Filed Under:Claims, Litigation

Volkswagen faces billions of dollars in penalties

The civil complaint alleges penalties that could reach $46 billion. (AP Photo)
The civil complaint alleges penalties that could reach $46 billion. (AP Photo)

(Bloomberg) -- The U.S. Justice Department sued Volkswagen AG for installing illegal devices meant to defeat emissions testing, and laid out claims that could push penalties into the billions of dollars — an opening salvo in a legal battle that could be far more costly for the German carmaker than had been expected.

The civil complaint filed Monday accuses the automaker of four violations of the Clean Air Act, which provides for penalties that could reach $46 billion, according to Bloomberg Intelligence analyst Kevin Tynan — more than twice the maximum some legal experts had estimated.

The penalties sought are expected to be far less, but would still be in the billions of dollars, according to Justice Department officials.

"We have not enumerated a maximum possible penalty, and will decline to speculate on what the court may ultimately choose to do," Wyn Hornbuckle, a spokesman for the Justice Department, said in an e-mail. "In the complaint, we have provided the statutory information we believe important for the court to consider in determining a penalty that reflects the seriousness of these allegations."

According to the formula in the complaint that lays out maximum penalties, the carmaker could be on the hook for $37,500 for each car sold without an approval certificate from the Environmental Protection Agency, an additional $37,500 per vehicle for tampering with the engines and $3,750 more per defeat device. In addition, the company could be levied $37,500 more for each day of the approximately seven years it allegedly failed to report the violations.

Other lawsuits

Volkswagen already faces hundreds of private lawsuits in the U.S. for its actions, which have been consolidated in San Francisco federal court. The Justice Department said it will ask for its suit to be transferred to that court as well, borrowing a tactic from its case against BP Plc in the Gulf oil spill litigation, where it worked alongside plaintiff’s lawyers.

Volkswagen is also facing lawsuits from state attorneys general, while regulators in at least seven countries, including Germany, have launched investigations. The U.S. could also bring criminal charges against Volkswagen for lying to the Environmental Protection Agency about the cheating devices.

“The U.S. seeks and obtains larger penalties for environmental violations than any other country, ” said David Uhlmann, a law professor at the University of Michigan and former head of the environmental crimes section of the Justice Department. “VW needs to fix the problem it has created, cooperate with the government investigations and make its victims whole.”

Volkswagen’s preferred shares fell 5.5% in Frankfurt, the most in two months, before the suit was revealed on Monday. The shares have dropped more than 22% since Sept. 18, the day the EPA said the automaker admitted cheating on emissions tests. The carmaker’s shares in the U.S., where they are listed as American depositary receipts, declined 2.8% to $30.10 after falling as much as 4.2%, the steepest intraday decline in two months.

Low-cost fixes

Volkswagen had been making some progress on the European side in addressing the pollution scandal, which cost the chief executive officer and several other senior employees their jobs. The company won regulatory approval in Germany last month for low-cost fixes for 8.5 million diesel engines in Europe equipped with the cheating software, out of 11 million in total worldwide.

Volkswagen admitted in September that it had rigged some diesel engines so that emissions controls came on only during testing. Those controls shut off while the car was on the road, producing nitrogen oxide emissions well in excess of the U.S. legal standard. The Justice Department complaint includes additional vehicles with larger engines, including some Porsche and Audi models, that Volkswagen admitted in November also contained mechanisms that could be considered defeat devices.

"Car manufacturers that fail to properly certify their cars and that defeat emission control systems breach the public trust, endanger public health and disadvantage competitors," Assistant Attorney General John Cruden said in a statement.

Recall discussions

The EPA, which in September announced Volkswagen violated federal law by using the defeat devices, said that talks with the company about repairing the affected vehicles hadn’t been resolved.

“So far, recall discussions with the company have not produced an acceptable way forward," Cynthia Giles, assistant administrator for enforcement and compliance assurance at EPA, said in the statement.

The Justice Department is seeking an order requiring Volkswagen to take “appropriate steps,” including mitigating nitrogen oxide emissions. Such steps might include forcing Volkswagen to install equipment to reduce pollution or buy back vehicles from owners. To obtain such an order, the government would have to spell out what it’s seeking in a separate filing later.

‘Work cooperatively’

Volkswagen is working with all government agencies investigating its diesel engines for possible violations of the Clean Air Act, company spokeswoman Jeannine Ginivan said in an e-mailed statement. It’s also developing an independently administered program to compensate consumers for their economic losses, she said.

“Volkswagen will continue to work cooperatively with the EPA on developing remedies to bring” the affected vehicles into full compliance with regulations as soon as possible, Ginivan said. The company has suspended sales of its diesel vehicles in the U.S. until the matter is resolved.

Jettas, Golfs, Passats

In addition to Volkswagen, the lawsuit also names company units Audi AG, Porsche AG and Porsche Cars North America as defendants. The U.S. said the violations involved car models from 2009 to 2016 including some Volkswagen Jettas, Golfs and Passats, as well as the Audi A6 and A7 Quattro.

Volkswagen presented California regulators with a proposal to make its 2.0-liter diesel engines compliant with pollution standards on Nov. 20. The EPA and California’s Air Resources board have been evaluating VW’s proposed fixes. CARB has said it will formally respond to the plan no later than Jan. 14. EPA hasn’t given any timetable for its response.

The case is U.S. v. Volkswagen AG, 16-cv-10006, U.S. District Court, Eastern District of Michigan (Detroit).

--With assistance from Jeff Plungis and Tom Schoenberg.

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Copyright 2017 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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