Volkswagen’s emission tests – the most expensive act of stupidity in the history of the car industry?

If you have somehow managed to miss this story recently then there is no need to worry; Volkswagen (‘VW’) are on the brink of entering one of the longest, most vast legal battles in corporate history. You will be hearing plenty more about this over the next few years.

What is VW being accused of?

According to the Environmental Protection Agency (‘EPA’), some VW-manufactured diesel cars being sold in America have been fitted with a device that is able to detect when the vehicle to which the device is fitted is being tested. The device is then able to automatically change the performance of the vehicle to improve results of emission tests. As a result, some models of vehicle have been emitting toxic gases at up to 40 times the permitted level.

The EPA’s findings relate to approximately 482,000 vehicles in America but VW have since confirmed that approximately 11 million cars worldwide have been fitted with this device. The president and chief executive of VW America has admitted that VW has ‘totally screwed up’ whilst former group chief executive Martin Winterkorn (who resigned on 23 September in the wake of the scandal) said that his company had ‘broken the trust of our customers and the public’.

It is worth noting that the VW group includes other popular manufacturers such as Audi (2.1 million vehicles affected), Seat (700,000) and Skoda (1.2 million), and that the group also manufactures vans (1.8 million).

What has been the impact on VW so far?

VW have put aside £4.7 billion to cover costs but that is expected to be just the start.

Almost 500,000 cars in America have been recalled so far but with 11 million VW diesel vehicles worldwide potentially affected it seems likely that there will be further recalls across the globe. In America, the EPA has the power to fine VW up to the equivalent of approximately £25,000 for each vehicle that breaches standards meaning a potential fine in America alone of around £12.5 billion.

Former chief executive Martin Winterkorn has already resigned and head of sales and marketing Christian Klingler is leaving although VW say that the latter’s departure was pre-planned and is not related to the emissions scandal. It seems improbable that the former chief executive was the only person at VW who knew about the effect of the device and it therefore appears logical that further departures will follow as investigations continue.

VW’s shares have dropped by around 35% since 21 September and other car manufacturers not related to VW have also seen their stock prices fall despite confirming that they have not used similar devices and have complied with all applicable laws.

What are the potential legal implications for VW?

The potential legal implications for VW are huge, both in terms of criminal liability and civil liability in America, the UK and across the world, particularly given the admissions that VW have already made.

In terms of criminal liability in America it does not seem that news of the scandal could have broken at a worse time for potentially guilty individuals at VW. As well as America taking white collar crime very seriously in any event, on 09 September 2015 the US Department of Justice issued a new policy memorandum putting a stronger emphasis on the prosecution of individuals in corporate fraud cases. The Department of Justice and the New York Regulators have already opened criminal investigations and others are expected to follow across the country.

Unlike in the UK, in America any criminal act by an employee criminalises the company. It may transpire, however, that the devices have a legitimate purpose and this would seemingly provide VW with a valid defence. Criminal prosecutors will need to show an intention to falsify emission test results.

In terms of civil liability, it is anticipated that various claims will be brought by individuals and groups around the world on the basis that VW have breached their contracts with consumers by misrepresenting the emission levels of vehicles. Several class actions have already been filed in several US states and in Canada.

Other potential civil claims could come from VW dealerships (also claiming breach of contract), VW shareholders (in relation to the loss in value of their shares), asthma sufferers (as a result of increased emissions and environmental groups (looking to hold VW to account).

Finally

Whether or not VW decide to defend these claims or settle them, the financial impact is certain to be enormous (and likely to far outweigh any benefit VW had derived from installing the devices in the first place) without even taking into account the loss of goodwill that has already been suffered.

We would be interested to hear your views on this story – has this put you off purchasing a vehicle manufactured by the VW group in the future? Please feel free to leave your comments in the comments section below.