WASHINGTON (Reuters) - The U.S. Supreme Court on Wednesday threw out the record $2.5 billion in punitive damages that Exxon Mobil Corp had been ordered to pay for the 1989 Exxon Valdez oil spill off Alaska, the nation’s worst tanker spill.

The Exxon Valdez is seen three days after the vessel ran aground. The U.S. Supreme Court overturned on Wednesday the $2.5 billion in punitive damages that Exxon Mobil was to have paid for the 1989 Exxon Valdez oil spill off Alaska. REUTERS/NOAA/Handout

By a 5-3 vote, the high court ruled that the punitive damages award should be slashed to a maximum amount equal to the total relevant compensatory damages of $507.5 million.

The justices overturned a ruling by a U.S. Court of Appeals that had awarded the record punitive damages to about 32,000 commercial fishermen, Alaska natives, property owners and others harmed by the spill.

In the majority opinion, Justice David Souter concluded the $2.5 billion in punitive damages was excessive under federal maritime law, and should be cut to the amount of actual harm.

Soaring oil prices have propelled Exxon Mobil to previously unforeseen levels of profitability in recent years; the company posted earnings of $40.6 billion in 2007.

It took Exxon Mobil just under two days to bring in $2.5 billion in revenue during the first quarter of 2007.

The Exxon Valdez supertanker ran aground in Alaska’s Prince William Sound in March 1989, spilling about 11 million gallons of crude oil.

The spill spread oil to more than 1,200 miles of coastline, closed fisheries and killed thousands of marine mammals and hundreds of thousands of sea birds.

A federal jury in Alaska awarded $5 billion in punitive damages in 1994. A federal judge later reduced the punitive damages to $4.5 billion, and the appeals court further cut it to $2.5 billion.

Exxon Mobil, the largest U.S. company by market capitalization, then appealed to the Supreme Court.

Souter rejected Exxon Mobil’s argument that the federal clean water law’s water pollution penalties preempt punitive damage awards in maritime spill cases. But he sided with the company in slashing the award.

“We ... hold that the federal statutory law does not bar a punitive award on top of damages for economic loss, but that the award here should be limited to an amount equal to compensatory damages,” he said.

In Irving, Texas, Rex Tillerson, Exxon Mobil’s chairman and chief executive, said in a statement, “The Valdez oil spill was a tragic accident and one which the corporation deeply regrets.”

“We know this has been a very difficult time for everyone involved. We have worked hard over many years to address the impacts of the spill and to prevent such accidents from happening in our company again,” he said.

‘SLAP ON THE WRIST’

In Alaska, Tim Joyce, mayor of the Prince William Sound town of Cordova, where most of the area’s fishing fleet is concentrated, said, “Instead of taking a large corporation to the woodshed, they just gave them a slap on the wrist.”

Compared to Exxon’s billions of dollars of quarterly profit, “$500 million, that’s lost in the rounding,” he said. “A lot of people had their whole lives ruined because of this.”

Alaska Gov. Sarah Palin also denounced the ruling and said, “The court gutted the jury’s decision on punitive damages.”

A joint statement from Alaska’s congressional delegation said, “Today’s ruling adds insult to injury to the fishermen, communities and Alaska natives who have been waiting nearly 20 years for proper compensation following the worst environmental disaster in our nation’s history.”

Tom Donohue, president of the U.S. Chamber of Commerce, said: “This is good news for companies concerned about reining in excessive punitive damages.” The business group said the ruling could have an impact far beyond federal maritime law.

Company lawyers had called the $2.5 billion the largest punitive damage award ever affirmed by a federal appellate court -- larger than the total of all punitive damage awards upheld by federal appellate courts in U.S. history.

The case was decided by eight Supreme Court members. The ninth, Justice Samuel Alito, who owns Exxon Mobil stock, recused himself from the case.

Dissenting Justices John Paul Stevens, Ruth Bader Ginsburg and Stephen Breyer would have upheld the award. Stevens and Ginsburg said Congress, not the court, should set limits on punitive damages under maritime law.

Breyer said this was no ordinary reckless behavior case.

RELAPSED ALCOHOLIC

“The jury could reasonably have believed that Exxon knowingly allowed a relapsed alcoholic repeatedly to pilot a vessel filled with millions of gallons of oil through waters that provided the livelihood for the many plaintiffs in this case,” he said.

“Given that conduct, it was only a matter of time before a crash and spill like this occurred,” Breyer said.

Exxon has not set aside any legal reserves for possible damages as the company has argued that it was not possible to predict the ultimate outcome. The ruling will likely take a small bite out of upcoming earnings.

Immediately after the ruling was announced, Exxon Mobil shares dropped around 80 cents, or just less than 1 percent.

But the company’s shares later recovered and closed up 68 cents at $87.60 on the New York Stock Exchange.

The ruling could create a new public relations challenge for Exxon, which is already facing heat from Congress and consumers because of high gasoline prices.

“They are already being vilified in the news because of their profits,” said Argus Research analyst Phil Weiss, who said the company’s tenacious legal defense was good for its shareholders.

“But if I’m a consumer who doesn’t own Exxon stock and doesn’t care about Exxon stock, I’m looking at the money I’m paying to put gas in my tank and thinking ‘Here they are, taking advantage of somebody else,’” Weiss said.