Volkswagen’s $15bn settlement over diesel scandal: how the deal was done

It was one of the fastest civil settlements in the history of corporate malfeasance, coming together in six months instead of the years usually required for such complex negotiations. But the path to Volkswagen’s $15 billion deal last month with US officials and car owners over the company’s diesel deception was fraught with pitfalls, including clashing egos and cultures, arguments over mathematical formulas and frayed nerves from late nights and lost weekends.

The negotiations, which began in January, threatened to unravel in March. Fixing half a million cars to comply with clean air rules looked increasingly impossible. And Volkswagen was balking at any plan to buy back and scrap every car, which the company said it believed would be exorbitantly expensive.

Looking to negotiate the differences, a group of Volkswagen executives and lawyers, led by Francisco Javier Garcia Sanz, a VW board member, headed to Washington to meet with officials at the Justice Department, according to three people briefed on the discussions. The company proposed fixing the cars as best it could, while reducing emissions in other ways, like installing cleaner engines in government trucks, buses and tugboats.

Buy back option

Government officials pushed back, said the people, who spoke on the condition of anonymity, citing the continuing legal action. The officials would agree to a partial fix, but Volkswagen would have to offer to buy back the cars, even if every owner took that option.

The breakthrough compromise led to the $15 billion deal with federal and state governments, and with plaintiffs’ lawyers to compensate car owners and help repair the environment. The settlement, though painful to Volkswagen, could easily have taken much longer and cost billions of dollars more, based on a review of court documents and interviews with parties on both sides.

But a quick settlement was in the interest of both Volkswagen and the US government.

Volkswagen was dealing with the corrosion of its brand, as the scandal weighed on its profitability. While the settlement would do nothing to address the threat of stepped-up criminal investigations and shareholder lawsuits, a settlement in the US civil case would eliminate one of the biggest sources of financial risk.

Common sense

Lawyers for the government wanted to get the polluting cars fixed or off the road. An extra push came from Judge Charles R. Breyer of U.S. District Court in San Francisco, who is presiding over the Volkswagen hearings and was anxious that owners of Volkswagen diesels not be left in limbo.

The common sense of urgency prevented the talks from dragging on, like so many other cases of corporate malfeasance. The $18.7 billion agreement that BP reached last year, meant to resolve all federal, state and local claims against the oil company arising from the 2010 Gulf of Mexico oil spill, took more than two years to negotiate.

“It’s remarkable that the civil case against Volkswagen has been resolved so quickly,” said David M. Uhlmann, a former chief of the Justice Department’s Environmental Crimes Section and a law professor at the University of Michigan.

“And the evidence of Volkswagen’s culpability was overwhelming,” he said. “Its viability as a company depended upon a quick resolution.”

Deadlines

Breyer set the tone from the beginning.

At an early settlement hearing in January, the judge put the lawyers on notice that he would not allow the civil case to become a circus or a witch hunt. The case, he said, was not a whodunit. Rather, he set two priorities: to stop the cars from polluting and get relief for the owners.

“How do we fix what was done?” Breyer said during the session on January 21st. “If it can’t be fixed, then what is fair and just compensation for the people who have been damaged by this matter?”

Breyer gave the lawyers tight deadlines. He set an example by deciding on members of the plaintiffs steering committee just hours after the court session ended.

Volkswagen was in a weak position as the talks got underway.

Greater cooperation

Government regulators were angry that the company had stalled for more than a year before admitting that software in nearly 500,000 cars was programmed to thwart emissions tests. American investigators were also frustrated that Volkswagen, citing German data privacy laws, refused to turn over internal emails and other documents.

The atmosphere improved after a humility tour by two top Volkswagen managers. One of them, Manfred Doss, Volkswagen's general counsel, has a reputation in Germany for hardball tactics. But beginning in January, he and Garcia Sanz met US officials at the Justice Department, promising to be more cooperative, according to the three people.

Behind the scenes, the two Volkswagen officials got German employees to waive their privacy rights so documents could be transferred to the United States. In some instances, employees were allowed to delete personal information not relevant to the case while a company lawyer watched, according to statements in court by Volkswagen's lawyer, Robert J. Giuffra Jr. Producing the documents helped restore goodwill with the government.

"From the beginning, if you compared it to a horse race, the winning horse was already some ways down the track," said Deborah R. Hensler, an expert on complex litigation and class actions at Stanford Law School. "It's extremely rare for there to be this scale of litigation against a defendant who at the beginning of the litigation has already admitted liability."

Settlement talks intensified under pressure from Breyer. The judge wanted to know by late March how Volkswagen was going to fix cars so they would not continue spewing illegal amounts of harmful nitrogen oxides.

How much compensation?

Flogging the talks forward was Robert Mueller, a former director of the FBI, who was appointed as special settlement master. Mueller brokered intense, late-night negotiations at the Washington offices of his law firm WilmerHale, taking one group, then another, into private conference rooms to push for concessions.

Still, for weeks, the parties could not agree on a crucial aspect of the deal: how much money to compensate Volkswagen owners. On several occasions, one plaintiff’s lawyer looked nervously at a replica Prohibition-era Tommy gun mounted on Mueller’s wall.

“If the director had his FBI badge and machine gun, he might have shot us all,” said the plaintiff’s lawyer, Joseph F. Rice, who spent many late nights at Mueller’s law offices in Washington, negotiating on behalf of Volkswagen owners.

Soon, the lack of personal time for the negotiators became a cruel, running joke. At periodic conferences with the parties in San Francisco, Breyer would repeatedly refer to the long days the lawyers were putting in, at sacrifice to their families, to groans from those assembled.

On April 21st, the lawyers met another deadline set by the judge to reach a preliminary agreement. It called for Volkswagen to buy back or fix diesels starting with the 2009 model year, to compensate owners and to pay money to offset the environmental damage it had caused.

While they had the broad outlines, they still needed to work out the details.

In the weeks that followed, number-crunchers from all sides fed proposed figures and situations into financial models during negotiations. But each step forward was fraught. At one point, talks about how to value the cars bogged down over misunderstandings of whether negotiators were calculating median versus mean values, which would result in substantially different settlement sums.

There were many questions. How many cars were out there? How many might have been wrecked and no longer on the roads? What were the taxes people paid? What was the car worth in September 2015, when the scandal broke in the United States?

"We were basically trying to determine how much consumers overpaid for the car based on the false advertising — in time, in extra taxes," said James Kohm, an associate director of the Federal Trade Commission, which was involved in the talks. "But I could say $50 billion, somebody could say $4 trillion."

Concessions

Despite its weak position, Volkswagen won some important concessions, like not having to bring all the diesels into full compliance with air-quality rules. Government officials realized, the negotiators said, that some customers would want to keep their cars and that there needed to be a solution that reduced pollution as much as possible.

The compromise also cut the potential cost to Volkswagen. It could save billions if many customers opted for repairs, which are less expensive for the company than buybacks.

Instead, the company will pay $2.7 billion into a fund overseen by a court-appointed trustee that will be used for projects to reduce nitrogen oxides. Volkswagen will also invest $2 billion to build charging stations and other projects to promote the use of electric vehicles. About $1 billion will go to California, which has the largest number of Volkswagen diesels.

In the final days before the June settlement deadline set by Breyer, negotiators gathered at the Washington offices of Sullivan & Cromwell, which represented Volkswagen, at a large conference room overlooking the Jefferson Memorial.

One of the last issues was to get state attorneys general, who had sued separately, to sign on to the deal, according to three participants in the discussions. Negotiations with Texas, a crucial state because it accounted for 43,000 of the affected vehicles, continued until around midnight on June 27, just hours before the settlement was due.

Negotiators agreed that Texas would get $50 million in fines and fees as part of the settlement money. With Texas, 44 states, along with the District of Columbia and Puerto Rico, were on board, enough to claim victory.

The next morning, Sally Q. Yates, the U.S. deputy attorney general, walked in front of cameras to announce steps to right what she called “an unprecedented assault on our country’s environment.”

“But let me be clear,” Yates said, “it is by no means the last step.” She notably said that criminal inquiries into Volkswagen’s conduct would continue.

Breyer drove that point home at a conference in San Francisco a day later, warning that the settlement had some notable loose ends. The deal, for example, offers no solution for the 85,000 larger Volkswagen, Audi and Porsche vehicles. And the settlement is still subject to formal approval by the judge, which is expected to be granted.

At the conference, the judge turned to Giuffra, one of the Sullivan & Cromwell lawyers who negotiated on Volkswagen’s behalf. Giuffra had often said that the negotiations took him away from his 9-year-old son.

“I’m just going to have to tell you,” the judge said, “that to get acquainted with your son may take a bit longer.”

- © 2016 New York Times News Service