Market News

 January 21, 2016
VW Admits Cheating in the U.S., but Not in Europe

 Volkswagen is staking out an aggressive response to its emissions-testing crisis in Europe, where the vast majority of affected vehicles were sold, by essentially saying: We didn't cheat here.

The company's system to trick, or "defeat," pollution tests, which VW has admitted installing in millions of vehicles globally, "is not a forbidden defeat device" under European rules, a company spokesman said in a statement to The New York Times.

The company's determination, which was made by its board, runs counter to regulatory findings in Europe and the United States. German regulators said last month that VW did use an illegal defeat device.

VW executives have already admitted to using the illegal software to cheat on emissions testing in the United States, where regulations are tougher. About 500,000 affected diesel cars were sold in America. But Europe is home to more than 8.5 million affected vehicles, making the risk of litigation and regulatory sanctions potentially costly.

Volkswagen's position sheds light on its view of the scandal as a whole. While it promises to fix affected vehicles wherever they were sold, it is prepared to admit wrongdoing only in the United States.

Its position is unlikely to mollify customers like Stephen Larkin, who has purchased Volkswagens since he bought a used VW Derby in 1988. Several weeks ago, not long after the scandal broke, he sold his 2014 diesel Passat and contacted a law firm about joining a potential suit against the company.

"They play a lot on their environmental credentials, but I don't think they care about the environment," said Mr. Larkin, a 47-year-old civil engineer from northern England. "I'm very disillusioned."

Volkswagen's claim that it did not cheat in Europe is likely to renew questions about Europe's porous regulatory system, which allows manufacturers to control and manipulate emissions tests for their own benefit. European states and the European Union's central government in Brussels are in a contentious battle to overhaul the regulatory system.

The scandal began in September, when Volkswagen admitted installing software in 11 million diesel vehicles worldwide that could detect when the cars were being tested in a laboratory and reduce the emissions of nitrogen oxides, a deadly pollutant tied to a range of health problems. American regulators learned that actual emissions on the road were as much as 40 times higher than tests were showing. Volkswagen includes the brands Audi and Porsche, and SEAT and Skoda in Europe.

Volkswagen has admitted that it cheated in the United States, though last week the company's new chief executive, Matthias Müller, clouded matters by denying in a radio interview that the company had lied to American regulators, only to backpedal to some degree in a subsequent interview.

Still, in a letter released by the British Parliament last week, Paul Willis, the company's chief in Britain, said Volkswagen "accepts that a defeat device was used in the U.S.A. in certain models." But Mr. Willis also said, "We do not think that it is possible to make the same definitive legal determination in relation to the software that was fitted" to "differently configured vehicles in the U.K. and the E.U." He then acknowledged "the potential for this to be an issue that is examined in litigation."

The company was more definitive in a subsequent statement provided to The Times, in response to a question about the determination by German regulators that the software did constitute an illegal defeat device. "The Board of Management remains of the opinion," the company said, that the system "is not a forbidden defeat device."

The decision not to challenge the determination made by German regulators was "purely procedural" and had "nothing to do with giving up the legal assessment" of the issue. "Rather, in the interest of customers it is solely in order to cooperate and work constructively and hand-in-hand with the regulatory authorities to implement the action plan," the statement said. "We did not want a dispute putting a strain on this."

This is not to say that the software was used only in the United States. Mr. Willis said that the vehicles sold with the software in Europe "would not function" without it. And he said that the software "clearly contributed to meeting" European emissions standards.

But regulations that apply in Europe give automakers discretion to determine the engine settings used during emissions testing. And in the past some regulators have fretted that those settings may not be the ones used on the road.

Plaintiffs' lawyers brush aside the distinction being drawn by Volkswagen. "The issue of whether or not it is a defeat device amounts to very little in a legal sense," said Bozena Michalowska Howells, a partner at the London law firm Leigh Day.

"They're going to remove it and fix it, and for regulatory purposes, it's being deemed a defeat device," she said.

Jacqueline Young, a partner in the London office of Slater and Gordon, an Australian law firm, said, "That will be a major issue if national authorities are going to start talking about fining or giving penalties, but whether it's a defeat device has bearing, but not huge significance, on consumer claims."

VW owners don't care about what you call it, she said. "They care about the value of their asset."

While class-actions suits in the United States began to appear almost as soon as the scandal broke, group litigation in Europe is far less aggressive. The applicable laws tend to be less hospitable to such claims, though they vary country to country. A recent law in Britain made such suits easier by allowing members of a potential class to opt out instead of opt in to group litigation.

Potential legal claims are in various stages in countries like the Netherlands and Ireland. In Britain, lawyers said they were waiting to see what remedy Volkswagen would offer before deciding whether to proceed with a suit. "We need to see exactly what the fix entails.We need to see what the impact is in relation to resale values," Ms. Howells said.

A major shareholder suit is also expected to be filed within days in Germany. Nadine Herrmann, a partner at Quinn Emanuel Urquhart & Sullivan, said the suit would be based only on the use of defeat devices in the United States. The suit is being supported by Bentham Europe, a London company that funds such litigation.

The crux of the claim is that the use of defeat devices "had to be disclosed under German securities laws," Ms. Herrmann said in an email response to questions.

The European Commission has asked VW to reconsider its refusal to make good-will payments to owners in Europe, as the company is doing in America. Volkswagen has argued that because regulations are different in the United States, the fix will be more complicated and time consuming there.

"They've put their hands up in the U.S. and said mea culpa," said Alan Campbell, a 57-year-old electrical engineer from Bristol, who owns a diesel power Skoda Octavia that is among the vehicles that will be recalled. "From what I've seen in the press, it's going to be one rule for U.S. people and one rule for U.K. people, which I think is wrong," he said.