Here’s Why VW Has a Lot at Stake in Latest Diesel Lawsuit
Weeks ago, the Volkswagen diesel scandal, now five years in the rearview mirror, received an unexpected sequel that could expose it to further fines that the federal court itself labeled a "staggering liability." But the case itself goes beyond Volkswagen.
In 2016 the automaker reached historic settlement with the EPA and a number of other U.S. regulators — historic due to the amounts of fines involved — over the emissions-cheating software installed in a number of its TDI models sold for several years in the U.S. The automaker ended up allocating over $20 billion to buybacks of hundreds of thousands of cars that had been sold in the U.S., in addition to paying fines and taking on other remedial projects. Following the 2016 civil settlement the German automaker had also settled with the Department of Justice in the U.S. in regards to criminal misconduct, paying another $2.8 billion in the process. Volkswagen has also faced separate criminal and civil litigation and government probes in a number of other countries, including Canada and Germany, and the diesel investigation eventually included other Volkswagen Automotive Group brands including Porsche and Audi, the offices of which had been raided by German prosecutors. By 2017 the probes has largely quieted down, even as German prosecutors continued to interview individual executives.
While the record-setting buyback process, fines and other remedial projects settled civil matters in the U.S. that involved agencies like the EPA, the California Air Resources Board and the Department of Justice, a number of lawsuits by individual state counties continued. Specifically, Florida's Hillsborough County and Utah's Salt Lake County.
In June of this year the lawsuits culminated in a stunning and unanimous 3-0 decision by the United States Court of Appeals for the Ninth Circuit that held that the settlements reached by Volkswagen with federal agencies did not prevent suits by local governments aimed at post-sale modifications of the so-called defeat devices, in contrast to sales of new cars. The court cited the Clean Air Act in making a very narrow distinction: While the Clean Air Act preempts local counties' claims in regards to defeat devices in new vehicles, leaving that up to federal agencies, it does not preempt their claims in regards to post-sale updates to their emissions software.
"The Environmental Protection Commission of Hillsborough County (EPC), Florida, filed an action against Volkswagen in Florida district court," the court said in part. "EPC’s first amended complaint alleged that Volkswagen violated two of the county’s anti-tampering and defeat device regulations, which provide that '[n]o person shall tamper, cause, or allow the tampering of the emission control system of any motor vehicle,' and no person shall 'manufacture, install, sell or advertise for sale, devices to defeat or render inoperable any component of a motor vehicle’s emission control system.'"
In effect, the county adopted a rule (prior to Volkswagen's misconduct, of course) that permitted itself to regulate instances of post-sale tampering with emissions control devices.
"The complaint alleged that Volkswagen violated these provisions by installing defeat devices in new vehicles, and by tampering with the emission control systems of used vehicles registered in the county through a program of field fixes and recall campaigns," the court added. "The penalty for violating Hillsborough County's anti-tampering and defeat device regulation is up to $5,000 per violation, with each day of violation constituting a separate offense."
Ultimately, this case is about preemption, a principle by which federal law takes precedence over state law and preemption, as the court noted, and can be either express or implicit. In the former instance a federal statute can contain a preemption clause, which is typically easy to discern and apply, but in the latter a court's analysis can be a little more complex and require it to examine statutes for evidence of "field preemption" or "conflict preemption," as the court in this case explained.
In its examination of the Clean Air Act statute, the United States Court of Appeals for the Ninth Circuit found that in instances of new car purchases, the Clean Air Act preempts state laws, but once a vehicle is sold the express preemption clause does not apply.
Before we examine what this means for Volkswagen, it's prudent to mention why local enforcement makes sense on a practical level.
The Clean Air Act was intended as a nationwide piece of legislation that applied to new car sales on a model-wide basis, which made enforcement of regulations uniform across most if not all states, as the creation of the California Air Resources Board later brought with it more stringent statewide regulations. But when it comes to individual enforcement, it makes sense for local state and county regulations to punish tampering with emissions control systems on a local level. Of course, the Clean Air Act still applies to some aspects of post-sale maintenance by manufacturers, as the court noted, and itself also prohibits pre-sale and post-sale tampering with air pollution control devices while providing its own fines for those who do so.
"Indeed, a determination that the CAA did not preserve state enforcement of anti-tampering rules as applied to post-sale vehicles would be inconsistent with the congressional framework. For example, if the CAA's penalty provision preempted state and local governments from imposing any penalty for post-sale tampering, then the EPA would be the sole enforcement authority for every incident of tampering with air pollution control equipment, including illegal alterations by the local garage mechanic or do-it-yourself efforts to disable a catalytic converter," the court noted. "But nothing in the CAA suggests that Congress intended the EPA to take over such local law enforcement issues, to the exclusion of state and local governments, which would have the effect of preempting anti-tampering rules in nearly every state."
Volkswagen, on the other hand, argued that the Clean Air Act's express preemption provision meant that the federal statute trumps counties' anti-tampering regulations as they apply to new and used vehicles, and that it is the EPA that has the exclusive authority to regulate incidents of post-sale tampering.
The United States Court of Appeals for the Ninth Circuit disagreed, finding nothing in the language of the Clean Air Act that intended for it to preempt local regulations regarding tampering with used vehicles.
"But the mere fact that a federal statute permits the imposition of federal penalties, without more, does not raise the inference that Congress created an exclusive federal regime," the court stated. "Because the CAA is, and always has been, a cooperative-federalism partnership . . . there is no basis for Volkswagen's argument that Congress's authorization of federal penalties, along with guidance on how those penalties should be imposed, expressly or impliedly forecloses state and local governments from enforcing their own rules or imposing sanctions of their choosing."
How much could Volkswagen be fined by the Utah county?
$5,000 per violation per day, which multiplied by the number of vehicles involved and the number of days that had passed, could easily amount to $10 billion per year. That's that the amount that the automaker could be fined by just one Utah county.
The scale of the potential monetary fines was not lost on the court, and certainly not lost on Volkswagen.
"We are mindful that our conclusion may result in staggering liability for Volkswagen," the court noted near the end of its decision. "But this result is due to conduct that could not have been anticipated by Congress: Volkswagen's intentional tampering with post-sale vehicles to increase air pollution. We assume that this conduct will be as rare as it is unprecedented."
But one item that's perhaps missing from this discussion, and not lost on the court, is that Volkswagen had already committed $14.7 billion to a settlement with federal agencies years ago, $10.033 billion of which was set aside for compensating owners. What was also not lost on the court, we hope, is that the majority of U.S. counties in all 50 states, with a few exceptions in rural areas far from Volkswagen dealers, had registered TDI vehicles that contained emissions-cheating software. In fact, some 400,000 cars were part of the recall campaign, so it would be difficult to find U.S. counties where they did not reside. Needless to say, if Volkswagen's liability to one Utah county could approach $10 billion per year, what could it owe other counties with similar provisions of several thousand dollars per violation per day?
Several days ago Volkwagen appealed the decision, noting that thousands of counties could impose their own post-sale emissions control regimes and set fine amounts in addition to those imposed by the EPA, amounts which Volkswagen had already paid.
What's at stake for Volkswagen and other automakers, in addition to billions of dollars, is likely the predictability of the post-sale recall process itself.
While Clean Air Act violations by automakers are somewhat rare, as Volkwagen's diesel emissions cheating effort revealed, county-level regulations regarding post-sale tampering with emissions systems could encompass a much broader range of updates, whether hardware or over-the-air (OTA), when it comes to maintaining vehicles. While the facts of the diesel case may seem confined to Volkswagen, it is by no means the sole automaker to face probes by federal agencies into its emissions-control hardware and software.
But just how workable is such a standard in practice? The court did not address this issue, and appeared to spend no time imagining what such a regulatory framework would look like. And that's perhaps one of the problems with this decision: It's based on narrow readings of conflicting federal and local statutes, but makes no effort to reconcile or paint a plausible picture of how such fines could be implemented.
For starters, this decision creates a legal landscape in which thousands of U.S. counties with similar provisions could pull VW into local courts. Surely it was not the intention of the federal court here to create thousands of new cases against VW, for the same conduct for which it had already been fined by a number of federal agencies, but it does open the door to such litigation.
Secondly, this decision creates an environment in which there is no incentive for counties not to draft legislation that applies local fines or "sanctions of their choosing," as the court called it, against the nationwide misconduct of an automaker, of course not in a post facto manner in this particular case. Why fine violators $5,000 per violation per day when the monetary penalty could just as easily be $15,000 per violation per day? We can only imagine how profitable such a system of fines would be against pickup trucks "rolling coal," but we have not been deluged with examples of enforcement of such statutes, given the number of pickup trucks we see weekly doing so. Of course, there is a difference in ability to pay between a pickup truck owner and a multi-billion dollar foreign automaker.
Third, this decision opens the door for counties to levy fines against conduct by a company after it had already reached settlements with the federal government. How many times could an automaker be held liable for emissions tampering, and at what point does it become a never-ending exercise in applying the regulations of every single jurisdiction where their cars were registered to a company that had already been obligated to spend in excess of $14 billion paying fines and compensating owners? Was the intention of the court to open the door to companies being liable to the federal government and also to thousands of local counties for the same conduct? Realistically we suspect that there is too much of a profit motive even at the state level, as demonstrated by the number of U.S. states that had also filed suits against the automaker following the outbreak of the diesel crisis in 2015, to create EPA-like agencies at the county level.
Of course, this third point is not the issue the court faced, and in the end it even acknowledged that its own interpretation of the federal statute could produce an absurd result: Thousands of counties each individually suing Volkswagen over violations of their own emissions control regulations.
Finally, the decision has the potential to have a chilling effect on manufacturers righting wrongs and introducing emissions-control software in a post-sale context as a part of legitimate recalls. We suspect that it's not difficult for other automakers to imagine scenarios in which failed or incomplete updates to engines or emissions control systems as part of recall campaigns could later be used against them by local jurisdictions. We suspect there is a way to hold automakers accountable on a federal level and for local jurisdictions to enforce individual instances of tampering with emissions control systems without imposing their own fines on an automaker for a second time for conduct that it had already paid for.
Volkswagen, we suspect, is not the only automaker now sweating the ramifications of this case, and we are reminded of an old legal adage: "Hard cases make bad law." The scope of the automaker's wrongdoing has unexpectedly snared it years later in legal limbo, and it remains to be seen whether its appeal of this decision will succeed.
