ADR and the BP Gulf Claims Facility

Using ADR to Compensate Victims of Environmental Catastrophes

In my Environmental Dispute Resolution course, I devote one class to a discussion of the claims facilities used in the 9/11 terrorist attacks and the BP Gulf Coast oil spill disaster.  The facilities attempted to handle the inevitable claims arising from these traumatic events in an organized way that allowed expeditious handling of the claims outside of litigation.  Both adopted a form of arbitration.  

If well designed, these facilities could also enhance procedural justice for claimants --  voice, careful consideration of the facts by the neutral, impartiality by the neutral, and respectful and dignified treatment of claimants.

Updating the Story

An article in The New York Times today updates the status of the Gulf Coast claims facility.    

The Times describes the spill this way:

The oil rig fire and the nearly unstoppable fountain of oil that followed at the Macondo Prospect on April 20, 2010, was the largest marine oil spill in the nation’s history. The oil poured into the gulf for 87 days, fouling an estimated 68,000 square miles of waters and almost 500 miles of coastline from Louisiana to Florida.

The spill released approximately 210 million gallons of oil.

BP, its reputation damaged and facing administrative penalties, criminal prosecution, and vast class action lawsuits, agreed to create a process designed to handle the civil claims for damages. With time, the agreement governing the Gulf Coast claims facility morphed into a 1,000-page document entitled the 2179 Economic and Property Damage Class Action Settlement Agreement.  

BP's Buyer's Remorse

Increasingly, BP has had buyer's remorse as the tab for the civil liability associated with the spill has grown from a predicted payout of  $7 billion to an estimated pay-out of $ 19.5 billion.  The Times explains:

A central element of the agreement . . . would prove to be a time bomb. Instead of having claims calculators contend with different kinds of arguable evidence to prove that damage was linked to the spill, the negotiators came up with a formula that relied solely on financial data for proof of harm. If a business was in a certain region and could prove that its income dropped and rose again in a specific pattern during 2010, that would be enough to establish a claim.

This liberal test has brought a "frenzy" of claims.  

BP has unsuccessfully challenged in federal court the administrator's interpretation of the agreement.  Its lawyers also sought greater oversight of possible fraud in the claims handling process.  The supervising judge called in Freeh Group, a firm headed by Louis J. Freeh, the former F.B.I. director, to investigate. Freeh issued a 98-page report finding some problems, but not a vast system of corruption.  More recently, BP began appealing one in five claims awards under the appeals provisions of the settlement agreement.

ADR Expert Expresses Dismay

Kenneth Feinberg, who spoke to our students last year, served as the administrator of the 9/11 Victims Compensation Fund and as the first administrator of the Gulf Coast claims facility. 

The Times quotes him expressing "dismay" that the problems associated with the Gulf Coast claims facility “too easily lead[] to the conclusion that an alternative resolution doesn’t work, and in an oil spill you’re better off with an Exxon-Valdez, decades-of-litigation approach. That’s a real public policy missed opportunity.”

Exxon Valdez Spill

Feinberg references the March 24, 1989 accident in which the Exxon Valdez ran aground, tore its hull, and spilled 11 million gallons of oil into the Alaska's Prince William Sound. Until the BP spill, the Exxon Valdez accident was seen as the biggest environmental disaster in U.S. history. 

In 1989, only a few law schools were beginning teach ADR principles, skills, and values, most notably the University of Missouri Law School under the leadership of Len Riskin.  

Accordingly, the court adopted the best known approach to mass torts. It approved a class consisting of 32,000 fishermen, Alaska natives, landowners, and others whose livelihoods were gravely affected by the disaster. Lawyers for this class have explained the history of the litigation:

• A class action jury trial was held in federal court in 1994. The jury returned an award of $5 billion in punitive damages. 

• In 2001, the Ninth Circuit Court of Appeals ruled that the original $5 billion punitive damages verdict was excessive. 

• In 2002, U.S. District Court Judge H. Russell Holland reinstated the award at $4 billion. Judge Holland stated that, “Exxon officials knew that carrying huge volumes of crude oil through Prince William Sound was a dangerous business, yet they knowingly permitted a relapsed alcoholic to direct the operation of the Exxon Valdez through Prince William Sound.” 

• In 2003, the Ninth Circuit again directed Judge Holland to reconsider the punitive damages award under United States Supreme Court punitive damages guidelines. 

• In January 2004, Judge Holland issued his order finding that Supreme Court authority did not change the Court’s earlier analysis. 

• In December 2006, the Ninth Circuit Court of Appeals issued its ruling, setting the punitive damages award at $2.5 billion. 

• Subsequently, [in 2008,] the U.S. Supreme Court further reduced the punitive damages award to $507.5 million, an amount equal to the compensatory damages. With interest, the total award to the plaintiff class was $1.515 billion.

In short, class action claimants waited over 20 years to reach this litigated resolution.  One environmental organization called it a "historic legal battle." 

Most of my students would have been toddlers when the accident happened. 

So, back to my first paragraph.  These claims facilities must be well-designed.  The Gulf Coast claims facility will offer new lessons for future designers about when this alternative approach makes sense.

So far, the federal courts have backed the process and shown overall confidence in the current administrator, Patrick Juneau.   

May 9, 2014 Update: More on BP's challenges of certain claims here.