The Case Against Making BP Pay

For the record, I think BP should pay for economic, property, and health damages resulting from the spill in the Gulf of Mexico. That seems the best course of action for everyone, except for BP, whose well is leaking.

And it appears they will pay. The company has agreed to set aside $20 billion for an escrow fund to be doled out independently. Damages could soar above that, in theory: Exxon paid out $4 billion in cleanup costs and damages after the Exxon Valdez spill, but the volume of spilled oil in the Gulf dwarfs the tanker disaster, not to mention the threatened Gulf tourism industry that doesn't exist in Prince William Sound.

The cap on damages liability, set at $75 million under the Oil Pollution Act of 1990, may not apply to BP anyway.

If BP violated federal regulations or was grossly negligent in its operation of the Deepwater Horizon rig--and a House subcommittee investigating the spill may well have evidence to that effect--the liability cap would no longer hold, and BP would be liable for all damages, without limit.

There is a case to be made, however, for why BP shouldn't be made to pay. Interestingly, no one is making it: not BP, not the Chamber of Commerce, not the American Petroleum Institute, not oil-friendly Republicans in Congress. They have all said publicly that BP should pay in full, and BP has said publicly that it will. Defending BP is politically toxic; seeking the cover of a $75-million liability cap seems inhumane.

But although BP likely will pay everything, and although that is the right outcome, it is worth acknowledging one reason why BP shouldn't be made to pay, because it sheds light on Washington's reaction to the spill.

It is simply this: laws should generally be followed, or at least treated seriously by the bodies that make them, otherwise laws in general are meaningless, as is the process by which they are made. Rules should not be changed mid game, otherwise the game falls apart. That is not an argument for those rules, or for the game, but an argument for the relationship between the two.

If Congress retroactively eliminates the liability cap for BP--in preemption of the escrow fund not being enough, or (perhaps more likely) as a PR stunt by congressional Democrats wishing to appear proactive and heavy handed--Congress will have, in no uncertain terms, changed the rules. The $75 million cap inserted into the Oil Pollution Act will have been meaningless--not that it was a good thing to begin with.

Twice in as many years the federal government will have intervened in such a manner. In 2008, the government intervened to save failing financial institutions with the TARP bailout, creating what was deemed a "moral hazard"--an incentive for banks to overextend themselves, because they could henceforth expect the federal government to swoop in and save them if they did. It was a problem of incentive--of insulation from existing expectations of risk and the rules of operating.

Lifting the liability cap on BP will effect just the opposite: an expectation that the government can change the rules in order to punish, despite what legal authorities one had previously counted on. The general message, however, is the same: that the government has gotten in the habit of stepping in to change things because it feels like doing so.

Such behavior is unconstitutional when it comes to criminal law. A bill of attainder--legislation declaring someone guilty of a crime--is not allowed. But BP's liability is a civil matter, so it's not an issue. Making BP pay is constitutional.

Courts have said that "there's no absolute rule against retroactivity" in civil, regulatory matters, Georgetown law professor and constitutional law specialist Louis Michael Seidman explains."There has to be an adequate government interest to justify doing it retroactively." (In this case, there sure is.)

The liability cap probably doesn't matter, anyway. Lawyers won't prosecute claims in court under the Oil Pollution Act's legal authority, according to Boston College law professor Zygmunt Plater, who chaired the State of Alaska Oil Spill Commission's Legal task Force for two years after the Exxon Valdez spill.

Instead, they'll use maritime tort law, which will allow more options in pursuing those claims. The $75 million cap only applies to statutory damages under OPA, while a host of non-statutory damages can be pursued under maritime tort law, which will allow lawyers to name more defendants (e.g. Halliburton and Transocean) and pursue punitive damages, as claimants against Exxon did after 1989.

The $75 million cap is a "red herring," Plater said. "OPA '90 is probably going to be a sideshow."

There is a history of legal arguments against retroactive liability. SeaRiver Maritime, Exxon's U.S. shipping subsidiary, argued that OPA amounted to a bill of attainder. Federal courts have also upheld retroactive of liability for superfund sites under the 1980 Comprehensive Environmental Response, Compensation, and Liability Act. In BP's case, Congress would have firm legal grounding if it lifted the cap.

But the retroactive changing of liability laws, while it may be the best thing for everyone, signifies an important admission that's getting overlooked: that if we're changing the law now, it was faulty to begin with. The $75 million cap shouldn't have been instituted in the first place. Louisiana Sen. David Vitter wants to only lift it for BP and leave it in place going forward, the argument being that smaller oil companies will be put out of business without this protection, unable to afford the risk. Vitter has proposed a bill to that effect. But at that point, we admit we're applying laws discriminately, and it's probably best to just go ahead and codify the discrimination with a new cap that's tied to an oil company's assets or quarterly profits.

The point is this: lifting the cap disincentivizes lawmakers from making good laws. Congress, in a sense, would be bailing itself out, just as it bailed out the banks. Accountability evaporates.

Billions of taxpayer dollars and the ruination of thousands of lives in the Gulf (through a confused claims process that Obama seems to have averted with his escrow fund) are too steep a price for mere incentive. It was BP's rig; the company made over $6 billion in the first quarter of 2010 anyway; it only seems right that they pay the bill.

But we should at least recognize that it's perhaps better not to make a habit of creating rules that later have to be waived. The waiving probably shouldn't be the standard.