By Juan Carlos Rodriguez
Law360, New York (June 28, 2016, 8:31 PM ET)
Volkswagen AG’s $14.7 billion deal to settle some claims stemming from its emissions cheating scandal is a landmark achievement for the federal government and will reverberate throughout the auto industry. But the pact announced Tuesday is just the first step in VW’s bid to put the matter in its rearview mirror, with some civil matters left unresolved and criminal charges potentially waiting in the wings.
The Volkswagen deal is the latest — and by far the biggest — in a string of bigticket settlements the federal government has obtained from automakers. (Credit: AP)
Consumers and the public are the big winners, with a $10 billion buyback or fix program and $4.7 million in VWfunded environmental projects combining to form the largest automotive settlement in history.
But the company could wind up paying even more, and the industry should be on notice that federal regulators will aggressively pursue claims against companies that similarly flout the law, said Pete Anderson, a principal at Beveridge & Diamond PC and head of the firm’s white collar and compliance team.
“Even though it’s a massive settlement, Volkswagen is still far from being out of the legal woods,” Anderson said.
Here are three takeaways from the VW settlements:
Car Makers in the Crosshairs
The VW deal is the latest — and by far the biggest — in a string of big ticket settlements the federal government has obtained from automakers. In September, General Motors Co. agreed to a $900 million deferred prosecution deal over faulty ignition switches; in November 2014, Hyundai Motor Co. and Kia Motors Corp. agreed to a $100 million Clean Air Act civil penalty — the largest ever under the act — to resolve claims that they sold more than 1 million vehicles that emit more greenhouse gases than had been certified to the U.S. Environmental Protection Agency; and in March 2014, Toyota Motor Corp. reached a $1.2 billion deferred prosecution agreement with the DOJ over claims it hid defects that caused vehicles to accelerate suddenly.
Anderson, a former federal environmental prosecutor, said the scale of the VW misconduct has intensified regulators’ focus on the auto industry.
“Despite budget constraints within EPA, the agency will react aggressively in throwing all of their enforcement spears if the underlying misconduct of the target is extreme. Corporations who underestimate the potential costs and liabilities of significant environmental violations will do so at their peril,” he said.
Doug Parker, the recently retired head of the EPA’s Criminal Investigation Division, now at Earth & Water Group, said the government’s reaction to the VW scandal has been much like it was to the Deepwater Horizon explosion and disaster in 2010, which shifted a great deal of attention to offshore energy production.
“The government essentially reorganized elements of the Department of the Interior and put additional resources focusing on offshore energy — there was a brief moratorium on drilling,” Parker said. “When you have a major incident with a major player, be it BP in the Gulf or VW in the automotive sector, the government’s really going to turn its attention to not just that company but that sector.”
Criminal Charges May Loom
Parker, who oversaw the ongoing criminal investigation of VW until his departure from the EPA, said the investigation is large and “very well resourced,” but added there are challenges.
“I think it’s more complicated because of its international nature, in terms of navigating issues of sovereignty and jurisdiction with the Germans,” Parker said. “When you have a case like this that reaches beyond your borders, there are just a lot more moving parts.”
And it’s not just the company that has to worry.
This is the first major environmental case that’s unfolded after Deputy U.S. Attorney General Sally Yates in September issued a mandate directing the government’s top attorneys to prosecute not just companies but also individual employees, noted Tom Boer, a partner at Hunton & Williams LLP and a former attorney with the EPA and U.S. Department of Justice.
“If the government chooses not to bring criminal charges in this case, they’re going to have to explain to the regulated community why it is that this fell so clearly outside of the priorities of the Yates memo, which really emphasized that criminal charges need to be filed more often,” Boer said.
The fundamental basis of the federal government’s environmental compliance programs is voluntary compliance, or being honest and truthful because the government can’t be everywhere, Parker noted.
“When the government comes upon information that really abuses that notion, they’re going to be aggressive not just to deal with the conduct at hand but to deter others and demonstrate that there’s a price to be paid,” he said.
Clean Air Act Claims May Push VW’s Tab Higher
A huge unanswered question is whether VW will be hit with a Clean Air Act civil penalty, and if so, how much that will be, according to Boer. He said the maximum could run into the tens of billions of dollars, but the final amount will be negotiated based on a number of factors.
“Obviously, Volkswagen will want to try to minimize the civil penalties they will need to pay,” Boer said. “One of the ways to accomplish that is to demonstrate cooperation with the government in response to the government’s alleged violations.”
But he said VW may run into difficulty proving its goodwill after a slew of bad press following the initial cheating revelations.
For instance, in November, the company attacked an EPA claim that an additional 10,000 3.0 liter V6 diesel engine vehicles had defeat devices. Then, a day later, it admitted that an internal investigation headed by Jones Day had uncovered emissions irregularities in 800,000 more cars, although it wasn’t clear if the V6 vehicles were among that number.
In January, California Air Resources Board Chair Mary Nichols released a statement accusing VW of covering up the scandal.
“They continued and compounded the lie, and when they were caught, they tried to deny it. The result is thousands of tons of nitrogen oxide that have harmed the health of Californians,” Nichols said.
Also in January, the EPA and CARB embarrassed VW when they rejected as insufficient a proposed recall plan submitted by the automaker to fix the relevant cars.
Anderson said “there is no question” that the government will seek additional, aggressive penalties against VW for the CAA violations.
“The full costs of this scandal are almost impossible to calculate since they go beyond settlement amounts and legal fees and extend into the loss of goodwill and public trust,” he added.