On June 28, 2016, in two related settlements, German auto-manufacturer, Volkswagen AG (“VW”), has agreed to pay $14.7 billion to resolve allegations that the company cheated diesel emissions tests for nearly 500,000 2.0 liter diesel vehicles sold over six years. One settlement partially resolves EPA allegations for alleged violations of the Clean Air Act’s federal emissions standard; the other partially resolves FTC claims that VW violated the FTC Act by deceptively and unfairly advertising its “clean diesel” vehicles. VW also will pay damages to 44 states, Washington, DC, and Puerto Rico. The announced settlements do not resolve pending civil claims concerning VW’s 3.0 liter diesel vehicles, or potential criminal liability.

According to the civil complaint filed by the Department of Justice on behalf of the EPA, VW illegally equipped its 2.0 liter diesel models with software called “defeat devices” in order to circumvent federal emissions tests. The software triggered emissions controls only for the testing process, but during normal driving conditions, the emission control systems remained inoperative. The net result was significantly increased gas emissions, with nitrogen oxide levels up to 40 times more than the allowable amount under EPA standards for cars on the road.

In addition to the EPA’s claims, the FTC sued the auto-manufacturer, alleging that VW engaged in a high-profile marketing campaign deceptively claiming its cars were “clean diesel.” The FTC alleged that, with an effort to target “environmentally-conscious” consumers, VW misleadingly claimed that its diesel cars reduced nitrogen oxide emissions by 90 percent and maintained a high resale value. According to the FTC’s complaint, without the defeat devices, the “clean diesel” vehicles would not have passed federal emissions standards and thus would not retain a high resale value. The FTC’s proposed consent order contains injunctive provisions prohibiting VW from making further deceptive claims about the environmental benefits or value of its vehicles.

The affected vehicles include 2.0 liter diesel versions of all 2009-2015 Jetta, Passat, Golf, Beetle and TDI Audi A3 models. VW set aside up to $10.3 billion to compensate consumers for damages. Under one buyback option, VW must offer to buy back any affected 2.0 liter vehicle at whatever the retail value was on September 2015. If this option would not cover a consumers loan on a vehicle, the consumer can elect to have VW pay their third-party loans, up to 130 percent of the September 2015 value. Under the EPA-approved modification option, consumers may also keep their vehicles and have them modified to comply with emissions standards free of charge.

VW has also agreed to set aside funding for clean-air initiatives and the technology development. The settlement of the Clean Air Act violations requires VW to pay $2.7 billion to fund emissions-reduction programs across the country. Beneficiary states can obtain funds for projects designed to mitigate emissions in excess of EPA and California standards. VW also is required to invest $1.2 billion over 10 years for research and development into zero emission vehicles.