

And you will look in vain in that opinion for an expected gain theory like the one put forward by the respondents in this case.

And there’s good reason, for the reasons I was trying to explain to Justice Souter.

It is a grossly over-deterring method of imposing a punitive award, and so there’s no reason in the world to assume at this point that West Virginia would adopt that kind of an approach in this kind of a case.

Carter G. Phillips:

So, it may be… you know, I have no quarrel.

If they want to go back on retrial, try to put in that evidence, it will show that the expected gain is nowhere near what they project in their briefs.

John Paul Stevens:

What do you think the expected gain might have been?

What do you think the record indicates on that?

Carter G. Phillips:

This record doesn’t indicate anything about what the expected gain would have been because it wasn’t an issue in the case.

There are some snippets of exhibit numbers that–

John Paul Stevens:

They couldn’t tell how valuable the property was.

Carter G. Phillips:

–We couldn’t even begin to know whether or not those are wild projections, whether they really went into anybody’s calculations on any of this stuff.

William H. Rehnquist:

Mr. Phillips, did I gather from a remark you made a moment ago that you think that West Virginia could not punish a… in the sense of inflict punitive damages on a defendant who had committed one bad act in West Virginia and had committed a series of similar bad acts in other States?

Carter G. Phillips:

I don’t think you could punish them for the potential injury to the others in other States.

I think you could derive from the facts something about the nature of the entity, and you might even be able to figure out something about what would be necessary as a deterrence matter in West Virginia if you can come up with some kind of a nexus between the two.

William H. Rehnquist:

What if it were shown that no lawsuits had ever been brought against the defendant for these bad… similar bad acts in other States?

So, this would be presumably the only opportunity to punish him for those.

Carter G. Phillips:

Well, but I mean, it’s clearly not the only opportunity.

There’s always the opportunity for those who are down in those States to bring those kinds of actions.

I mean, I don’t think West Virginia… simply because West Virginia saw bad acts in Texas, I don’t see that it can reach down and exercise jurisdiction over those bad acts even if it has a case–

John Paul Stevens:

You don’t think a career offender could be punished for a career of crime in another State?

Carter G. Phillips:

–Well, the difference in that is that when you get in the criminal sentencing process, you have some set guidelines and you have–

John Paul Stevens:

Well, I know, but you’re arguing it’s not a permissible factor, as I understand you.

You’re arguing that out-of-jurisdiction wrongdoing–

Carter G. Phillips:

–In a civil proceeding.

John Paul Stevens:

–is not a permissible factor in the calculation–

Carter G. Phillips:

I think in civil proceeding–

John Paul Stevens:

–in this proceeding, but it would be in a criminal proceeding, obviously.

Carter G. Phillips:

–It would be in a criminal proceeding, but in a civil proceeding, what you’re talking about… and remember what he says.

The language is harm to victims as a monetary amount in other States based on other acts, frankly.

William H. Rehnquist:

In a civil proceeding, usually the standards are more lax than in a criminal proceeding.

Carter G. Phillips:

But see, my problem with this is that when you’re in a situation where we are orders of magnitude beyond anything that anyone else has ever permitted with a particular punitive award… and as we explain in the… in our brief, we’ve already demonstrated that we are orders of magnitude outside… one of the genuine fears you have to have is this a product of passion and prejudice, and that bad acts evidence, as used in this context does create passion and prejudice.

And the best evidence of it is the West Virginia Supreme Court’s own opinion.

David H. Souter:

Then it never can be used again.

David H. Souter:

As a theoretical matter, it cannot be used in a civil punitive damages award?

Carter G. Phillips:

No.

It clearly plays a role in the sense–

David H. Souter:

Well, how do we… how would you articulate the permissible role?

Carter G. Phillips:

–Well, because you can demonstrate the malice.

You can demonstrate a certain amount of knowledge and, therefore, demonstrate two things I think from it.

One is that some greater amount will be required to deter this actor in the future because of what we know from other acts, and two, that this actor… it’s not just a mistake here, that this really is a bad actor, and therefore some additional amount would be required as a consequence of that.

What I had–

David H. Souter:

May I interrupt you just with one question?

Carter G. Phillips:

–Oh, of course.

David H. Souter:

Can that additional amount, in effect, be the… be calculated as the additional amount to deter the additional or the further economic harm, let’s say, outside of the State itself if this conduct were to continue?

In other words, you said it may be used for determining malice.

Well, maybe this… I don’t know how you articulate the add-on for malice, but I suppose that malice’s add-on would be something less than a calculation of a deterrence amount if we considered the fact that there had been 10 other attempts to do what was done here with the same objective in mind, so that if the potential gain here was $5 million, the jury could consider that there had been attempts to gain $50 million.

That I suppose would take you beyond a mere malice add-on.

Would that be impermissible?

Carter G. Phillips:

I don’t think it probably would be impermissible under those circumstances, but the… you know, of course, the problem is, is that what you’re talking about there is an undertaking that we clearly embrace, which is that you initially have to examine sort of what the nature of the award is.

Is it off the charts?

Has it fallen beyond what is by all objective measures impermissible?

If it is, then you have to justify it.

David H. Souter:

But my example wouldn’t be off the charts.

Carter G. Phillips:

Well, it would be if I–

David H. Souter:

This one you say… pardon me?

Carter G. Phillips:

–It would be probably.

If you end up with a number that’s way off for the slander of title and you looked and tried to compare it, you’d say, geez, this number is nowhere near what we would have expected for this kind of an offense anywhere.

And then you can look in the record, if there is such a record, for what is unique about this case that might justify that award.

And that way you do permit the common law to continue to develop without being completely constrained by the Constitution.

But we’re nowhere near that because we… there’s nothing specific to TXO that would allow you to get from what would be the ordinary kinds of multiples that ought to be applied here.

Anthony M. Kennedy:

Is it permissible, Mr. Phillips, to enter a punitive damages award not only to deter this actor, but other actors similarly situated?

Carter G. Phillips:

Yes, Justice Kennedy, it is permissible.

Anthony M. Kennedy:

Well, it seems to me that if it’s the marginal cost of wrongdoing that’s the limit on the award, that that might not have sufficient notoriety or publicity to accomplish that effect.

Carter G. Phillips:

Well, I think you’ve still got to be limited by the nature of what is it that you’re trying to deter here, and what we’re trying to deter here is the reckless recordation of quitclaim deeds, which is hardly something that requires a huge amount of notoriety for the purpose of trying to get others not to do it.

You don’t need a $10 million award to tell a land man and his title counsel, the next time he’s got a problem with title, to act cautiously in trying to resolve that title.

And, indeed, a $10 million award in a case like this is going to place the fear of God into those people and thereby create way over-deterrence and cause even more trouble–

Anthony M. Kennedy:

Well, I suppose that’s–

Carter G. Phillips:

–in terms of oil and gas development.

Anthony M. Kennedy:

–That’s for the jury, isn’t it?

Carter G. Phillips:

At some point, I think it isn’t for the jury.

At some point, if the State’s reason for having a punitive damages system is to deter and to punish and what you’ve done is effectively grossly over-deterred, then you’ll have, in effect, gone way beyond the ends permissible by the State and therefore the means are invalid.

Sandra Day O’Connor:

Mr. Phillips, are you going to suggest some kind of a test that courts could employ in knowing when there is a likelihood of bias or arbitrariness in these cases?

Carter G. Phillips:

I think what you–

Sandra Day O’Connor:

Or do we… is it just we know it when we see it?

I mean, what is it?

Carter G. Phillips:

–Well, I knew it when I saw it here, but I don’t think that’s the right test, Justice O’Connor.

[Laughter]

The test is that you look first at the gravity of the offense, and you look at the nature of what kind of deterrence would be necessary.

You compare it to the objective criteria in sort of Solem versus Helm’s like analysis to see is this objectively unreasonable.

At that point, that should trigger two separate inquiries.

One is is there a basis for believing that this was the product of passion and prejudice.

The use of wealth in this case clearly caused passion and prejudice.

The use of other bad acts clearly caused passion and prejudice, and the repeated references to out-of-State defendants, compared to in-State plaintiffs created passion and prejudice in this case.

The other thing you can look for then is what State justifications exist specific to this defendant that would justify the award in this case.

In this case, no such exists.

Respondents have tried to bring some in, but they weren’t adjudicated below.

If there are no further questions, I’ll reserve the balance of my time.

William H. Rehnquist:

Thank you, Mr. Phillips.

Mr. Tribe, we’ll hear from you.

Laurence H. Tribe:

Thank you, Mr. Chief Justice, and may it please the Court:

This case, rather like the gas in the wells in the thousand acre tract, seems to be vanishing before our very eyes.

Mr. Phillips says in response to Justice O’Connor’s, I think, very important question, what standard after all does he ask this Court to promulgate, says he knew it when he saw it.

But he doesn’t really offer a test different from that in the instructions in this case, as I’ll show in a moment.

Laurence H. Tribe:

And I do think that perhaps TXO, which has been adjudicated guilty of a number of land frauds, has sold this Court something of a dry hole because the case was originally presented as though the relevant ratio was 526 to 1.

But I think we now see that’s apples to oranges.

That is, the numerator of that fraction came from a $10 million figure which, as I will show, was well grounded in this record in terms of expected gain, what did they hope to gain not simply by recording fraudulently a phony quitclaim deed, but by doing it as part of this particular century old pattern of land fraud.

The numerator was then upped somewhat in light of the fact that there is a real chance that someone will get away undetected.

In this case, they didn’t.

They were caught.

The denominator, the $19,000… that’s where this fancy 526 to 1 ratio comes from… had nothing to do with what they expected to gain.

It just happened to be how much it cost to get attorneys to stand up to TXO and to stop them dead in their tracks in this declaratory judgment action.

Sandra Day O’Connor:

Mr. Tribe, where in this record do you find that the jury was told there was some $5 to $8 million gain at stake, and where in the record does it show the courts below had those figures?

Laurence H. Tribe:

Justice O’Connor–

Sandra Day O’Connor:

I haven’t been able to find it.

Laurence H. Tribe:

–Justice O’Connor, there is no reference below in the courts to the $5 to $8 million figure.

There is reference through simple multiplication that would give it to us.

Sandra Day O’Connor:

It just doesn’t seem to be the basis on which this was tried or–

Laurence H. Tribe:

That I… let–

Sandra Day O’Connor:

–presented to the jury.

Laurence H. Tribe:

–Let me address–

Sandra Day O’Connor:

It looks to me like you’re trying to concoct something that might have served, if it had all been presented, but I don’t find it.

Laurence H. Tribe:

–Let me address that directly.

I don’t think that’s true.

That is the center of their claim, somehow that this case was tried on a different theory.

The fact is it was tried on this very theory.

Let me turn to, for example, our closing argument to the jury in this case.

After the dollar figures had been put in on how many wells could be dug, on how much gas per well, on how many dollars per thousand cubic feet, in the closing argument… and if you want the citations, it’s pages 746 to 58 and 779 to 83 of the transcript.

Let me read a characteristic sentence.

It was full of these.

TXO thought this was going to be a huge money-making lease.

That’s why it was worth the scheme, and the punishment should fit it so we can stop people from stealing people’s land with fraudulent quitclaim deeds.

And then in the brief in the West Virginia Supreme Court, our brief… I don’t know why they think this argument was one–

Anthony M. Kennedy:

Now, wait.

Anthony M. Kennedy:

That’s all that the jury was told with reference to these figures?

Laurence H. Tribe:

–No.

The jury was told, with reference to the figures, that they would add up to, I believe, millions of dollars, but it was never quantified as 5 to 8.3.

That is, that arithmetic is something the jury would have had to do for itself.

Sandra Day O’Connor:

Well, and it was never… I didn’t find anything in the record demonstrating dollar amounts of projected loss to your client.

Laurence H. Tribe:

Well, Justice O’Connor, as Mr. Phillips’ brief says, in this case, the expected gain to TXO, if they had gotten away with it… that is, if they had successfully gotten Mr. Signaigo to sign the false affidavit, and if they had managed to get their declaratory judgment so that they made it look as though they didn’t have to pay the 22 percent to the respondents, the expected gain to them was exactly equal to the expected loss.

That’s their point in their reply brief… expected loss of–

Anthony M. Kennedy:

But as I understand the way you have calculated the $8.3 million that you want us to focus upon at the high end, it assumes 25 wells, all of which are successful, 0 failure rate.

It assumes that there’s maximum recovery.

It gives no discount for present value of money, which is routine in, say, wage earner cases.

And I think this is a highly exaggerated figure that you’re asking us to rely upon.

Laurence H. Tribe:

–Justice Kennedy, let me address those points.

Anthony M. Kennedy:

Plus the fact, as Justice O’Connor put it, it was never pointed out to the jury or the Supreme Court anyway.

Laurence H. Tribe:

Justice Kennedy, with respect to the discount rate, we were projecting figures using the $3 that was the price in 1985.

TXO’s own experts in defense exhibit 14 indicated that they expected the price of gas, over the 20-year life of the wells, to go up by a factor of 4 or 5.

That would more than offset any rational discount rate.

The most important point, however, isn’t that.

It is that the time to litigate the amount of expected gain is surely not in this Court reviewing this case under the Fourteenth Amendment’s Due Process Clause.

That is, we did introduce before the jury dollar figures and a range of estimates about the number of wells.

Even if you take the lower estimate of 15 wells, you come up not with $8.3 million, but $5 million as to what they hoped.

And it would only take a multiplier of 2 then to get punitive damages of $10 million.

But the time to contest those numbers was at trial.

You see, if it were true that no one was thinking about expected gain in the State of West Virginia in a case of this kind, so that they were basically bamboozled… they didn’t know that that was the focus… that might be, though not necessarily for constitutional purposes, enough of an explanation for why they didn’t do it at trial.

But at trial, when we introduced these numbers, we didn’t get any counter-figures from TXO.

On the contrary, when they put on Ken Walty and Mike Good as key witnesses, it was on cross-examination of those witnesses at pages 544 to 553 and 672 to 677 of the transcript that we clearly established that they expected a multi-million dollar income stream.

Their whole strategy was don’t think about that.

We’re innocent.

We relied on advice of counsel, arguments that have been demolished below and rejected by this jury.

When I get to the jury instructions, I think that will be clear.

They also ended up saying, as they said here, don’t punish the innocent.

Laurence H. Tribe:

We, after all, didn’t make all this money.

But, of course, the theory of deterrence in West Virginia and a number of other States is that you punish in accord with what they hoped and intended to gain, not what they happened to gain.

That’s why–

Sandra Day O’Connor:

Well, Mr. Tribe, is there… where in the instructions is this theory expounded?

Laurence H. Tribe:

–If you–

Sandra Day O’Connor:

And were they told anything except consider the actual damages, which here were $19,000, and the wealth of TXO?

Laurence H. Tribe:

–Yes, they were, Justice O’Connor.

If you look at plaintiffs’ instruction number… defendants’ instruction number 6A in the joint appendix–

Sandra Day O’Connor:

Joint appendix where?

Laurence H. Tribe:

–Joint appendix, page 34, an instruction which is, of course, considerably more detailed than the one this Court held sufficient in the Haslip case.

The last paragraph–

William H. Rehnquist:

Well, could you read it?

Yes.

Laurence H. Tribe:

–Yes.

The critical thing is you’re supposed to look at the intent of the party committing the act, as well as the extent committed, and the purpose, it’s explained at the end, is to deter TXO and others from committing like offenses in the future.

And then it says to in fact deter it, may require a larger fine and one of larger means.

Now, this instruction in these respects was not objected to.

There was no suggestion on their part at trial that they were entitled to something more precise.

And West Virginia put them on notice in a case called Wells against Smith in 1982 of this entire theory, which is standard in West Virginia.

That is, in Wells, the court had said that where the defendant’s conduct has been egregious, but the plaintiff has suffered indeterminate or nominal damages, one needs to award a high multiple.

And, indeed, in that case they said the sky is the limit.

No ratio is relevant.

William H. Rehnquist:

A high multiple of what did they say?

Laurence H. Tribe:

They don’t address what the denominator is, but the theory–

William H. Rehnquist:

Well, I would think it would be very difficult to put anybody on notice if they don’t even discuss what the denominator is.

Laurence H. Tribe:

–Well, I would suggest if we were in an arithmetic class, that might be true, but common sense out in West Virginia I think tells people when the law was that we’re going to punish you in terms of the outrageousness of what you tried to do, that you’re not supposed to be doing arithmetic.

In other words, there was no numerator, there was no denominator.

The suggestion was that looking at ratios isn’t relevant.

What you look at is what did they hope to get away with, and then you add a kicker for the chance that they would never have been caught.

Anthony M. Kennedy:

Well, I suppose that’s why I have trouble with the extrapolations in your brief.

Anthony M. Kennedy:

Here in this Court is the first time anybody has heard about $8.3 million, which is a very high end figure in any event.

Laurence H. Tribe:

Not quite.

Page 8 of the brief in the Supreme Court of West Virginia used these numbers to calculate this figure, $13,676,252, was… and I’m reading… the price… the prize TXO hoped to grab by fraudulently disparaging appellee’s title.

That $13 million figure was a bit lower than some of the other numbers because it was based on some later projections after one well had proved disappointing.

But you notice they do not deny–

Anthony M. Kennedy:

But that was a gross production figure.

Laurence H. Tribe:

–That was a total revenue figure.

That’s right.

Anthony M. Kennedy:

We’re talking here about lost royalties, and–

Laurence H. Tribe:

Well, no.

That’s right.

The 22 percent of that–

Anthony M. Kennedy:

–There are other issues here you want to discuss.

Laurence H. Tribe:

–Yes.

Anthony M. Kennedy:

But it would seem to me that those persons who have been punished for being overzealous on the behalf of their clients would find it rather difficult to understand why there’s some puffing in the figures before this Court which is used to justify that punishment.

Laurence H. Tribe:

Justice Kennedy, I had thought that the relevant standard in substantive due process attack on a judgment such as this is whether there is any rational basis that can be offered.

In Nordlinger v. Hahn, it was stressed that what matters is not how the State’s decision makers articulate that, but whether one can find a rational basis.

More recently than Nordlinger, in Growe v. Emison this Court said that one defers to judicial, as well as legislative decision making.

It was for that reason that we felt free and that I would fully defend taking the numbers that were before this jury, and which TXO did not undertake to attack at trial, to show how very easily from them one could understand the conclusion of the West Virginia Supreme Court that a judgment of this magnitude was needed to deter this kind of harm.

And, indeed, the instruction… to go to the questions that were asked with respect to the instructions by the Chief Justice and Justice White, if you look not just at 6A, Justice O’Connor, but if you also look at plaintiffs’ instruction 2 on page 26 of the joint appendix, look at what this jury had to find in order to find TXO liable.

They had to find… second paragraph of instruction 2… TXO filed the quitclaim deed with the intent to hurt the interests of the defendants, in other words, ill will.

They also had to find that TXO acted maliciously.

They had to find malice and without good faith and recorded the quitclaim deed with an intent to hurt the defendants rather than clear up the title.

So that when, on that basis, the jury returned this award, it’s not so surprising to me, given that the case was litigated below on this very theory, that that was the closing argument, that that was the brief in the State Supreme Court, that that was what the instructions called the jury’s attention to.

What did they intend to get away with, not how much did it cost to catch them.

Given all of that, it’s not so surprising that the West Virginia Supreme Court, finding this attempted fraud… and I now quote from that court… no isolated incident, but part of TXO’s pattern and practice to defraud and coerce those in positions of unequal bargaining power, a pattern that the court said threatened, quote, millions of dollars in damages to other victims, unquote.

That’s not just other victims in Oklahoma or Texas.

The millions of dollars in damage from numbers they didn’t undertake to refute at trial would have been to us because those are royalties that we would have expected to gain.

It’s no surprise that the West Virginia Supreme Court found on that basis that, quote, an award of this magnitude is necessary to discourage TXO from continuing this pattern and practice of fraud, trickery, and deceit, unquote.

Now, if the theory is constitutional… and I see no conceivable basis as a matter of substantive due process for saying the State cannot use this as a way of deciding how much is needed to deter and punish, no basis for saying that you can’t look at how much they hoped to gain, even optimistically that you can’t look at that, but must instead look at some multiple of what it costs to prevent them from succeeding.

Laurence H. Tribe:

Given that there’s no basis in substantive due process for that, it seems to me that all they’re left with is the idea that somehow there wasn’t sufficient evidence here.

And I agree that the evidence that was in the record wasn’t added up in precisely the way our brief does, but surely, that is a burden that would have fallen on TXO at trial.

And it’s not a proper question for this Court to second guess the reasonableness of the West Virginia judiciary in saying that $10 million was needed.

It seems to me that all they’re left with is some theoretical arguments that one might debate, arguments about what’s the best way to deter.

Do you go after people, whether they succeed or fail, as West Virginia does?

In fact, in its constitution, article 3, section 5, it says that the penalty should be proportionate to the nature of the offense.

In fact, with respect to aggravated… attempted aggravated robbery, West Virginia says we’ll punish you the same way whether you succeed or fail.

Is that the best way, or is it best to only add a very high kicker when the wrongdoer succeeds?

Well, that’s an interesting question.

Most States, the 27 amici who have filed a brief in support of our position, take the view that it’s for them to decide and that they think it is more just, as well as more effective, to use this theory and to use a theory which, by the way, West Virginia has officially endorsed.

The West Virginia Attorney General, at pages 6 to 7 of the amicus brief filed by the 27 States, endorses this very theory quoting from the Garnes case, and Garnes really expresses the view that the reason it is improper to play with numbers and look at these proportions is precisely that it’s perverse in terms of incentives and in terms of fairness.

What it means is that when a victim is smart enough and tough enough to stand up to an extortionate scheme, as the respondents did here, then the wrongdoer is going to be, in effect, rewarded, rewarded because the most that can be charged against it is the attorney’s fees or some reasonably low multiple thereof.

Because the West Virginia Supreme Court has quite clearly rejected that approach and has said instead you look to the expected gain, it seems to me that all that’s left is some possible procedural due process arguments, and perhaps I should turn to those.

I don’t think, by the way, that the Court ought to reach the merits of some of the fancier procedural due process arguments that we have here because TXO’s only argument at trial was about the First Amendment.

They said that slander of title violates the First Amendment, but nowhere at trial did they argue that under the Due Process Clause of the Fourteenth Amendment, one is entitled to some different or more precise jury instructions or some further kind of explanation by a trial judge.

William H. Rehnquist:

Did the Supreme Court of West Virginia pass on that point?

Laurence H. Tribe:

I think not, Mr. Chief Justice.

That is, the West Virginia Supreme Court said these damages are not excessive.

They also said that their new rules, which are rather like what I gather TXO would like this Court to promulgate somehow for all 50 States… their new rules about jury instructions and post-verdict explanation in the Garnes case should not be applied retroactively.

The West Virginia Supreme Court ruled that.

But it was never asked to rule that the Due Process Clause of the Fourteenth Amendment requires of its own force special instructions beyond those that were used in Haslip.

It was never asked to rule for the first time that Fourteenth Amendment due process requires States to assign some special role to the trial judge post-verdict.

And when we made that argument, the response of TXO at footnote 33 of their brief was that it’s frivolous.

It’s frivolous to say they waived it, and to prove that, they give you a 23-word snippet from their brief below.

I would invite you to look at the relevant parts of that brief when there is time.

In their reply in support of certiorari in their appendix, they reproduced the entire relevant portion of their brief below.

I think a fair reading of that whole argument is simply West Virginia law under Garnes should entitle us retroactively to these special procedures.

If the Court, however, were to reach the merits of the procedural attack, I think it’s quite clear that TXO ought to lose.

The State Supreme Court’s post-verdict review, which was critical in Haslip, was at least as thorough here as in the Alabama Supreme Court.

Now, the petitioners make some mileage out of Justice Neely’s rhetoric; that is, they make something of the fact that he used some homespun shorthand to categorize wrongdoers as really mean or really stupid, but I think that’s a pretty irrelevant distraction.

Laurence H. Tribe:

His colleagues called him to task for what they thought was unduly colorful.

In any event, he explained in good old-fashioned legalese, very traditional, exactly what those terms meant, and lo and behold, they meant exactly what we would expect, intentional, malicious, deliberate wrongdoing was the kind that really mean was supposed to cover.

So, one can’t make a federal case out of that.

As far as the trial judge’s review post-verdict, they make the rather astonishing argument now… they didn’t make it below, but they make the argument now, supported by at least some of their amici, that the Federal Constitution guarantees them a right to, quote, several layers, unquote, of judicial review… that’s at footnote 38 of their reply… and, therefore, to a fuller post-verdict explanation by the trial judge than they got here.

I would submit that that’s untenable.

Even in criminal cases, this Court has held ever since McCain v. Durston, that the Fourteenth Amendment entitles you to only one level of judicial review.

It’s entirely up to the States how to allocate post-verdict assessments as between their trial and appellate judiciaries.

And, anyway, TXO could have received, had they only asked, a much fuller explanation from the trial judge of just why he thought $10 million was reasonable.

And that does go back to the questions that both you, Justice O’Connor, and you, Justice Kennedy, asked.

That is, if one is nervous about the attempt in hindsight to figure out just exactly where the $10 million could have come from, it seems to me that the fault for that difficulty should be placed squarely at the feet of TXO.

They had, after all, a bifurcated trial.

Under West Virginia Rule of Civil Procedure 42(c), they could have had a trifurcated trial with a separate proceeding on punitive damages.

West Virginia would have fully entitled them to put special interrogatories to the jury.

If they wanted to know exactly how these numbers were derived, they could have asked, but it was too obvious to anyone I think for them to make quite a fuss about it.

Their whole strategy was, and it seems here to be, simply to emphasize, look, we may have done terrible things, but that was in other States, and here we were innocent, although the jury evidently found that they were guilty of the most scurrilous, deliberate, fraudulent behavior.

As far as the jury’s role is concerned, not only were the instructions given in this case considerably more constraining than those that the Court found sufficient in the Haslip case, not only did they require a showing of indifference to the rights of others, something very much like the utter disregard phrase that the Court thought sufficient when given a further gloss in your opinion yesterday in Creech, Justice O’Connor, not only that, but they didn’t ask for any further instructions, as we show in some detail in our brief.

Beyond that they waived any requests for including proportionality in the instructions.

We explained that.

They were satisfied to have the jury have even less guidance.

As a matter of strategy, their whole game was we’re innocent.

They didn’t want to focus the jury on punitive, and so, they can surely not complain now even if the Court were to reach that issue on the merits of a violation of procedural due process in terms of the jury’s role.

Well, there being no violation of procedural due process, and it being quite clear that the judgment below meets the standard for substantive due process, it really does seem to me that this case is not an opportunity for the Court to give further guidance to the lower courts.

And let me just add a word about that issue of further guidance because one of the recurring themes in the petitioner’s submissions is somehow to recur to passion and prejudice, prejudice against out-of-staters.

Well, that’s a red herring here.

TXO and Alliance are both Texas corporations.

There’s not a scintilla of evidence about that.

Passion and prejudice, but no real standards, nothing that would really offer guidance to the lower courts.

And I think I know why.

Because that’s a fundamentally legislative task.

As the 27 amicus States have made clear, in the last few years, the vast majority of the States have responded to the perceived problems of punitive damages.

Laurence H. Tribe:

10 of them have set dollar caps.

12 of them have required bifurcation of the punitive phase.

25 of them have required heightened standards of proof.

Unless this Court were to undertake the extraordinary task, of under… sort of doing that legislative business in an even more complicated replication of the labyrinthine jurisprudence of the death penalty cases, to really structure the trials in these cases–

Antonin Scalia:

Don’t tempt us, Mr. Tribe.

[Laughter]

Laurence H. Tribe:

–Well, I hope not.

I gather some of you are less happy than others with that labyrinth.

I would hope that you’re not tempted by this case to do anything very much because I don’t think that this case is what it was cracked up to be.

Thank you.

William H. Rehnquist:

Thank you, Mr. Tribe.

Mr. Tribe, may I just ask?

These are State law issues that we don’t have to examine, but just for me to understand the quiet title litigation here.

Suppose that the deed that they found had been given to the individual and then his successor in title was I think the Crews Company.

Suppose that deed had, in fact, granted the mineral rights so that Alliance didn’t have them.

Would, under your theory of the case, TXO have a duty to then encourage Crews to deed the property back to Alliance, or could TXO legitimately take it for itself?

Laurence H. Tribe:

Well, one of their own experts suggested that in those circumstances, the standard practice would be to unify the title and deed it back to Alliance, but I think it might be harder to show, under the body of West Virginia law that was in place at the time, that it would have been a violation of any duty if they had acted in a more self-interested way.

But as you say, clearly that’s a State law question.

And what happened here is really unmistakable.

They went around trying to find people who would say that they owned the oil and gas, and they didn’t succeed.

And when Mr. Signaigo said I won’t sign that affidavit, we really know that they were willing even to suborn perjury.

Anthony M. Kennedy:

Well, but aren’t they supposed to do that in order to investigate their title?

Laurence H. Tribe:

Well, there’s no question that in general you’re supposed to ask questions, but when the answer is no, then paying somebody $6,000 to say yes, which is what they did to Virginia Crews, that’s not my understanding of ordinary business practice.

Anthony M. Kennedy:

There’s a letter from a title attorney in the last exhibit to the yellow brief, who indicates that this deed… Mr. Wallace’s letter… that this deed was ambiguous so far as he’s concerned as written to Mr. Skeen.

Was that written so that Mr. Skeen could introduce it at trial?

Laurence H. Tribe:

Well, it was written in December.

It was written just before the declaratory judgment action.

It looks like it was written with litigation in mind.

And you notice that the courts of West Virginia said there’s no ambiguity.

Paragraph 6 of the original 1958 deed, which these other opinion letters studiously avoided discussing, eliminated any ambiguity.

Laurence H. Tribe:

It was a ridiculous theory.

I find it hard to take these legal opinions seriously.

I don’t mean to impugn the ethics of these lawyers, but it doesn’t sound to me as though this was a genuine search for truth.

Thank you.

William H. Rehnquist:

Thank you, Mr. Tribe.

Mr. Phillips, you have 4 minutes remaining.

Carter G. Phillips:

Thank you, Mr. Chief Justice.

Let me just address a couple of points here.

First of all, you will notice that again, there is no defense of the punitive award on the terms that it was imposed by the jury and upheld by the West Virginia Supreme Court in this case.

Indeed, I think Mr. Tribe revealed quite plainly that he cannot defend it on that ground, that he has to find some other ground by which to justify this award and then invokes Nordlinger v. Hahn to justify it.

Antonin Scalia:

But he… but he’s responding to your substantive due process argument.

If… your procedural due process argument would, indeed, say, well, it has to be upheld on the same ground that was proposed.

But for substantive due process, isn’t he right that so long as it is sustainable on some rational basis?

That’s what we do for legislatures.

Why is it any different for courts?

Carter G. Phillips:

It is a huge difference for courts because the punishment was imposed by the jury, and what trying to sustain the jury’s verdict on a ground not in front of the jury does is ignore the potential of passion and prejudice that undergirds the jury’s–

Antonin Scalia:

Procedural due process it seems to me, not substantive due process.

Carter G. Phillips:

–I think procedural and substantive due process merge here, Justice Scalia.

I’m not… I am not here to defend across the board the possibility that $10 million verdicts can never be entered in any kind of case.

What I am here to say is that the $10 million verdict in this case is grossly excessive, and if this Court has meant what it said in the past, that grossly… that a State is no more permitted to assess a grossly excessive damage award than it is to impose a grossly excessive fine, this is the case that tests the limits of that.

And if you go back and examine with care the precise items that Mr. Tribe has gone through and look at the jury instructions, if they thought they had tried this case on a potential gain theory throughout the entire proceedings, wouldn’t it have been reasonable to expect that when they proposed a jury instruction that it would have said you must measure this by the potential gain rather than by the harm actually inflicted?

It’s clear that this was not tried on that particular theory.

David H. Souter:

Well, they did refer, didn’t they, in the… or the instruction referred to deterring other conduct in other circumstances.

So, I suppose that carries with it the implication of potential gain in these other circumstances.

I can’t seem to find the instruction now.

What was it?

6?

Carter G. Phillips:

But even… but that… I don’t think you can reincorporate into other… into the deterrence rationale, which is the rationale that you’re supposed to follow, these elements which decide the amount of the award.

This is what describes how you get to $10 million.

David H. Souter:

Well, it may assume a degree of analytical sophistication on the part of the jury, which is a little bit generous, but when you start talking about deterrence, what you’re really talking about is deterrence in relation to the temptation.

David H. Souter:

And the temptation is what you’re referring to by potential gain, isn’t it?

Carter G. Phillips:

If you defined it in those terms for the jury, that might be, but there is simply nothing in what the jury was asked to do to look at potential gain.

All it was asked to do was look at actual profit and actual harm, and on that basis, there is no way that you can get to $10 million.

The only way you get to $10 million is because of the wealth of TXO and the decision to impose a 1 percent penalty.

Byron R. White:

What was the purpose, Mr. Phillips, of all this evidence about potential gain?

Carter G. Phillips:

It was originally put into the case because there was at one stage a claim that they were going to make that there was a bad faith dealing here in that when we capped the well, we actually deprived them of a significant amount of money.

That was a separate element.

It wasn’t a separate cause of action, but it was a separate element of the case.

That evidence was brought in for that purpose to give some measure to that because they didn’t have access to the specific numbers.

Byron R. White:

This would be relevant to actual damages.

Carter G. Phillips:

Right, and it was abandoned.

That claim was specifically abandoned in the middle of trial, Mr. Justice White.

William H. Rehnquist:

Thank you, Mr. Phillips.

The case is submitted.