Tina Li

Federal Government Sues Volkswagen Over Emissions Defeat Devices

Recently Volkswagen admitted to deliberately creating software for its TDI diesel engines to thwart EPA emissions testing. After several class-action suits and a plummet in reputation and sales, the federal government has brought suit against the carmaker.

On January 4 the Department of Justice sued Volkswagen in federal court for the car company’s installation of software to evade U.S. emissions standards. In a statement, the DOJ said the lawsuit alleges nearly 600,000 diesel engine vehicles had illegal defeat devices installed which impaired their emission control systems and caused emissions to exceed the Environmental Protection Agency’s standards. The DOJ is suing Volkswagen to stop using the devices, mitigate excess air pollution, and pay civil penalties.

The allegations are consistent with what environmental regulators accused Volkswagen of in September of last year, when the EPA alleged that the car maker installed devices that circumvent emissions standards for nitrogen oxides in its cars with two liter engines from 2009 to 2015. The EPA later alleged that the company installed devices to evade emissions standards in cars with larger engines and in Porsches. In November, Volkswagen admitted to installing the devices in all U.S. 3.0 liter diesel models in 2009. According to the EPA, the vehicles emit 40 times the amount of nitrogen oxide allowed by prevailing clean air standards.

The DOJ’s complaint covers nearly 500,000 two-liter engine vehicles sold since 2009 and 85,000 three-liter vehicles. Volkswagen released a statement saying the claims in the suit cover the same vehicles covered by the EPA’s violation notices in September and November. In December, Volkswagen tasked Kenneth Feinberg (the lawyer noted for overseeing the 9/11 victim compensation process) with coming up with a program for Volkswagen buyers. “Volkswagen will continue to work cooperatively with the EPA on developing remedies to bring the TDI vehicles into full compliance with regulations as soon as possible,” the company’s statement said. “We will continue to cooperate with all government agencies investigating these matters.”

In addition to collecting civil penalties that could be up to $48 billion, the government could leverage this suit to compel Volkswagen to address its diesel issue once and for all. The complaint specifically accuses Volkswagen of violating the Clean Air Act by producing and selling cars that didn’t match up with the performance and design criteria reported to the EPA and California Air Resources Board when getting them certified. It also claims investigation into Volkswagen’s emissions “were impeded and obstructed by material omissions and misleading information provided by Volkswagen entities.”

“Today’s complaint is the first stage in bringing Volkswagen to justice for failing to disclose the defeat device while seeking certification for its diesel vehicles from EPA’s Office of Transportation and Air Quality in Ann Arbor, Michigan,” U.S. Attorney Barbara McQaude said in a recent statement.

The deception first came to light after third-party tests performed by the International Council on Clean Transport. The tests set out to prove that Volkwagen’s engines were cleaner than standard gasoline engines by inadvertently exposed the scandal. Based in a European facility, the research group was stunned to discover that some of the TDI-powered vehicles were producing much more nitrogen oxide than reported. The ICCT replicated the experiments in the United States, where emissions regulations are more stringent, expecting the U.S. market vehicles to pass the tests. The vehicles appeared to pass the tests when driven on a dynamometer or “rolling road” but gave different results outside of the lab.  Driving from San Diego to Seattle, the ICCT tested the emissions on a Jetta TDI, Passat TDI, and BMW X5 xDrive 35d. During the trip, the Jetta produced 15 to 35 times the U.S. legal limit of nitrogen oxide. The Passat produced 5 to 20 times the legal limit of the pollutant. Only the BMW’s emissions were at or below regulated levels.

Volkswagen performed its own tests in December of 2014, replicating the ICCT tests, and claimed the discrepancy could be remedied with a software update. The carmaker recalled nearly 500,000 vehicles. Meanwhile California Air Resources Board tested the vehicles in question and found they were in violation of U.S. law. In May 2015, the EPA and CARB opened a non-publicized inquiry into the Volkswagen Group’s emissions. On July 8, 2015 CARB informed the EQP and Volkswagen of its findings. Subsequently, the EPA demanded proof the emissions issues had been resolved before it would certify Volkswagen’s 2016 TDI models. It was then that Volkswagen admitted it had installed a “defeat device,” which “reduces the effectiveness of the emission controls system,” as described by the EPA, that could detect when it was in testing mode versus a normal driving situation.

In September class-action suits began to pop up. For instance law firm Hagens Berman, with experience in class-action litigation against General Motors for faulty ignition switches, filed two complaints against Volkswagen. The second complaint is 190 pages long and names plaintiffs from at least 20 states. The complaint brings at least 70 counts against the car maker, cites numerous states’ consumer protection laws, and asks for undisclosed damages including attorney fees and punitive damages. Another class-action firm, Keller Rohrback, has filed a complaint against Volkswagen with 14 counts and 7 plaintiffs so far.

Whether the class-actions are successful has yet to be determined, and could depend on the lawsuit from the DOJ. “It is not unusual to have class actions follow regulatory developments,” said Neal Walters, an attorney at Ballard Spahr who has defended corporations in product liability cases. “As serious as the allegations may be from the regulatory perspective, the class actions will not be as easy as they look.” One obstacle is that plaintiffs will have to show that buyers specifically bought the affected models because of their (possibly illusory) environmental benefits, or that their cars suffered a serious reduction in resale value due to the emissions scandal and its fallout. This has not escaped the notice of Hagens Berman. “I paid a premium for a Golf TDI because I was promised that it was ‘Clean Diesel.’ I was told that the emissions were better than a standard gas automobile. In addition, I was also promised high fuel economy,” one buyer says in the firm’s announcement of its class-action suit. “I now feel I have been defrauded by these claims.”

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Lawsuits will likely follow the modifications Volkswagen is required by the court to make in order for its cars to comply with emissions standards. If the tweaks affect engine performance, for instance, consumers will lose value when they resell the cars. Alec Gutierrez, a senior market analyst at Kelley Blue Book, said the value of affected cars could decline 3% to 5% in the second-hand markets. For example, a 2013 Golf Sportswagen TDI with a $16,000 Kelly Blue Book value could see its price decline $500 to $800, Gutierrez said, based on the experience of past models which experienced recalls.

However retail values do not always take a hit. In the GM ignition case, used car values and retail values showed no decline. After the wake of Toyota’s unintended acceleration debacle, resale values went back to normal within a year. Additionally, it is very difficult for lawyers to prove diminution in value given the myriad of factors that influence what you pay for a car and what you sell it for. It is worth noting that the aforementioned two cases differ in that Volkwagen’s issue is not life-threatening but one of trust violation. Even after the dust settles, Volkswagen could be left with a permanently damaged reputation among consumers.

The carmaker has two options. It can either:

  • Change the engine software which will significantly hinder engine power output and fuel economy or
  • Install urea treatment systems which would not only require major vehicle modification but also cost the company thousands of dollars per car.

Meanwhile owners will simply have to keep driving. The initial sale of the vehicles was technically illegal. As a consequence, owners may not be able to re-register (at least in California) until the emission are brought into compliance, and they will not likely be able to re-sell the cars. Volkswagen has send out a stop-sale order to its dealers, halting the sales of new and used 2.0-liter TDI models. The company’s stock plummeted 38% when the story broke last September.

Volkswagen Chief Executive Matthias Mueller is scheduled to meet with the EPA chief Gina McCarthy next week. Mueller was named chief executive in September, days after the company’s longtime CEO, Martin Winterkorn, resigned. The meeting will take place in Washington on Wednesday at the request of Volkwagen, according to an agency spokesman. Mueller will be discussing the next steps for Volkswagen in remedying the fiasco. According to Volkswagen brand chief Herbert Diess, fixing older cars equipped with 2.0 liter diesel engine would be more difficult than bringing newer models into compliance. Germany’s daily newspaper Sueddeutsche Zeitung said Volkswagen expected it would have to either refund the purchase price of a fifth of the diesel vehicles affected (about 115,000) or offer a new car at a significant discount. Volkswagen declined to confirm the report.

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