US Justice Department files law suit threatening Volkswagen with bankruptcy

An American Judge will require the wisdom of Solomon after the US Justice Department yesterday filed a law suit which could put global car maker Volkswagen into bankruptcy. There is no doubt about VW’s guilt – the company consciously broke environmental laws by fitting “defeat devices” in 600 000 cars sold into the US market. Some will argue any business which has so blatantly deceived its customers should lose its licence to operate. On the other hand, VW employs just under 600 000 people worldwide, only a tiny fraction of whom would have been aware of what was going on. So should they be punished for the crime of a few? That VW itself is at risk of imploding is now obvious. The company set aside less than one tenth of the potential US liability to meet potential claims. With a similar sized fine possible from European authorities where the same deceit happened on 800 000 VW, Audi and Porsche vehicles, the consequences are existential. There are some obvious lessons for the rest of us. Not least how a reputation which takes generations to establish can be wiped out in a heartbeat. – Alec Hogg  

By Alan Katz and Margaret Cronin Fisk

(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 tens of 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 and outlines penalties that could amount to as much as $80 billion — about four times as much as the maximum some legal experts had estimated. While the court is unlikely to come anywhere near that amount, according to a senior Justice Department official, the penalties sought against the company would still be in the billions of dollars, another senior Justice Department official said.

A Volkswagen logo is shown on the front of an old Volkswagen van in Encinitas, California in this September 29, 2015, file photo. The U.S. Justice Department on Monday filed a civil lawsuit against Volkswagen AG for allegedly violating the Clean Air Act by installing illegal devices to impair emission control systems in nearly 600,000 vehicles, January 4, 2016. REUTERS/Mike Blake/Files
A Volkswagen logo is shown on the front of an old Volkswagen van in Encinitas, California in this September 29, 2015, file photo. The U.S. Justice Department on Monday filed a civil lawsuit against Volkswagen AG for allegedly violating the Clean Air Act by installing illegal devices to impair emission control systems in nearly 600,000 vehicles, January 4, 2016. REUTERS/Mike Blake/Files

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.

Criminal Charges

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.

Read also: Dummies guide to VW pollution cheating device

“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 percent in Frankfurt, the most in two months, before the suit was revealed on Monday. The shares have dropped more than 22 percent 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 percent to $30.10 after falling as much as 4.2 percent, 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.

Read also: VW woes continue as spotlight turns to petrol powered vehicles

“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.

The complaint includes four alleged violations for each vehicle: selling cars without EPA emissions certifications, selling cars with the so-called defeat devices, tampering with the engines and failing to report the existence of the defeat devices.

Under the Clean Air Act, each of those violations could result in a penalty of up to $32,500 or $37,500 depending on when the violation occurred. That means that each of the approximately 580,000 cars sold by Volkswagen in the U.S. that had defeat devices could, in theory, be hit with four separate penalties, according to the Justice Department official.

Read also: Lawyers predict fee bonanza from owners demanding VW buys back their cars

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).

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