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Ahead of the Curve Auto Supplier Blog

January 24, 2017

A Busy Week for the Automotive Industry . . . and for the U.S. Department of Justice

While much of the automotive industry was focused on the North American International Auto Show and related events a few weeks ago, government authorities with responsibility for overseeing the industry were busy wrapping up a number of extraordinary enforcement actions, with no signs of slowing down.
 
On Wednesday, January 11, Volkswagen (VW) agreed to pay a $2.8 billion criminal penalty and to plead guilty to three criminal felony counts – i) conspiracy to defraud the U.S. and VW’s U.S. customers and to violate the Clean Air Act, ii) obstruction of justice for destroying related documents, and iii) importation of affected vehicles based on false statements regarding compliance with limitations on emissions – in connection with the company’s use of a “defeat device” to cheat federal and state required emissions tests on nearly 600,000 diesel vehicles imported into the U.S. In addition, VW agreed to pay another $1.5 billion in civil penalties in resolution of certain environmental, customs and other civil claims, bringing the total amount that VW has agreed to pay in U.S. and Canadian civil and criminal settlements to over $22 billion. Not only that, but, in a rare move, the U.S. Department of Justice simultaneously criminally charged six VW executives for their alleged roles in the emissions scandal.
 
Then, just two days later, Japanese automotive supplier, Takata, was slapped with a $1 billion criminal penalty by the U.S. Department of Justice and agreed to plead guilty to wire fraud for its fraudulent conduct in connection with its sales of tens of millions of faulty airbags, including, among other things, submission of falsified safety test data and other fraudulent information designed to conceal inflator performance concerns to its customers. Of the $1 billion criminal penalty, Takata will pay $25 million in fines, $850 million in restitution to automakers for recall and replacement costs incurred in connection with what is now the largest recall in U.S. history and $125 million to a compensation fund for those injured by the faulty airbags. Three senior executives were also charged with wire fraud and conspiracy for their alleged role in providing the falsified data to automaker customers in order to induce continued airbag purchases.
 
And more civil and criminal penalties could be coming. Just one day after VW reached its settlement, the EPA issued a Notice of Violation to Fiat Chrysler, claiming that Fiat Chrysler failed to disclose to the EPA engine software installed on approximately 100,004 model year 2014, 2015 and 2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks with 3.0L diesel engines. The software allows the vehicles to emit excessive nitrogen oxide in violation of the Clean Air Act. While the EPA has not characterized the software as an illegal “defeat device,” like that used by VW, the EPA also has not yet ruled out that possibility. Fiat Chrysler also faces the possibility of criminal action, as the U.S. Department of Justice is also investigating.
 
In light of these and other major legal matters impacting the automotive industry over the past few years, including, among others, the GM ignition switch recall and the massive automotive parts antitrust investigation, it’s fair to say that the impact of governmental scrutiny of the industry has reached new heights, particularly given the apparent increased willingness to criminally charge individuals involved in automotive related matters. In fact, NHTSA investigations and enforcement action against OEMs and automotive suppliers may become even more frequent in light of the Motor Vehicle Safety Whistleblower Act, which was signed into law in December of 2015 and affords automotive whistleblowers substantial financial incentives and protections for reporting auto safety related violations. Of course, it remains to be seen whether the new Trump administration will continue to scrutinize the automotive industry like our current administration has over the past few years.
 
As such, it is critical for automotive suppliers to be sure that they have the necessary policies in place to proactively get ahead of compliance or safety-related concerns before they spiral out of control and land the supplier in hot water with their indirect and direct customers and the government. Specifically, suppliers should have a process for employees and contractors to report safety-related or other compliance concerns internally without fear of retaliation. They must also ensure that employees and contractors are not only knowledgeable about the existence of the mechanism, but are encouraged to use it to report safety concerns and potential violations. Then, once a potential concern is reported, suppliers must be certain that it is promptly and thoroughly investigated and, where necessary, elevated within the company.
 
To learn more about how to create and implement effective internal reporting and investigation processes or for assistance with an internal investigation, please contact a member of the Warner Norcross & Judd automotive industry group.

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