Feinberg’s Wizardry

How he’ll help the down-and-out businesses of the Gulf states—despite the law.

Kenneth Feinberg

The BP oil spill: another mass disaster, another compensation fund, and another opportunity for Kenneth Feinberg to mete out economic justice to the victims? Probably, but it won’t be routine. Feinberg is the master of mediation who helped sort out compensation for Agent Orange, Sept. 11, and the financial bailout. But the $20 billion BP oil spill fund will present pure legal challenges he hasn’t encountered before.

One problem has been much discussed: the inability of fishermen or others who rely on the Gulf waters to make a living, but who don’t keep careful records, to prove their losses. Cash businesses like that may have no way to compare their monthly revenue before and after the spill.

But there’s another, deeper problem that hasn’t received enough attention: The state law Feinberg says he’ll rely on offers nothing to many, even most, possible claimants. Unless he ignores clear rules of law, the promise of this fund won’t—and can’t—be fulfilled. To see why, it’s useful to compare the oil spill aftermath with the 9/11 Victim Compensation Fund.

When Congress created the VCF, it clearly spelled out who was eligible: only those present at one of the three terrorist attack sites, either at the time they occurred or shortly thereafter. Regulations further limited the pool by requiring claimants to have sought medical assistance within a few days of the disaster. So, much of Feinberg’s admirable work revolved not around deciding who was eligible for compensation but rather assessing damages. Feinberg was a whiz at getting victims (mostly surviving family members of those who died when the Twin Towers fell) to see that taking the generous compensation offered was better than putting their hopes into a protracted and uncertain lawsuit.

Not so in this case. No legislation or executive order from the president created the oil spill fund. It is the result of an informal agreement between President Obama and BP. And so Feinberg has been given neither formal guidance nor limitations on who can recover. To determine who’s eligible, Feinberg says he’ll look to the law of the state where the injury was suffered. Most victims will surely hope he’s not serious about that, because the law on recovery in the Gulf states—and in most states—is terrible for many potential claimants.

To be sure, some victims will still benefit. Those who were injured by the spill, or the families of those who were killed, are the clearest cases. People who suffered the damage or destruction of their property are also good candidates. For example, if oil causes property damage to a beachfront hotel, the owners have a sound claim for recovery—both for the property damage and for any resulting economic loss.

But claimants who suffer only economic loss, such as loss of profits or increased costs, face longer odds, legally speaking. In an almost unbroken line of decisions, state courts that have considered the issue have drawn a clear, firm line against recovery for such economic losses in virtually every case and context. Consider the 1984 Louisiana case PPG Industries Inc. v. Bean Dredging. There, Bean Dredging Co.’s negligence had damaged a gas pipeline belonging to Texaco. The plaintiff, PPG Industries, was a customer of Texaco’s that claimed it had to buy gas from another seller, at a higher price, because of the pipeline damage. But PPG was not even permitted to make its case against Bean Dredging. Why? Because the court could not figure out a way to limit the class of plaintiffs once it recognized any claimants at all. Quoting a well-known line from an old New York case (written by legendary jurist Benjamin Cardozo), the Louisiana court expressed a fear that allowing PPG to recover could lead to liability “in an indeterminate amount for an indeterminate time to an indeterminate class.”

The court then gave pointed examples of the possible, ever-rippling consequences of Beam Dredging’s negligent act. Here’s one of them: “If any of PPG’s employees were laid off while PPG sought another source of fuel for its plant, they arguably sustained damages which in all likelihood would not have occurred but for defendant’s negligence.” The court made a policy decision to limit recovery “[b]ecause the list of possible victims and the extent of economic damages might be expanded indefinitely.”

That decision amounts to a rule against any recovery in many cases. There have been exceptions, but these are usually cited as reasons to retain the rule against recovery for purely economic loss. For example, in 1985, the progressive New Jersey Supreme Court decided People Express Airlines Inc. v. Consolidated Rail Corp. The court held that the plaintiff airline could recover its economic losses stemming from the defendant’s negligence in creating a toxic spill (sound familiar?). Because of the danger posed by the spill, People Express had been forced to shut down operations and cancel flights.

How far would that liability extend? The New Jersey court, always sensitive to the implications of its holdings for future cases, tried to limit the scope of its ruling by emphasizing (among other facts) that People Express’ terminal was near the site of the spill and that economic injury to this plaintiff was “particularly foreseeable” to the negligent defendant.

Among other state courts, People Express has had few takers. After all, what does the term “particularly foreseeable” mean, and how would it serve as a real limitation on liability? Those daunting questions have caused most courts to go the way of Louisiana’s. As Robert Rabin of Stanford Law has memorably stated, the People Express case is a “historical artifact” and “a lonely outpost.”

Despite the overwhelming consensus view, one recognized exception to the rule limiting recovery may help the people of the Gulf. Those who make a living by fishing can recover their economic losses from negligent parties—like BP—that foul the water they rely on. Courts haven’t been entirely clear or consistent in their reasoning in these fishing cases, but at least Feinberg has a good place to start here. Not so in the cases of the ice vendor who sells to the fishermen or the hotels that have lost business because of the spill. If anything, these ripples seem far fainter than those for which recovery was denied in PPG Industries.

Does this mean that the great majority of claimants will leave their meeting with Feinberg empty-handed? I doubt it. Feinberg probably won’t look to state law in the same strict way a judge would. As long as his awards seem reasonable to BP, the company is not likely to complain. It can’t take the PR hit, and in any event, it can only appeal awards in excess of $500,000. (Claimants, though, can appeal any award they’re not satisfied with.) So expect the ice supplier who can show weak sales since the spill, or the hotel owner whose tourist business has dropped to, say, zero to recover—whatever the state law says.

The 9/11 fund again provides a good comparative lesson. Feinberg was directed to look to state law in one aspect of those cases, to determine which of the bereaved qualified as “family.” Even though the relevant law would have frozen out many surviving members of same-sex couples, some of them in the end were compensated. Using his considerable charm and problem-solving skills, Feinberg found a way to help these gay and lesbian mourners.

There’s $20 billion on the table. I expect Ken Feinberg to find a reasonable way to push it all across and into the pocket of deserving claimants, whatever the state law says. In an important sense, that’s why he was hired.

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