The headlines generated by the Volkswagen emissions scandal continue to amaze the environmental community and the general public, both here and abroad. The events are shocking in part because they involve a household name in the auto industry, and a company that has been long-regulated by EPA’s mobile source emissions requirements. In the U.S. alone, 600,000 supposed “clean diesel” vehicles it turns out are equipped with hidden “defeat device” software that allowed the models to pass EPA emissions tests, but actually emit many times the allowable pollutant limits while in use. Hundreds of lawsuits have been filed by citizens, states, and governments all over the world, and billions of dollars in settlements have been agreed to thus far. The litigation will go on for years to come, and provide a comfortable retirement for many lawyers as well.
Perhaps when the company thought the news could not get any worse, in early January, the FBI made the surprise announcement that it had arrested Oliver Schmidt, one of the company’s German engineers and managers, and charged him with criminal violations of the Clean Air Act, conspiracy, and wire fraud in connection with the scandal. Schmidt was in a Miami airport enjoying the last few minutes of his vacation (and possibly his freedom, as it may turn out), about to board a flight back home to Germany, when the feds swooped in. He appeared before a judge a few days later in Detroit sporting some new optional accessories – a jail uniform and shackles – and was ordered held pending a later hearing. Unfortunately for him, this is not “fake news,” and this development should send a shiver down the lederhosen of any environmental manager or company representative whose responsibility includes compliance with U.S. environmental laws, or signing certification statements submitted to regulatory agencies.
The allegations are egregious – Schmidt was intimately involved in the decision to develop and install the defeat device software back in 2006, when his engineering group realized it was unable to develop an engine to meet EPA’s emissions standards, and faced being shut out of the U.S. market. To compound matters, once the excess emissions came to the attention of EPA and CARB in 2014, Schmidt conspired with his engineering group colleagues to attempt to conceal the existence of the software from the regulators, while ostensibly working with the regulators to find the cause of the excess emissions. (Interestingly, and somewhat ironically, it was not EPA or CARB that discovered the excess emissions in the first place, but rather a non-profit called the International Council on Clean Transportation, led by an engineer named … Mr. German). The Sargent Schultz defense strategy was allegedly presented to and subsequently supported by VW’s upper management.
Perhaps unsurprisingly given Schmidt’s arrest, a few days later, 5 other shoes dropped as the feds announced the indictment of Schmidt’s oom-pah band of co-conspirators. And to-boot, these charges include allegations of document destruction and obstruction of justice. Whether they can be extradited from Germany to the U.S. to face these charges remains to be seen. Meanwhile, VW announced that the company had settled its own set of criminal allegations for the tidy sum of 4.3 billion dollars (with a “b”!), and guilty pleas to charges of violating the Clean Air Act, obstruction of justice, and importing goods using false statements.
This scandal is particularly shocking for those of us who work in the mobile source compliance and enforcement area. For the last decade or so, EPA has focused intense enforcement scrutiny on mobile sources, particularly those regulated engines and equipment manufactured imported from China by relatively small, lesser-known gray market manufacturers. The big, well-known players were assumed to be ahead of the curve for regulatory compliance purposes, and limited enforcement resources were deemed better spent on forcibly educating the less sophisticated players. The bulk of these products have been off-road vehicles and equipment, such as ATVs, UTVs, off-road motorcycles, generators, and lawn and garden equipment, but all regulated engines are subject to a similar emissions regulations and certification program under the Clean Air Act. The typical violations have been relatively rudimentary and caused by a lack of an understanding of the applicable regulations or EPA’s interpretation thereof.
EPA mobile source enforcement focus has caught numerous U.S. businesses off-guard, particularly in the distribution and retail sectors, as EPA has often chosen to pursue U.S. companies involved in the distribution of these products, rather than the Chinese manufacturers, due to the difficulty often encountered in pursuing Chinese manufacturers with little to no physical presence in the U.S.[i] Some fly-by-night manufacturers have simply abandoned their small, leased office space at the first sign of trouble from EPA, rather than face the music. A number of U.S. retailers have been unpleasantly surprised to learn not only that the products they purchased were non-compliant with EPA and/or CARB standards, but that they themselves could be held responsible as if they were the manufacturer! More than one U.S. company has been driven out of business by the costs of defending EPA’s aggressive enforcement actions triggered by failures of the overseas manufacturers, where the issues were of a magnitude far less serious than the current allegations against Volkswagen.
The VW case illustrates that the feds will pursue foreign actors for violations of EPA emissions requirements, at least where the allegations are severe enough to warrant criminal prosecution. The criminal liability standards for environmental laws are notoriously low, generally only requiring “knowing” conduct, but consciously and intentionally conspiring to break the law, and then effectively lying directly to the regulators’ faces, as it is alleged VW did, is a virtual guarantee that the feds will vigorously pursue criminal prosecution.
EPA also seems to be more vigorously pursuing foreign manufacturers for civil violations as well. In late December, the Environmental Appeals Board released a decision affirming a $1.5 million penalty against two Chinese manufacturers for importing or selling 22,000 noncompliant motorcycles and recreational vehicles. The companies originally defended the allegations but at some point in the proceedings gave up and stopped responding, and a default order was entered against them.
The Appeals Board decided on its own to review whether EPA had properly served the defendants with its complaint, and properly calculated the proposed penalty under its mobile source penalty policy. The Board, without the Defendants even defending themselves at this point, essentially upheld EPA’s prosecution of the case and the substantial penalty against the two Chinese companies. It remains to be seen whether the defendants will actually pay the penalty, or play hard to get. However, the Board’s support of the penalty policy calculations under its mobile source penalty policy should only embolden EPA’s ongoing enforcement efforts, as this particular penalty policy can be manipulated to produce extremely high penalty numbers depending on an array of factors that are left within EPA’s discretion. And as the VW case illustrates, the penalties in criminal cases can be ridiculously high, as can the other costs of noncompliance.
The smaller players in the regulated engine industry should resist any VW- induced schadenfreude. I expect mobile source emissions enforcement to continue full speed ahead under the Trump administration, against not only the household name car manufacturers, but also the unknown small and recreational engine manufacturers, and their U.S. distributors and retailers. As these cases show, those who operate in willful or even unknowing violation risk a car wreck of consequences.
[i] See, e.g., U.S. v. The Pep Boys- Manny, Moe & Jack and Baja, Inc. (https://www.epa.gov/enforcement/consent-decree-pep-boys-manny-moe-jack-and-baja-inc) and U.S. v. Tractor Supply Company, Inc. (https://www.epa.gov/enforcement/consent-decree-tractor-supply-inc).
