AIDA FRANCE - CLIMATE
CHANGE WORKING PARTY
The Volkswagen Dieselgate (VWDG)
A First Survey on the Main Facts and Legal
Issues
by
Professor Marco Frigessi di Rattalma
with the assistance of
Professors Sara Landini, Paolo Rainelli and Francesca
Romanin-J
Jacur
The United States Environmental Protection Agency
(EPA) issued a notice of violation of the Clean Air
Act to German automaker Volkswagen Group on 18
September 2015
On 18 September 2015, the United States Environmental Protection
Agency (EPA) enacted a notice of violation of the Clean Air Act to
German automaker Volkswagen Group, as it was found that VW had
intentionally programmed turbocharged direct injection (TDI) diesel
engines to activate certain emissions controls exclusively during
laboratory emissions testing.
The programming caused the vehicles' nitrogen oxide (NOx) output
to accommodate with U.S. standards during regulatory testing, but
produce up to 40 times higher NOx output in real-world driving.
An estimated eleven million cars worldwide, and 500,000 in the
United States, produced between model years 2009 and 2015,
included such programming.
Environmental Protection Agency (EPA)
EPA issued a notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG, and
Volkswagen Group of America, Inc. (collectively referred to as Volkswagen).
The NOV alleges that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015
include software that circumvents EPA emissions standards for certain air pollutants. California is
separately issuing an In-Use Compliance letter to Volkswagen, and EPA and the California Air
Resources Board (CARB) have both initiated investigations based on Volkswagens alleged actions.
Using a defeat device in cars to evade clean air standards is illegal and a threat to public health,
said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance
Assurance. Working closely with the California Air Resources Board, EPA is committed to making
sure that all automakers play by the same rules.. Working with US EPA we are taking this
important step to protect public health thanks to the dogged investigations by our laboratory
scientists and staff, said Air Resources Board Executive Officer Richard Corey. Our goal now is to
ensure that the affected cars are brought into compliance, to dig more deeply into the extent and
implications of Volkswagens efforts to cheat on clean air rules, and to take appropriate further
action.
As described in the NOV, a sophisticated software algorithm on certain Volkswagen vehicles
detects when the car is undergoing official emissions testing, and turns full emissions controls on
only during the test. The effectiveness of these vehicles pollution emissions control devices is
greatly reduced during all normal driving situations. This results in cars that meet emissions
standards in the laboratory or testing station, but during normal operation, emit nitrogen oxides, or
NOx, at up to 40 times the standard. The software produced by Volkswagen is a defeat device,
as defined by the Clean Air Act.
Environmental Protection
Agency (EPA)
The Clean Air Act requires vehicle manufacturers to certify to EPA that their products will meet
applicable federal emission standards to control air pollution, and every vehicle sold in the U.S. must
be covered by an EPA-issued certificate of conformity. Motor vehicles equipped with defeat devices,
which reduce the effectiveness of the emission control system during normal driving conditions,
cannot be certified. By making and selling vehicles with defeat devices that allowed for
higher levels of air emissions than were certified to EPA, Volkswagen violated two
important provisions of the Clean Air Act.
EPA and CARB uncovered the defeat device software after independent analysis by researchers at
West Virginia University, working with the International Council on Clean Transportation, a nongovernmental organization, raised questions about emissions levels, and the agencies began further
investigations into the issue. In September, after EPA and CARB demanded an explanation for the
identified emission problems, Volkswagen admitted that the cars contained defeat devices.
NOx pollution contributes to nitrogen dioxide, ground-level ozone, and fine particulate matter.
Exposure to these pollutants has been linked with a range of serious health effects, including
increased asthma attacks and other respiratory illnesses that can be serious enough to send people
to the hospital. Exposure to ozone and particulate matter have also been associated with premature
death due to respiratory-related or cardiovascular-related effects. Children, the elderly, and people
with pre-existing respiratory disease are particularly at risk for health effects of these pollutants.
VW may be liable for civil penalties and injunctive relief for the violations alleged in the
NOV.
The allegations cover roughly 482,000 diesel passenger cars sold in the United States since
2008.
US Laws and Regulations related to Volkswagen
Violations
Defeat Devices
Section 203 (a)(3)(b) of the Clean Air Act (CAA), 42 U.S.C. Sec. 7522(a)(3)(b), prohibits the
manufacture, selling, or installation of any device that intentionally circumvents EPA
emission standards by bypassing, defeating, or rendering inoperative a required element of
the vehicles emissions control system.
Section 203 (a)(1) of the same Act also prohibits the sale of motor vehicles or engines that
are not covered by valid certificates of conformity.
40 CFR Part 86, Subpart A contains the regulatory language pertaining to defeat devices.
Section 86.1803-01 defines Auxiliary Emission Control Devices (AECDs) and defeat devices
Section 86.1809-12 sets forth the prohibition of defeat devices
Recall
EPA has the authority under Section 207(c)(1) of the CAA to require a manufacturer to issue
a recall when EPA determines that a substantial number of vehicles do not conform to EPA
regulations. Section 203(a)(4)(B) of the CAA makes clear that it is a prohibited act for
manufacturers to fail or refuse to comply with an ordered recall by EPA.
40 CFR Part 85 Subpart S contains the regulations (40 CFR 85.1801-85.1808) regarding recall
requirements for light duty-vehicles.
Volkswagen's response
According to the EPA, Volkswagen had insisted for a year
before the outbreak of the scandal that discrepancies
were mere technical glitches.
Volkswagen only fully acknowledged that they had
manipulated the vehicle emission tests after being
confronted with evidence regarding the "defeat device".
Formal acknowledgement of the deception was
made by Volkswagen executives in Germany and the
United States to EPA and California officials during a 3
September conference call, during which Volkswagen
executives discussed written materials provided to the
participants demonstrating how Volkswagen's diesel
engine software circumvented U.S. emissions tests.
That admission came after the EPA threatened to
withhold approval for the company's 2016 Volkswagen
and Audi diesel models.
CEO Martin Winterkorns declaration
Volkswagen's CEO Martin Winterkorn said: "I personally am deeply
sorry that we have broken the trust of our customers and the
public." Winterkorn was in charge at Volkswagen from the start of 2008
to September 2015. He attributed the admitted wrongdoing to "the
terrible mistakes of a few people". Winterkorn initially resisted calls
to step down from his leadership role at VW, but then resigned as CEO
on 23 September 2015.
Volkswagen Group of America CEO Michael Horn was more direct,
saying, "We've totally screwed up. Horn added, "Our company
was dishonest with the EPA, and the California Air
Resources Board and with all of you.
Olaf Lies, a Volkswagen board member and economy minister of
Lower Saxony, later told the BBC that the people "who allowed
this to happen, or who made the decision to install this
software" acted criminally, and must be held personally
accountable. He also said the board only found out about the
problems "shortly before the media did", and expressed concerns
over "why the board wasn't informed earlier about the
problems when they were known about over a year ago in
the United States".
Vehicle recall and consequences
On 29 September 2015, Volkswagen announced plans to refit up to 11
million vehicles affected by the emissions violations scandal. The recall will
affect models fitted with Volkswagen's EA 189 diesel engines, including 5
million at VW brand, 2.1 million at Audi, 1.2 million at koda and 1.8
million light commercial vehicles. SEAT said that 700,000 of its diesel
models were affected. In Europe, a total of 8 million vehicles are affected.
In Germany, 2.8 million vehicles will have to be recalled, followed by the
UK, with 1.2 million. In France, 984,064 vehicles were affected, in Austria
around 360,000, while in the Czech Republic 148,000 vehicles were
involved (of which 101,000 were kodas). In Portugal, VW said it had sold
94,400 vehicles with the software. The repair may not require a formal
recall; in the UK, for example, the company will simply offer to repair the
cars free of charge; a recall is only required, "when a defect is
identified that... could result in serious injury". As the rules violation
involved enabling emission controls during testing, but turning it off under
normal conditions to improve performance or fuel mileage, the software
update will make cars perform less efficiently and impair fuel economy.
Government actions
Australia: The Australian Competition and Consumer Commission is
investigating VW for possible violations of consumer and safety standards.
Canada: Environment Canada has announced that it has initiated
proceedings to evaluate if "defeat devices" were installed in Volkswagen
vehicles to bypass emission control tests in Canada.
France: French authorities have opened an inquiry into Volkswagen over the
rigging of emission tests, with prosecutors investigating suspicions of
"aggravated deception".
Germany: German prosecutors have launched an investigation against
former Volkswagen chief executive Martin Winterkorn. Winterkorn had
resigned over the scandal, saying he had no knowledge of the manipulation
of emissions results. A German prosecutor later clarified the status of these
inquiries, saying it was looking into allegations of fraud from unidentified
individuals, but that Winterkorn was not under formal investigation. Police
raided VW headquarters on 8 October 2015. On 16 October 2015 there were
20 investigators working on the case, targeting "more than two, but a lot
fewer than 10" VW staff. The KBA is testing 50 cars from different
manufacturers in November 2015, both in laboratory and on-road with PEMS.
Government actions
Italy: Italy's AGCM, the competition regulator, announced plans to investigate whether VW
engaged in "improper commercial practices" when promoting its affected diesel vehicles. On
15 October 2015, Italian police raided VW offices in Verona, and the company's Lamborghini offices
in Bologna, placing six executives under investigation.
Switzerland: Switzerland has banned sales of Volkswagen diesel cars, marking the most severe
step taken so far by a government in reaction to the emissions crisis.
United Kingdom: The Department for Transport announced on 24 September that it would begin
re-testing cars from a variety of manufacturers to ensure the use of "defeat devices" is not
industry wide.
United States: The EPA announced that should the allegations be proven, Volkswagen Group
could face fines of up to US$37,500 per vehicle (approximately US$18 billion in total). VW
suspended sales of TDI-equipped cars in the US on 20 September [Link] addition to possible civil
fines, media reports state that the United States Department of Justice Environment and Natural
Resources Division is conducting a criminal probe of Volkswagen AG's conduct. The United States
House Energy Subcommittee on Oversight and Investigations has announced that it would hold a
hearing into the Volkswagen scandal. New York Attorney General Eric Schneiderman said that his
investigation was already underway and warned: "No company should be allowed to evade our
environmental laws or promise consumers a fake bill of goods". Over 25 other states' attorneys
general, as well as the FBI in Detroit, are reported to be involved in similar investigations.
Following the scandal, the EPA decided to broaden its investigations, focusing on 28 dieselpowered models made by BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz. The
agency will initially focus on one used vehicle of each model, and will widen the probe should it
encounter suspicious data.
INVESTORS ACTION
Derivative lawsuit by the company against its board of directors/top-management
will be resolved by the competent corporate bodies according to German corporate
law rules and will be arguably brought before German courts.
Volkswagen AG shares (ordinary and preference) are listed on Frankfurt stock
exchange and suffered a significant loss as a consequence of the emission scandal
(roughly 30% of its market value). Also bonds and other securities issued by VW
suffered a huge negative impact.
VW investors (either individually or as category/class/group) will inevitably consider
the possibility of shareholders claims against VW and/or against its management.
Venue of claims may be multiple jurisdictions, including Germany, U.S.A., U.K.,
country of residence of investors and /or country where the OTC trading took place.
To determine jurisdiction investor should prove that VW issued inaccurate
prospectus or similar document subject to a certain foreign law and jurisdiction
(e.g., U.S. or U.K.) or that they relied on other financial statements over past years
while senior management was aware of such inaccuracies.
The grounds for such claims are dozens (also depending on the applicable law), but
they can be roughly classified in three categories:
Missing and misleading information to the market (including prospectus liability and
MNPI);
Mismanagement by the board of directors/top-management (also supervisory
board may be exposed);
Failure in the internal control/monitoring systems (possible spillover effect on
auditors and rating agencies).
Claims- Class actions
By 7 October 2015 the L.A. Times reported that the number of
class-action lawsuits filed had grown to more than 230, filed in
the U.S. and Canada on behalf of Volkswagen and Audi owners,
claiming fraud and breach of contract, positing the
"diminished value" of diesels that will be fixed to conform
with pollution regulations, due to expected reductions in
horsepower and fuel efficiency.
On 19 November 2015, ABC News Australia reported that
more than 90,000 VW, Audi and Skoda diesel vehicle
owners had filed a class action lawsuit against VW in the
country's Federal Court.
Claims in Italy
CLASS ACTION by ALTRONOSUMO a CONSUMER ASSOCIATION
WE ASK THAT VOLKSWAGEN REFUNDS MOTORISTS. JOIN us.
PARTICIPATE
The deception of Volkswagen
In the United States, as measured by the Environmental Protection Agency (EPA), Volkswagen has
illegally used in his car a software specially installed in the engine control unit to obtain, in the
homologation tests, emission data in line with the parameters required for vehicles Diesel: the result
is that in normal road driving instead actual emissions can exceed up to 40 times those stated. Now
Volkswagen has admitted that this trick has been used for the models sold in Europe and in Italy.
VW should compensate motorists
We had therefore sent a warning to Volkswagen Italy, asking not only to cease the sale of
cars containing this software, but also to put in order, with a new permit models
circulating and suitably compensate all those who have purchased one of the models
involved, convinced of buying a car which is less polluting than that they are actually in
their hands. Given the negative response, we launched a class action.
How much damage is shifted to the
insurance?
After the scandal, the VW group is looking for those responsible for
the manipulation. An important role is played by the D&O insurance,
the insurance policy which is designed to cover managers, to
protect them in case of transgressions and negligence against claims
for recourse by their employers (Regressforderungen). But
experts expect that the insurers reimburse VW only a fraction of the
billions in damage.
Much of the focus of investigation has been on individuals and their
role in the emission scandal. Any time an individual, rather than an
entity is the focus, there is a chance the D&O policy will be
impacted.
6.5 billion euros damages, perhaps 18 billion US dollars of
fines: The scandal is costly for VW. Top managers can not pay
such sums. However, the insurance does not cover
everything.
How much damage is shifted to
the insurance?
Errors and omissions in the executive board can pull in
large enterprises immense damage. Executives and board
members are liable for what is happening in their area of
responsibility. Large corporations, as well as many
medium-sized companies, insure their top-managers
therefore with a directors and officers' liability insurance
(D&O). Otherwise the manager would have to pay
compensation to their employer from their private assets.
VW estimates the damage from the exhaust scandal so far
to 6.5 billion euros. In addition, the carmaker in the US
threatens a fine of up to 18 billion US dollars.
Such sums could not afford even top managers. Even
insurers share the load: when coverage of managers of
large corporations are concerned several insurers are on
board, at VW, among other things, the Allianz and
according to "Brsen-Zeitung" the Swiss insurer Zurich.
How much damage is shifted to
the insurance?
The D&O insurance covers pecuniary damage which may cause board
members or supervisory board members by errors in the
management of the company. These may be costs incurred by the
Company directly - as compensation payments to injured customers.
Or an image damage, which impacts only in the future on sales and
profits.
Are EPA-penalties covered? Are they insurable?
Even fines, as they threaten VW in the US (EPA fines) are insured
under certain policies in some jurisdictions. Universally, all policies
specifically exclude coverage for criminal fines, criminal penalties and
criminal assessments. The coverage for civil fines and penalties is
often found within the policys definition of loss or damages and the
grant will only operate where allowable or insurable by law, is left
to the each of the individual states to determine, often based upon an
analysis of whether insuring them would violate public policy.
In existing policies on the market, fines are often excluded. The
relocation of fines from managers to their insurance is also
controversial from a law of torts perspective because the punishment
then miss its effect. Obviously for knowingly caused violations there is
no insurance.
How much damage is
shifted to the insurance?
--
Perhaps notification by VW to insurers of potential exposure to shareholders claims.
--
Possible impact on product liability policies ?
The technology being developed is now so sophisticated that identifying responsibility for software
malfunctions is a major forensic challenge. Defining were responsibility lies is critical and the insurance
industry must make this top of their agenda.
However product liability requests that a defective product causes property damage or severe personal injury
or death, and the consumer becomes a victim and may take action in the form of a product liability lawsuit.
--Possible
impact on product recall insurance policies ?
Automotive parts recall policy, a tailored product designed for suppliers in the automotive industry. The policy
delivers a choice of coverage to respond to the increased exposures and liabilities related to automotive
recalls.
Recently, the number of automotive recalls has increased significantly around the world. In the US alone, the
National Highway Traffic Safety Administration reported that in 2014, automotive product recalls reached a
record high of close to 64 million vehicles, more than doubling the previous record set in 2004.
The rise of global automotive recalls has put vehicle manufacturers under pressure and they are increasingly
looking to push the liability down the supply chain.
The additional exposure to automotive recalls is creating a demand for a stand-alone product recall policy
that addresses the associated financial risk and contractual requirements on suppliers.
The new stand-alone products offer a choice of specific triggers including product safety issues, product
guarantee issues and government ordered recalls.
However most recall insurance requires some degree of accident, rather than somebody knowingly taking
certain action.
