Buyback options, lease terminations, and investments in green vehicle technology are all part of VW’s penance

Volkswagen could be on the hook for a staggering $14.7 billion stemming from the diesel emissions scandal that rocked the German automaker last year. The announcement was made by Volkswagen and the Environmental Protection Agency with the amount expected to cover a variety of costs, including the buyback of cars from customers, end of early leases, modification of affected vehicles, and investments in zero-emission vehicle technologies and pollution mitigation, among other things.

All together, Volkswagen is going to spend $10.03 billion to compensate consumers under the program with the remaining $4.7 billion earmarked for the mitigation of pollution from the cars, as well as investments in green vehicle technology. The buyback and early lease termination options affect almost 500,000 vehicles, all of which fall on the 2009-2015 model years. Among the models included are 2.0 TDI versions of the Volkswagen Beetle, Golf, Jetta, Passat, and the 2.0 TDI version of the Audi S3.

It’s worth noting that the settlement reached by Volkswagen is with two parties, one with the United States and the State of California, and the U.S. Federal Trade Commission (FTC). The amount is staggering on the surface, but given what it has to lose if no settlement was reached, it could be a lot worse for the German automaker if the lawsuits against it pressed any further.

Unfortunately, VW is still not free and clear because the settlement that was reached does not involve any of its 3.0-liter diesel cars, as well as any “pending claims for civil penalties,” or “any potential criminal liability.” In other words, the German automaker plugged a big hole with this settlement but it’s got a lot more holes to take care of, including whatever fines and lawsuits exist against the company in other parts of the world.

Continue after the jump to read the full story.

Why it matters

There’s a lot to digest here so please bear with me. The most important part of the settlement is the $10.03 billion that Volkswagen has spend to in a variety of ways, including paying back consumers as part of a buyback option, terminating leases, and modifications to the vehicle emissions system.

The first option is the buyback, which states that VW must buy back any affected car at their retail value as of September 2015, or just before the emissions scandal became public. Depending on the model, its model year, trim, mileage, and the region of the U.S. where it was bought, cars that are bought back from their owners could amount from $12,500 all the way up to $44,000. This option also takes into account consumers who took out loans to buy their vehicles. Since there’s a possibility that consumers may owe more than their cars are worth due to depreciation, Volkswagen is also ordered to pay off those loans of up to 130 percent of the amount a consumer would’ve received under the buyback potion. Take for example a buyback of $30,000. With that amount, Volkswagen would have to pay as much as $39,000 to pay of the loan.

Consumers who opted to lease their cars are entitled to either have their leases terminated with no termination fee or have their vehicles modified once a modification becomes available. Those who avail of either option also stands to receive additional compensation while those who have already sold their vehicles after the diesel scandal was made public will also receive “partial” compensation that will be divvied up in two with the other half going to the consumer who purchased the car from its original owner.

A third option is also on the table, although this one has more to do with Volkswagen. This option allows the company to apply to EPA and CARB for approval of an emissions modification on any of the affected vehicles. If Volkswagen gets the approval, it can offer the modification to consumers who kept their cars at no cost to the owner. Likewise, VW is also ordered to provide compensation to these owners.

Owners of any affected models are free to check if they’re eligible for the compensation by going to VWCourtSettlement.com or AudiCourtSettlement.com. They’ll also receive notices from the automaker after the orders are entered by the court, which is expected to happen in the fall of this year. The mentioned websites can also be used to make claims, as well as sign up for appointments at their local VW or Audi dealers.

Of final importance: consumers aren’t going to get payments now, at least not until the settlements take effect if and when they are approved by the court. There’s no specific timetable for that yet, but according to Volkswagen, the earliest date would be around October 2016.

Press Release

Settlements Require VW to Spend up to $10 Billion to Buyback, Terminate Leases, or Modify Affected 2.0 Liter Vehicles and Compensate Consumers, and Spend $4.7 Billion to Mitigate Pollution and Make Investments that Support Zero-Emission Vehicle Technology

WASHINGTON – In two related settlements, one with the United States and the State of California, and one with the U.S. Federal Trade Commission (FTC), German automaker Volkswagen AG and related entities have agreed to spend up to $14.7 billion to settle allegations of cheating emissions tests and deceiving customers. Volkswagen will offer consumers a buyback and lease termination for nearly 500,000 model year 2009-2015 2.0 liter diesel vehicles sold or leased in the U.S., and spend up to $10.03 billion to compensate consumers under the program. In addition, the companies will spend $4.7 billion to mitigate the pollution from these cars and invest in green vehicle technology.

The settlements partially resolve allegations by the Environmental Protection Agency (EPA), as well as the California Attorney General’s Office and the California Air Resources Board (CARB) under the Clean Air Act, California Health and Safety Code, and California’s Unfair Competition Laws, relating to the vehicles’ use of "defeat devices" to cheat emissions tests. The settlements also resolve claims by the FTC that Volkswagen violated the FTC Act through the deceptive and unfair advertising and sale of its "clean diesel" vehicles. The settlements do not resolve pending claims for civil penalties or any claims concerning 3.0 liter diesel vehicles. Nor do they address any potential criminal liability.

The affected vehicles include 2009 through 2015 Volkswagen TDI diesel models of Jettas, Passats, Golfs and Beetles as well as the TDI Audi A3.

"Today’s settlement restores clean air protections that Volkswagen so blatantly violated," said EPA Administrator Gina McCarthy. "And it secures billions of dollars in investments to make our air and our auto industry even cleaner for generations of Americans to come. This agreement shows that EPA is committed to upholding standards to protect public health, enforce the law, and to find innovative ways to protect clean air."

"By duping the regulators, Volkswagen turned nearly half a million American drivers into unwitting accomplices in an unprecedented assault on our atmosphere," said Deputy Attorney General Sally Q. Yates. "This partial settlement marks a significant first step towards holding Volkswagen accountable for what was a breach of its legal duties and a breach of the public’s trust. And while this announcement is an important step forward, let me be clear, it is by no means the last. We will continue to follow the facts wherever they go."

"Today’s announcement shows the high cost of violating our consumer protection and environmental laws," said FTC Chairwoman Edith Ramirez. "Just as importantly, consumers who were cheated by Volkswagen’s deceptive advertising campaign will be able to get full and fair compensation, not only for the lost or diminished value of their car but also for the other harms that VW caused them."

According to the civil complaint against Volkswagen filed by the Justice Department on behalf of EPA on January 4, 2016, Volkswagen allegedly equipped its 2.0 liter diesel vehicles with illegal software that detects when the car is being tested for compliance with EPA or California emissions standards and turns on full emissions controls only during that testing process. During normal driving conditions, the software renders certain emission control systems inoperative, greatly increasing emissions. This is known as a "defeat device." Use of the defeat device results in cars that meet emissions standards in the laboratory, but emit harmful NOx at levels up to 40 times EPA-compliant levels during normal on-road driving conditions. The Clean Air Act requires manufacturers to certify to EPA that vehicles will meet federal emission standards. Vehicles with defeat devices cannot be certified.

The FTC sued Volkswagen in March, charging that the company deceived consumers with the advertising campaign it used to promote its supposedly "clean diesel" VWs and Audis, which falsely claimed that the cars were low-emission, environmentally friendly, met emissions standards and would maintain a high resale value.

The settlements use the authorities of both the EPA and the FTC as part of a coordinated plan that gets the high-polluting VW diesels off the road, makes the environment whole, and compensates consumers.

The settlements require Volkswagen to offer owners of any affected vehicle the option to have the company buy back the car and to offer lessees a lease cancellation at no cost. Volkswagen may also propose an emissions modification plan to EPA and CARB, and if approved, may also offer owners and lessees the option of having their vehicles modified to substantially reduce emissions in lieu of a buyback. Under the U.S./California settlement, Volkswagen must achieve an overall recall rate of at least 85% of affected 2.0 liter vehicles under these programs or pay additional sums into the mitigation trust fund. The FTC order requires Volkswagen to compensate consumers who elect either of these options.

Volkswagen must set aside and could spend up to $10.03 billion to pay consumers in connection with the buy back, lease termination, and emissions modification compensation program. The program has different potential options and provisions for affected Volkswagen diesel owners depending on their circumstances:

Buyback option: Volkswagen must offer to buy back any affected 2.0 liter vehicle at their retail value as of September 2015 — just prior to the public disclosure of the emissions issue. Consumers who choose the buyback option will receive between $12,500 and $44,000, depending on their car’s model, year, mileage, and trim of the car, as well as the region of the country where it was purchased. In addition, because a straight buyback will not fully compensate consumers who owe more than their car is worth due to rapid depreciation, the FTC order provides these consumers with an option to have their loans forgiven by Volkswagen. Consumers who have third party loans have the option of having Volkswagen pay off those loans, up to 130 percent of the amount a consumer would be entitled to under the buyback (e.g., if the consumer is entitled to a $20,000 buyback, VW would pay off his/her loans up to a cap of $26,000).

EPA-approved modification to vehicle emissions system: The settlements also allow Volkswagen to apply to EPA and CARB for approval of an emissions modification on the affected vehicles, and, if approved, to offer consumers the option of keeping their cars and having them modified to comply with emissions standards. Under this option in accordance with the FTC order, consumers would also receive money from Volkswagen to redress the harm caused by VW’s deceptive advertising.

Consumers who leased the affected cars will have the option of terminating their leases (with no termination fee) or having their vehicles modified if a modification becomes available. In either case, under the FTC order, these consumers also will receive additional compensation from Volkswagen for the harm caused by VW’s deceptive advertising. Consumers who sold their TDI vehicles after the VW defeat device issue became public may be eligible for partial compensation, which will be split between them and the consumers who purchased the cars from them as set forth in the FTC order.

Eligible consumers will receive notice from VW after the orders are entered by the court this fall. Consumers will be able to see if they are eligible for compensation and if so, what options are available to them, at VWCourtSettlement.com and AudiCourtSettlement.com. They will also be able to use these websites to make claims, sign up for appointments at their local Volkswagen or Audi dealers and receive updates. Consumer payments will not be available until the settlements take effect if and when approved by the court, which may be as early as October 2016.

Emissions Reduction Program: The settlement of the company’s Clean Air Act violations also requires Volkswagen to pay $2.7 billion to fund projects across the country that will reduce emissions of NOx where the 2.0 liter vehicles were, are or will be operated. Volkswagen will place the funds into a mitigation trust over three years, which will be administered by an independent trustee. Beneficiaries, which may include states, Puerto Rico, the District of Columbia, and Indian tribes, may obtain funds for designated NOx reduction projects upon application to the Trustee. Funding for the designated projects is expected to fully mitigate the NOx these 2.0 liter vehicles have and will emit in excess of EPA and California standards.

The emissions reduction program will help reduce NOx pollution that contributes to the formation of harmful smog and soot, exposure to which is linked to a number of respiratory- and cardiovascular-related health effects as well as premature death. Children, older adults, people who are active outdoors (including outdoor workers), and people with heart or lung disease are particularly at risk for health effects related to smog or soot exposure. NO2 formed by NOx emissions can aggravate respiratory diseases, particularly asthma, and may also contribute to asthma development in children.

Zero Emissions Technology Investments: The Clean Air Act settlement also requires VW to invest $2 billion toward improving infrastructure, access and education to support and advance zero emission vehicles. The investments will be made over 10 years, with $1.2 billion directed toward a national EPA-approved investment plan and $800 million directed toward a California-specific investment plan that will be approved by CARB. As part of developing the national plan, Volkswagen will solicit and consider input from interested states, cities, Indian tribes and federal agencies. This investment is intended to address the adverse environmental impacts from consumers’ purchases of the 2.0 liter vehicles, which the governments contend were purchased under the mistaken belief that they were lower emitting vehicles.

FTC’s Injunctive Relief: The FTC settlement includes injunctive provisions to protect consumers from deceptive claims in the future. These provisions prohibit Volkswagen from making any misrepresentations that would deceive consumers about the environmental benefits or value of its vehicles or services, and the order specifically bans VW from employing any device that could be used to cheat on emissions tests.

The provisions of the U.S./California settlement are contained in a proposed consent decree filed today in the U.S. District Court for the Northern District of California, as part of the ongoing multi-district litigation, and will be subject to public comment period of 30 days, which will be announced in the Federal Register in the coming days. The provisions of the FTC settlement are contained in a proposed Stipulated Final Federal Court Order filed today in the same court.

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