Volkswagen Agrees to $15 Billion Diesel-Cheating Settlement

  • Buyback plan leaves criminal probes, other suits unresolved
  • Deal includes investments in pollution reduction, clean energy

VW, U.S. Agree to $14.7 Billion Emissions Settlement

Volkswagen AG’s $15.3 billion agreement to get a half million emissions-cheating diesel vehicles off U.S. roads sets an auto-industry record that will only go higher as criminal probes and lawsuits on three continents roll ahead.

The German carmaker agreed to devote as much as $10 billion to buy back affected models and compensate drivers. It will also pay $2.7 billion to federal and California regulators to fund pollution-reduction projects, and give $2 billion to be invested in clean technology. Volkswagen also announced a $603 million settlement to resolve consumer and environmental claims with 44 U.S. states.

The settlements mark a swift but partial resolution for VW in the U.S., after the carmaker admitted last September to systematically rigging environmental tests since 2009 to hide that its diesel vehicles were emitting far more pollutants than allowed under U.S. and California law. VW’s widely traded preferred shares closed more than 1.6 percent higher at 107.75 euros in Frankfurt after rising as much as 5 percent Tuesday.

VW still faces lawsuits by at least five states plus investors and dealerships in the U.S., as well as parallel lawsuits, including consumer complaints, in Germany, all of which could raise the scandal’s price tag for the automaker. Future expenses will also include perhaps hundreds of millions of dollars in fees for the lawyers who secured Tuesday’s deal for car owners. More penalties, along with further damage to VW’s reputation, may yet spring from criminal probes in the U.S., Germany and South Korea.

U.S. Deputy Attorney General Sally Quillian Yates said prosecutors are “aggressively pursuing the criminal investigation in this case, both against companies and individuals.”

For a look at how car owners are affected by the VW settlements, click here.

While the deals require the company to pay drivers for their troubles, they also require it to spend billions to make up for the environmental damage caused by its diesel engines, partly in the form of advancing clean-engine technologies. A major beneficiary is California, which called out VW for its emissions cheating and will receive $800 million for clean-energy development.

Buy-Back Cash

The centerpiece of the deals is the fund for car owners, which is capped at $10.03 billion. Under that agreement, which still requires a judge’s approval, owners will have the choice of having Volkswagen buy back their vehicles or install whatever pollution-control retrofit is eventually accepted by regulators.

In either case, owners will get $5,100 to $10,000 each in additional compensation. Some leaseholders will receive about half those amounts. VW’s actual cost will likely be less than the maximum because some owners won’t opt for buybacks, and any unspent portion of the fund will be returned to the company.

The Federal Trade Commission pushed to make buy-back terms that car owners would find hard to resist.

“The settlement we’ve negotiated is so generous, that it doesn’t make any financial sense not to participate, when you see how big the numbers are,” said James Kohm, director of the FTC’s enforcement division. “You’d have to not care about money.”

Further Penalties

The U.S. Justice Department, which brought a civil suit against VW on behalf of the Environmental Protection Agency, said that the carmaker could still be on the hook for further civil penalties.

The record settlement raises questions about whether VW will need to devote more than the 16.2 billion euros ($17.9 billion) it has set aside to cover the cost of repairs, fines and legal fees. On Tuesday, VW said the settlement was within the scope of the provisions it has already made and repeated that its assessment of financial risk might be revised.

“It will take a long time to determine the full cost of the scandal,” said Frank Biller, a Stuttgart-based analyst at LBBW Bank. “Now it looks as if we might be able to close this chapter, and if that were to be true, it would remove some uncertainty.”

Biller estimates the total price tag to exceed 26.5 billion euros, including potential litigation costs in other countries.

The consequences for VW could extend to auto sales as the settlement requires it to support technologies sold by rivals such as Tesla Motors Inc. and Toyota Motor Corp.

Part of the $4.7 billion earmarked for pollution-reduction projects and investments in zero-emissions technologies will go to incentives to replace heavy-duty diesel vehicles with newer, cleaner trucks. With its MAN and Scania brands, VW is Europe’s third-largest heavy-truck maker.

Recall Deadline

The settlement with the U.S. government requires VW to get 85 percent of the cars recalled by June 30, 2019. If it fails to do that, it will have to pay $85 million more into the environmental mitigation trust for each percentage point of the shortfall. It will also have to pay an additional $13.5 million into the trust for each percentage point it fall below the 85 percent target in California.

“The company is still trying to convince us that they have a fix,” said Mary Nichols, the California Air Resources Board chairwoman who helped negotiate the deal. “We don’t think it will drag on for a whole lot longer. Durability is a big issue.”

VW owners can continue to drive their vehicles for now, even if they wouldn’t pass state emissions testing. Individual states may require approved emissions fixes on these vehicles in the future. Owners who choose the buyback option will receive their cars’ trade-in value as of last September, just before VW’s admission, plus the compensation payments.

The agreement covers a half million 2.0-liter engines but leaves claims related to about 80,000 3.0-liter engines for further negotiations. VW must scrap cars that it buys back or fix them before reselling or exporting them.

“It’s going to be very hard for VW to comply with all this,” said Anthony Sabino, a law professor at St. John’s University in New York and an expert on complex litigation.

‘Huge Burdens’

The consent decree VW signed with the U.S. places huge burdens on the automaker, Sabino said. “The authorities have the right to come into VW facilities any time, any place, and inspect records, operations, procedures. The pall that will cast over VW’s operations will be tremendous.”

Volkswagen’s agreements with car owners and the U.S. must be approved by U.S. District Judge Charles Breyer, who is overseeing more than 800 lawsuits over the rigged vehicles that were consolidated in San Francisco. Breyer is scheduled on July 26 to consider approving the agreements.

The agreement “should send a very clear message that when you break the laws designed to protect public health in this country, there are serious consequences,” EPA Administrator Gina McCarthy said at the news conference.

The carmaker still faces lawsuits by investors in the U.S. and Germany for what they describe as massive losses in the days following the Sept. 18 disclosure that the company had installed a so-called defeat device on 11 million vehicles to beat emissions tests. Holders of American depositary receipts, whose claims aren’t covered by Tuesday’s agreement, contend that the drop cost them hundreds of millions of dollars.

The Wolfsburg, Germany-based company’s shares are down 34 percent since the disclosure, wiping out about 18 billion euros in value.

‘Step Forward’

“We take our commitment to make things right very seriously and believe these agreements are a significant step forward,” said Matthias Mueller, VW’s chief executive officer.

As part of the settlement with the states, New York will receive more than $115 million for air-quality improvement projects, as well as about $30 million for the state’s coffers, according to the New York attorney general Eric Schneiderman, who led the investigation by the states, plus the District of Columbia and Puerto Rico. New York will also continue a investigation into the scope of VW’s environmental liability.

Leaders of the multi-state probe also included Massachusetts, Connecticut, Oregon, Tennessee and Washington.

“These partial settlements announced today exact a stiff price from Volkswagen for its deception of consumers and the environmental damage it has caused in New York and across the country,” Schneiderman said in a written statement. Schneiderman said that VW’s liability with the states could increase substantially.

Lawsuits Continue

States including Arizona, Oklahoma, New Jersey and West Virginia, which sued VW alleging consumer protection or environmental violations, aren’t dropping their actions despite the attorneys’ general resolution.

Arizona is seeking fines up to $10,000 per violation under the state’s consumer fraud law, said Mia Garcia, a spokeswoman for attorney Mark Brnovich. The lawsuit is expected to go to trial in 2017, she said.

Texas signed onto the multistate attorneys general settlement but will continue its own lawsuit alleging violations of state environmental protection laws. The state has settled only Texas claims under its deceptive trade practices act, according to Texas Attorney General Ken Paxton. Counties in at least four states including Texas and Florida have also sued separately to enforce environmental or consumer protection laws.

The case is In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices and Products Liability Litigation, MDL 2672, U.S. District Court, Northern District of California (San Francisco).

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE