Exxon Mobil Corporation v. Alabama Department of Conservation and Natural, et al

This case began as a contract dispute between Exxon and the Alabama Department of Conservation and Natural Resources ("DCNR") regarding the interpretation of the royalty provisions of the State's 1981 lease form covering properties in three producing areas in Mobile Bay, Alabama. The principal disputes involved (1) the gas valuation point for royalty purposes, and (2) whether the lease form permitted free use of gas as fuel. Other lease interpretation issues included royalty on co-generated electricity, sulfur production, and slop oil/condensate, the interpretation of the lease "payout" provisions, and the proper method for measuring gas volumes subject to royalty.

Exxon filed suit in July 1999 in state court in Montgomery, Alabama, asking the court to clarify Exxon's obligations under the lease. The State filed a counterclaim for breach of contract and fraud; the fraud claim was premised on allegations of misrepresentation, deceit and/or suppression. On December 19, 2000, a Montgomery County jury awarded the State $87.7M for the underpayment of royalties and fraud and $3.4 billion as punitive damages. The Alabama Supreme Court reversed the Trial Court's judgment on December 20, 2002, because the Trial Court had improperly admitted into evidence an internal Exxon legal opinion interpreting the lease, and sent the case back for
a new trial.

Following the trial on remand, a second Montgomery jury awarded $63.6M for breach of contract damages ($102.8M including interest @ 12% through 11/14/03) and punitive damages of $11.8B. The jury designated $23.4M of the $63.6M as fraud damages. The Trial Court denied all of Exxon's post-trial motions, but remitted the punitive damages to $3.5 Billion. Exxon appealed the Trial Court's decisions to the Alabama Supreme Court.

On November 1, 2007, the Court issued its decision, reversing the punitive damages award in its entirety, concluding that "no fraud was proven under Alabama law." The Court also reduced the compensatory award from $64M (plus interest) to $52M (plus interest), concluding that Exxon's interpretation of the lease on three issues was the correct interpretation (proper measurement of gas royalty volumes, sulfur and slop oil/condensate), and ruling in favor of the State on the remaining lease interpretation issues (fuel gas, cost-netting, electricity, payout). The State did not seek rehearing in the case.