On March 19, 2014, the US Department of Justice announced the filing of a criminal felony wire fraud charge against Toyota Motor Corporation (“Toyota”). At the same time, the Justice Department also announced that it had entered into a deferred prosecution agreement (the “agreement”) with Toyota, concluding a lengthy investigation into safety issues with its Lexus and Toyota vehicles.
As part of the agreement, Toyota agreed to forfeit $1.2 billion—the largest criminal penalty imposed on a car manufacturer in US history. While the size of this penalty has rightly received considerable attention, there is much more about the criminal case against Toyota and the deferred prosecution agreement that is worthy of close scrutiny by companies in the US and abroad, as the Justice Department’s prosecution represents an extremely aggressive use of federal criminal statutes in what is typically a civil regulatory context.
The Wire Fraud Charge
According to the statement of facts stipulated to by Toyota as part of the agreement, over a multi-year period employees of Toyota made misleading public statements to Toyota consumers, and concealed from regulators, a safety issue involving accelerators becoming stuck at partially depressed levels. Toyota employees also minimized the scope of another safety issue, whereby accelerators would become entrapped at depressed levels by improperly secured floor mats. While Toyota made public statements that it had “addressed” the “root cause” of this unintended acceleration problem through a limited recall, the company in fact knew that the extent of the problem was broader than the recalled vehicles. The company later provided the National Highway Traffic Safety Administration (“NHTSA”), the US Congress, and the general public with an inaccurate timeline making it appear as though Toyota had acted promptly to remedy the “sticky pedal” problem.
US law contains specific provisions designed to address automobile safety and recall failures. Under these provisions, Toyota is required to disclose to the NHTSA when it “learns [a] vehicle or equipment contains a defect and decides in good faith that the defect is related to motor vehicle safety.”1 Failure to disclose is subject to a statutory cap of $5000 per violation, with a maximum penalty for a related series of violations of $35,000,000.2 Applying these civil statutes, NHTSA imposed its own record penalty of $66 million on Toyota for its conduct related to the unintended acceleration issues.
Despite the direct applicability of these civil statutes, the Justice Department enlarged the range of potential penalties by bringing a criminal case against Toyota under the federal wire fraud statute—a broadly worded criminal provision that criminalizes the use of an interstate wire transmission (e.g., telephone call, facsimile, e-mail) in furtherance of “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.”3 The statute, which requires no proof of actual harm, has been used since its passage in 1952 against a broad array of financial and other fraudulent schemes, but its application in this highly regulated environment was far less obvious.
To bring a charge of wire fraud in this context, the Justice Department relied principally on the general claim that Toyota had defrauded its consumers into purchasing its products by concealing information and making misleading statements about latent unintended acceleration problems in its vehicles. Indeed, while the information alleges that Toyota’s “fraudulent scheme” was directed against the large and undefined class of the company’s “US consumers,” it fails to specify how the alleged misleading statements affected consumer behavior. As Preet Bharara, United States Attorney for the Southern District of New York acknowledged, prosecuting Toyota’s conduct criminally under the wire fraud statute in this way represents a “new and aggressive way of going after these problems.”4
The Deferred Prosecution Agreement
Deferred prosecution agreements have become a common mechanism used by the Justice Department to resolve corporate criminal cases, and it is not surprising that the Toyota investigation ended with such a settlement. Under the terms of such an agreement, the company typically consents to the filing of a criminal charge against it, pays a financial penalty, and agrees to cooperate with the Justice Department and conduct some form of remedial compliance over a period of years. At the end of that period, if the company has complied with all its obligations under the agreement, the criminal charge will be dismissed. That basic structure was used by the Justice Department for the Toyota agreement, which carries a three-year period.
The $1.2 billion penalty imposed on Toyota, payable within a week after the execution of the agreement, has been widely reported. But the other obligations imposed as part of the agreement are no less substantial. First, the agreement requires Toyota to stipulate to a detailed statement of facts, by which it unequivocally admits that it misled US consumers by concealing and making deceptive statements about the unintended-acceleration issues. This is unlike more common civil settlement agreements, where the alleged wrongdoer is not required to make such an admission. In addition to consequences for a company’s public image, these types of admissions in the criminal context can have serious implications for any related civil cases. Indeed, Toyota further agreed not to make any statements—in litigation or otherwise—contradicting the statement of facts. Second, the agreement requires Toyota to hire and pay for an independent monitor, selected by the Justice Department, for a three-year period. The monitor has the mandate to review and assess Toyota’s policies, practices and procedures relating to the accuracy of its safety-related public statements and certain safety-related internal procedures. The monitor must be given access to any and all Toyota records (except those covered by the attorney-client privilege), and the ability to interview any Toyota officer, employee, agent, or consultant. Toyota must adopt any and all recommendations submitted by the monitor unless the Justice Department determines otherwise.
The Justice Department’s use of a general criminal statute such as the wire fraud statute to prosecute Toyota for intentionally misleading its consumers represents a dramatic and aggressive use of generic criminal statutes to supplant existing regulations. The text of the law contains no limits on the contexts to which it can be applied, and thus there is reason to believe that the Justice Department will seek to apply this approach in other areas.5 As the result of the Toyota investigation demonstrates, the Justice Department will use this power to attempt to extract far more extensive financial penalties than regulatory statutes would otherwise allow, and impose considerable compliance requirements through the use of independent monitors. The broad language of the wire fraud statute affords the Justice Department great discretion in deciding whether to turn a regulatory investigation into a criminal one.
As Attorney General Eric Holder stated during the announcement of the Toyota agreement, the Justice Department expects that this approach “will serve as a model for how to approach future cases involving similarly situated companies.”6 Companies that manufacture and sell consumer products beyond the automotive industry should heed this announcement, as there is every reason to believe that the Justice Department will apply this model more broadly.