CARY, N.C. -

Described as a “painful pill to swallow,” Volkswagen is going to have to spend nearly $15 billion to settle with federal regulators and consumers involving vehicles associated with a diesel emissions controversy.

In two related settlements — one with the United States and the state of California and one with the Federal Trade Commission — federal officials said on Tuesday that Volkswagen and related entities have agreed to spend up to $14.7 billion to settle allegations of cheating emissions tests and deceiving customers. They indicated VW will offer consumers a buyback and lease termination for nearly 500,000 units with 2.0 liter diesel engines from the 2009 through 2015 model years that were sold or leased in the U.S.

The automaker agreed to spend up to $10.03 billion to compensate consumers under the program.

In addition, federal officials stated the OEM will spend $4.7 billion to mitigate the pollution from these vehicles and invest in green vehicle technology.

Officials explained 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.

Officials added 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.

2 options to satisfy current owners

The settlements require Volkswagen to offer owners of any affected vehicle the option to have the company buy back the vehicle and to offer lessees a lease cancellation at no cost. Volkswagen may also propose an emissions modification plan to the 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. 

Regulators noted that 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. They explained 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 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 unit’s model, year, mileage and trim of the vehicle, as well as the region of the country where it was purchased.

In addition, because officials computed a straight buyback will not fully compensate consumers who owe more than their vehicle 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 (such as if the consumer is entitled to a $20,000 buyback, VW would pay off his/her loans up to a cap of $26,000), according to the settlement.

—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. 

Regulators went on to mention consumers who leased the affected vehicles 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, officials insisted 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.

Officials pointed out that 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, according to regulators.

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. 

Automaker’s assessment of settlement

Volkswagen recapped the settlement details in a news release and chief executive officer Matthias Müller touched on how the OEM reached this point.

“We take our commitment to make things right very seriously and believe these agreements are a significant step forward,” Müller said. “We appreciate the constructive engagement of all the parties, and are very grateful to our customers for their continued patience as the settlement approval process moves ahead.

“We know that we still have a great deal of work to do to earn back the trust of the American people. We are focused on resolving the outstanding issues and building a better company that can shape the future of integrated, sustainable mobility for our customers,” he continued.

The automaker noted that the company and regulators believe that the class settlement as presented to the court will provide a fair and reasonable resolution for affected Volkswagen and Audi customers.

Volkswagen added that it continues to work expeditiously to reach an agreed resolution for affected vehicles with 3.0L TDI V-6 diesel engines.

On April 22, Volkswagen reiterated that it recognized total exceptional charges of 16.2 billion Euro in its financial statements for 2015 for worldwide provisions related to technical modifications and repurchases, legal risks and other items as a result of the diesel matter.

As noted at that time, VW maintained that due to the complexities and legal uncertainties associated with resolving the diesel matter, a future assessment of the risks may be different.

“Today’s announcement is within the scope of our provisions and other financial liabilities that we have already disclosed, and we are in a position to manage the consequences,” Volkswagen chief financial officer Frank Witter said.

“It provides further clarity for our U.S. customers and dealers as well as for our shareholders. Settlements of this magnitude are clearly a very significant burden for our business. We will now focus on implementing our TOGETHER-Strategy 2025 and improving operational excellence across the Volkswagen Group,” Witter went on to say.

Immediate auto industry reaction

Observers from Kelley Blue Book, Autotrader and Edmunds.com all used colorful adjectives to describe their reactions to the settlement VW reached with federal regulators and how the automaker is being asked to remedy the situation with current vehicle owners.

“At nearly tenfold the cost of recent payouts by GM and Toyota this one should hold the record for most expensive automotive settlement for quite some time,” Kelley Blue Book senior analyst Karl Brauer said. “While undoubtedly a painful pill for VW’s accountants and stockholders to swallow, it’s also the most comprehensive and customer-friendly resolution I’ve ever seen.

“Not only will VW diesel owners have multiple compensation options, but the company will also fund environmental efforts and advanced clean air technology to offset its excessive diesel emissions,” Brauer continued. “It’s a huge step toward resolving the issue, though many legal hurdles remain, as does finding a resolution for VW’s customers in markets outside the U.S.”

Edmunds.com director of industry analysis Jessica Caldwell also made some medical analogies when sharing her assessment about the settlement.

“Volkswagen has to swallow a $15 billion pill, but it needs to take this medicine in order to move on,” Caldwell said. “This massive financial hit won’t magically make VW’s troubles disappear overnight, and it still has a long road ahead to repair its reputation among car shoppers.

“The company got a head start earlier this month by announcing a long-term commitment to electrification, but it will be a long time before shoppers will trust VW as an environmentally friendly brand,” she continued. “The good news is that history is on Volkswagen's side. Other automakers have successfully weathered their own high-profile scandals and VW has the resources and infrastructure in place to do the same.”

 Autotrader senior analyst Michelle Krebs called Volkswagen's proposed settlement “unprecedented in its dollar amount, but the situation was unprecedented, in that it was not a mistake but a deliberate deception.

“The question remains which option will consumers select,” Krebs added.

And fellow Kelley Blue Book senior analyst Rebecca Lindland noted that “It's a huge settlement for any company, especially involving a non-fatal issue. But this has dragged on long enough and the sooner VW puts this behind them, the better.

“They need to concentrate on launching the product-led renaissance that will revitalize the brand and its reputation,” Lindland went on to say.

Environmental requirements & regulator displeasure

According to the civil complaint against Volkswagen filed by the Justice Department on behalf of EPA on Jan. 4, Volkswagen allegedly equipped its 2.0 liter diesel vehicles with illegal software that detects when the vehicle 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 settlement of the automaker’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. 

Officials indicated that 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.

Regulators emphasized 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.

Furthermore, 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, officials said 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.

Finally, 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 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.

“Today’s announcement shows the high cost of violating our consumer protection and environmental laws,” FTC chairwoman Edith Ramirez said. “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.”

The provisions of the U.S./California settlement are contained in a proposed consent decree filed on Tuesday 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 a 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. 

“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 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,” Yates continued.

And EPA Administrator Gina McCarthy added, “Today’s settlement restores clean air protections that Volkswagen so blatantly violated. 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,” McCarthy went on to say.