Last Monday, Volkswagen agreed to pay up to $14.7 billion to settle class-action claims arising from its emissions-cheating scandal. This large penalty approaches the $18.7 settlement that BP reached last year to resolve all federal, state and local claims against it. At the time, it was the largest civil settlement with any single entity in the U.S. Volkswagen’s settlement marks the largest settlement in national history for a consumer class action; $14.7 billion constitutes nearly a fifth of the company’s value. To put the number into perspective, it is more than ten times the amount Toyota paid up in 2012 over flawed accelerators, and far exceeds the $2 billion that General Motors recently agreed to pay in fines and settlements for defective ignition switches. The previous record penalty for violating emissions limits was $100 million, which was imposed on Hyundai-Kia in 2014.
The Steep Penalty
The size of the penalty, standing alone, demonstrates the Justice Department’s disdain for the automaker’s deceptive practices. Deputy Attorney General Salley Yates drove home this sentiment in her announcement speech of the settlement when she stated that “Volkswagen turned nearly half a million American drivers into unwitting accomplices in an unprecedented assault on our environment.” See DOJ announcement June 28 2016.
A majority of the total settlement figure – $10.03 billion – will be paid out to owners of affected vehicles with two-liter diesel engines. Another $2.7 billion will be used to fund Clean Air Act initiatives across the country that will reduce nitrogen oxide emissions where Volkswagen’s vehicles were, are or will be operated. According to the Department of Justice, this “marks the largest monetary mitigation obligation in the history of the Clean Air Act.” In addition, $2 billion will be invested in promoting zero-emission vehicle technology. Lastly, Volkswagen will pay $603 million to 44 states, the District of Columbia, and Puerto Rico to resolve consumer protection claims.
Court records show that Volkswagen executives far underestimated the penalty they would pay. They thought they could deal with the consequences of their deceptive practices quietly, and believed that if they were to get caught, they would not pay much more than what Hyundai-Kia paid in 2014 – $100 million – for violating emission standards. Moreover, being long-accustomed to deferential treatment by government leaders in Germany, where they are one of the largest employers, they seriously underestimated the wrath of American regulators. As a result, they did not think much of it when American regulators started asking questions about the diesel issue, devoting little time to discussing the possible ramifications of the investigation, and continuing to install the secret software designed to cheat emissions tests in many of their vehicles. They were in for a surprise when infuriated American regulators set out to punish Volkswagen for intentionally and knowingly destroying the environment and defrauding consumers.
The settlement offers a great deal to the owners of affected Volkswagen vehicles. Pressured by the government, the automaker hopes to buy back most of the cars to get the polluting agents off the road. Drivers can sell their car back to the manufacturer or end their lease without penalty and receive a cash compensation between $2634 and $9852. Those who choose to keep their car will be asked to get an emissions repair to bring the affected vehicles into compliance with environmental regulations and still receive the same cash payment. Once the settlement is finalized, likely in the fall, Volkswagen hopes to finalize all buybacks within 90 days. Those who participate in the buyback program will be paid the September 18, 2015 market value price for their vehicles before regulators disclosed Volkswagen’s deception. Owners of affected vehicles who sold their car after this date are still entitled to the half of the diminished value reimbursement. The other half of the buyback amount will go to the new owner.
Dieselgate is far from over. Volkswagen may be on the hook for more penalties, specifically for installing the same cheating software in three-liter diesel cars. The settlement announced on June 28 concerns only two-liter diesel cars. The company and its executives may also be held for criminal liability when the ongoing FBI investigation is complete. The $14.7 billion fine and additional forthcoming penalties will certainly cripple Volkswagen’s ability to stay competitive. Perhaps this is a fair result for the deception they practiced for over a decade and for the damage they did to our environment.