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The VW scandal: the legal perspective

Ever since the United States Environmental Protection Agency (EPA) claimed Volkswagen allegedly circumvented emissions testing, the bad news has kept on coming. Oliver Foerster of German law firm Huth Dietrich Hahn considers the fallout.

SGM

In Europe, Volkswagen must call back 8.5 million of its cars. In the US, penalties of up to $18 billion could be imposed. Criminal investigations have been initiated, lawsuits filed, managers suspended, internal investigations performed, and more is yet to come. But what does all of this mean from a legal perspective?

Criminal investigations

The district attorneys of Braunschweig and Ingolstadt in Germany initiated criminal investigations on the charge of suspected fraud, through selling cars with manipulated emissions values. However, under German law, only individuals can be held liable for committing crimes. The investigations are therefore directed against individual employees of Volkswagen, rather than the Volkswagen group as a whole. This scandal could trigger legislation to introduce criminal law for companies, which would be a landmark in the legal system of the Federal Republic of Germany.

The situation in France, Australia and the US is different. In these countries, prosecutors (e.g. federal agencies like the EPA and Department of Justice in the US) could direct their investigations against the Volkswagen group as a whole. These investigations will very likely result in massive penalties for the Volkswagen group, amounting to many billions of euros or US dollars. This compensation could be aggravated by the fact that Volkswagen allegedly acted willfully, over a period of several years, to evade legislation.

The charges allege that Volkswagen did not cooperate unconditionally with the authorities. The EBA issued its second notice of violation (NOV) of the Clean Air Act on 2 November. This alleged that the Volkswagen group not only installed a defeat device on certain diesel vehicles with two litre engines, but also on some with three litre engines. In possible mitigation, Volkswagen retained the former Federal Constitutional Court Judge Christine Hohmann-Dennhart to be on the Board of Directors. She would be responsible for Integrity and Law, and therefore in charge of implementing new and effective compliance within the organisation.

Civil proceedings

In Germany, lawsuits have already been brought in the District Court of Braunschweig by investors, as well as by customers.

The investors claim that they are entitled to damages because of being misled while investing in Volkswagen shares. Those investors bought Volkswagen shares before the scandal, when the price was at €250, but incurred a loss when the share price dropped to €119.75 afterwards.  

Some media reports claim that some Volkswagen senior managers may have been aware of the EPA investigations months before the allegations were made public. If these reports are accurate, the investor claims might have merit on the basis that Volkswagen violated its duties by not releasing an appropriate announcement.  

Customers assert that they have been defrauded, since they expected to buy a car that was environmentally friendly. In this scenario, however, the claimants must prove that the individual(s) actually implementing the software acted with the consent of the board of Volkswagen. Such evidence will be difficult to obtain for an individual, who will not have available the resources of a public prosecutor.

The chances of those customers whose cars are still under warranty are much better. According to German law, the customer has to prove that the emission values specified within the marketing materials and purchase contract have not been achieved; given the information already made public, this is not a difficult burden of proof to achieve. Those customers are entitled to either rescind the purchase contract or reduce the purchase price, as well as being entitled to damages.

From a financial point of view, Volkswagen should be more concerned about the lawsuits brought by Harris County, Texas. They are suing Volkswagen for $100 million for allegedly polluting Harris County’s air, in addition to action from the State of Texas for misleading trade practices. There are also class actions being prepared across the USA.

Indemnification

There is also the question of whether the Volkswagen group is entitled to indemnification. The individual(s) actually implementing the software are liable to Volkswagen (unless they acted on instructions of the Volkswagen group). They are, however, not likely to be in a position to provide significant indemnification given the multi-billion euro damages that Volkswagen is expected to incur. Instead, Volkswagen’s D&O (directors and officers) insurance might provide the necessary deep pockets. According to unsubstantiated industry rumours, Volkswagen has D&O coverage of up to €500 million.

Volkswagen may claim this insurance under German law if it can assert a breach of duty by the insured person (which included regular members of the board of directors, members of the supervisory board and certain senior managers). The breach triggering the insurance is likely to be inadequate compliance within the organisation.

If the investigations show, however, that insured persons were aware of the installation of the defeating software, these insurance proceeds will be out of reach for Volkswagen, since the D&O insurance does not usually cover deliberate breaches of duties. In addition, the Siemens’ scandal has shown that €500 million is insufficient to cover the legal costs involved, not to speak of the damages incurred.

In conclusion, the legal consequences are massive. Volkswagen faces liability on a number of legal grounds and principles. Indemnification, if any, will be insufficient. The diesel scandal will keep Volkswagen busy for years and will cost the company billions of euros, not to mention the expected decline in sales caused by the damage to VW’s brand. The €3.5 billion loss recorded in the last financial quarter is only the beginning.

Oliver Foerster is a partner at German law firm Huth Dietrich Hahn, a member firm of the Globalaw network. 

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Oliver
Foerster

13 November 2015

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