Last week, on September 18, 2015, the EPA issued a News Release revealing that Volkswagen Group of America (“Volkswagen”) sold cars incorporating a “defeat device” as defined in the Clean Air Act (“CAA”) to purposefully evade federal and state emissions and environmental laws and regulations.[1]  In this Notice, the agency said that Volkswagen’s software allowed its vehicles to release up to 40 times the level of nitrogen oxides permitted under the CAA without being detected during testing.  The EPA’s Notice puts the carmaker on the hook for potential civil penalties and injunctive relief.

The EPA is not the only trouble on the horizon.  The U.S. Justice Department commenced a criminal investigation and State Attorney Generals in several states have initiated independent investigations.  Class Actions have been filed on behalf of consumers in at least ten (10) different states alleging among other things, violation of the CAA, fraud, unfair competition, breach of express and implied warranties and false advertising.[2]  These class actions carve out personal injury claims resulting from the use of VW vehicles incorporating defeat devices, meaning those may pop up separately.  Given the decline in the stock price in response to the revelation of fraud, shareholder derivative suits are sure to follow.

The Potential Fallout:

The U.S. Environmental Protection Agency (EPA) said on Friday Volkswagen could face penalties of up to $18 billion for cheating emissions tests on some of its diesel cars.[3]   Volkswagen said on Tuesday it was setting aside just 6.5 billion euros ($7.3 billion) to help cover the costs of the crisis.  Not surprising, analysts doubt that will be enough, with the company disclosing that 11 million of its cars were fitted with Type EA 189 engines that had shown a “noticeable deviation” in emission levels between testing and road use.  What is more, where the underlying conduct at issue is intentional fraud the fact of which has been conceded[4], recovering costs from insurers for defending against these claims and recalling these vehicles is likely impossible.  As a result, much like in the BP Deepwater Horizon spill, the central issues likely to emerge here are going to be fines and civil damages, and the distribution of those funds.

Lessons Learned: Compliance, compliance, compliance. 

  1. Develop a strong compliance program.  A good compliance program contemplates and addresses varying governing regulations in all regions where your goods will be sold and typically involves third party independent testing during development, design and manufacturing stages.  Involving an independent third party testing agency throughout the process not only reduces the risk of internal side-stepping, but also may help off-set liability to the extent issues arise down the line.
  2. Ensure adherence with your compliance program.  Stringent internal quality control is not just about ensuring performance and style, but also compliance with governing regulations.  Even if there is a way to make your product unique, different and ahead of the developmental curve, failure to do so within the constraints of governing regulations subjects you to unnecessary and unwelcome liability.
  3. Be diligent and responsive.  Volkswagen put off investigations into its emissions system for years before conceding to the installation of the defeat device.  Failing to address the issue when first identified may result in increased liability to VW in the nature of both fines and shareholder claims.