updated 11/1/2007 6:35:51 PM ET 2007-11-01T22:35:51

The Alabama Supreme Court on Thursday threw out nearly all of a record $3.6 billion verdict that the state government won against Exxon Mobil Corp. in a dispute over natural gas royalties.

In an 8-1 decision, the state's highest court awarded Alabama $51.9 million in compensatory damages. The court threw out all punitive damages, which made up most of the $3.6 billion verdict, the largest ever in Alabama.

The state conservation department had sued Exxon Mobil, saying it had intentionally underpaid the state for royalties due from natural gas wells the company drilled in state-owned waters along the Alabama coast. The company argued that no fraud was involved, and the case was a routine contract dispute.

In 2003, a Montgomery jury agreed with the state's arguments that Exxon Mobil intentionally underpaid, and it returned a verdict of $102.8 million in compensatory damages and $11.8 billion in punitive damages.

Circuit Judge Tracy McCooey cut the punitive damages to $3.5 billion, which dropped the total verdict to $3.6 billion. Even after the verdict was cut, it was still the largest in the country that year, according to the annual rankings by the National Law Journal and VerdictSearch.

In Thursday's decision, the majority of the Supreme Court said the state failed to prove fraud by Exxon Mobil and no punitive damages were due.

The court left compensatory damages for breach of contract and sent the case back to circuit court to determine what interest might be due the state on the $51.9 million.

The decision was the second time the Alabama Supreme Court ruled in Exxon Mobil's favor. The first time the case went to trial, a jury awarded $3.5 billion, but the Supreme Court threw out the verdict and ordered the new trial that occurred in 2003.

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