Piling on to Volkswagen’s legal woes regarding its admitted cheating on emissions tests, the Federal Trade Commission (FTC) has taken the once-venerable German automaker to court, charging it with duping consumers in an eco-friendly, “clean diesel” advertising campaign for its diesel models. Since the scandal broke last year, more than two dozen class actions have been filed against Volkswagen (VW), and the Department of Justice (DOJ) has brought suit on behalf of the Environmental Protection Agency (EPA), seeking billions of dollars in fines for knowingly violating federal clean air and auto emission rules. Now the FTC is getting into the fun as well, with a vow to collect billions more to make deceived VW purchasers “whole.”
The FTC complaint filed in federal district court in San Francisco lays out, in comprehensive detail, the fraudulent environmental advertising themes employed by VW to sell more than 550,000 vehicles it now admits were equipped with so-called “defeat devices” designed to trick emissions tests into thinking the vehicles (dubbed “Defeat Device Vehicles,” or “DDVs”) were compliant with EPA standards. In fact, with the device turned off, permissible levels of the pollutant NOx were exceeded by as much as 4000 percent. Spending tens of millions of dollars on widely disseminated advertising, VW marketed the vehicles as “Clean Diesel,” targeting “progressive” and “environmentally-conscious” consumers who it knew from its own research would “rationalize themselves out of their aspirations and justify buying lesser cars under the guise of being responsible.”
VW represented that the DDVs had low emissions, reduced NOx by 90 percent, and had lower emissions than comparable diesel and gasoline vehicles. One ad ended with the tagline: “Diesel. It’s no longer a dirty word.” Another claimed that the car’s engine is “designed to reduce emissions,” which is why it is “clean as a whistle.” An ad for one model said it was the “world’s cleanest diesel SUV.” VW also claimed its “Clean Diesel” vehicles complied with all federal and state emissions standards and were likely to retain a high resale value, higher typically than comparable gasoline vehicles.
Given the mountain of evidence against it, including its own admission of cheating, one could be reasonably excused for wondering what possible defenses VW could have against the FTC charges, and why it just didn’t settle if there are none. The likeliest answer to the latter is that the FTC probably demanded billions in pre-litigation settlement negotiations, which VW could not agree to pay in its worsened post-scandal financial state, especially with other multi-billion-dollar claims hanging over its head.
The FTC starting point in monetary negotiations is gross revenues. That number here – based on the sale of 550,000 DDVs at an average price of $30,000 – is more than $15 billion. The FTC would then lower the number based on a financial showing of an “ability to pay” only a lower amount. In its present legal and financial predicament, facing untold billions in liability on multiple fronts, it is hard to imagine how VW could determine what it can presently “afford” to pay the FTC. In any event, it is reasonable to assume the two could not agree on what that amount is, at least for now.
To obtain a monetary award in court, all the FTC has to prove is that a claim is materially false or misleading to the reasonable consumer – neither intent to deceive nor proof of actual consumer reliance is necessary. Under this standard, given the centrality of the “Clean Diesel” message in its advertising and its salience with those environmentally conscious consumers to whom it was aimed, VW would seem to have no chance to defeat liability (barring a miracle or superhuman lawyering).
The battle, therefore, most likely will be fought on the monetary terrain. There, as well, the law is not friendly to VW. After obtaining a federal court verdict of false advertising, the FTC normally seeks and is granted restitution, usually equal to the “ill-gotten gains” (gross revenues, not just profits) received by the advertiser from the illicit campaign. That amount in this case, according to the FTC complaint, would be more than $15 billion, representing the total sum paid by consumers for DDVs, who would have the option of turning their car in for a refund or getting VW to pay for an emissions fix – if that is technically doable.
VW could argue such an award would be a windfall since DDV owners still had the benefit of the use of their cars. Where tried, that argument has usually fallen on deaf ears, since the basis for restitution is not that the product is worthless, but that the consumer is entitled to his money back because he was fooled into making a purchase he otherwise would not have made. As the Ninth Circuit (which includes California) has said in awarding restitution to the FTC, the “fraud in the selling, not the value of the thing sold, is what entitles consumers … to full refunds … [there is] no windfall for … customers.”
As a defendant under siege, VW is cooperating with its adversaries, no doubt hoping to buy time until it can attempt to achieve some sort of “global” resolution that will enable it to avoid financial armageddon. Meanwhile, the FTC lawsuit will proceed. A court in an FTC action sits “in equity,” with broad discretion to fashion remedies appropriate to the circumstances of the case. Barring a settlement with the FTC and its other nemeses, VW’s only chance, with the legal deck so stacked against it, may be to throw itself on the mercy of the court, begging it to be “kind and gentle” in the exercise of its equitable powers.