"The $5 billion punitive damages award is too high to withstand the review we are required to give it ... it must be reduced," the 9th Circuit Court of Appeals said in its ruling.

"We therefore vacate the award and remand it so that the district court can set a lower amount" in light of earlier case precedent, the court panel said.

Lawyers for the plaintiffs said they still expected to win "significant" damages from Exxon, and would lodge fresh appeals if the final dollar amount was deemed too low.

"I don't see this in the least as the end of the line," said attorney David Oesting. "We are going to get punitive damages in this case - the question is just how much."

The 1989 Exxon Valdez disaster in Alaska's Prince William Sound marked the worst oil spill in U.S. history as some 11 million gallons (50 million liters) of oil fouled local beaches and harmed local fish and wildlife.

In the 1994 trial, a jury ordered Exxon to pay about $287 million in compensatory damages to commercial salmon and herring fishermen, plus $5 billion in punitive damages for behavior that led to the 1989 oil spill.

That award had been repeatedly upheld by both the district court and, last year, by the U.S. Supreme Court, which rejected Exxon's assertion that the award should be set aside because of irregularities during jury deliberations.

In Wednesday's decision, however, the San Francisco-based 9th Circuit Court of Appeals took a different tack and agreed with Exxon that the $5 billion figure was excessive and should be reduced.

The appeals court decision, by Justice Andrew Kleinfeld, affirmed what it called "reckless" behavior both by Exxon and by Exxon Valdez Capt. Joseph Hazelwood who was in charge of the supertanker when it ran aground.

But the court said the $5 billion figure, which was awarded after the jury was explicitly instructed not to include environmental damages in its overall damage assessment, was nevertheless excessive in light of recent U.S. Supreme Court decisions governing punitive damage awards.

"The plaintiffs here were almost entirely compensated for their damages years ago," the court said in its unanimous decision. "The punitive damages at issue were awarded to punish Exxon, not to pay back the plaintiffs.

"The law began changing shortly after judgment, and important aspects of this opinion are controlled by a Supreme Court decision that came down only last term."

NEW GUIDELINES FOR PUNITIVE AWARDS

The court specifically cited two Supreme Court decisions, Cooper Indus v. Leatherman Tool and BMW of North America v. Gore, as setting parameters for acceptable punitive damage awards in similar cases.

Under these guidelines, punitive damage awards must be assessed in light of the "relative reprehensibility" of Exxon's conduct, earlier penalties imposed for similar misconduct, and the ratio of the award itself to actual harm inflicted on the plaintiffs.

The $5 billion award, larger by a factor of some 17-to-1 to the actual harm claimed, was far in excess of the 4-to-1 ratio the Supreme Court set as a dividing line between constitutionally acceptable and constitutionally unacceptable jury award verdicts.

Exxon, which spent more than $2 billion cleaning up the polluted beaches of Prince William Sound and another $1 billion settling government claims, did not dispute the $287 million compensatory damage award.

But it did repeatedly and loudly object to the huge punitive award, which would have in effect wiped out a year's worth of profits for the oil company.