VW's $14.7 Billion Settlement Resolves False Ad Claims

Sharp Increase From the $10B VW Had Been Expected to Pay

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Volkswagen's $15 billion agreement with U.S. regulators to resolve emissions-cheating allegations includes a settlement with the Federal Trade Commission, which had charged the automaker with deceptive and unfair advertising of its "clean diesel" vehicles.

The deal announced Tuesday aims to get 480,000 emissions-cheating diesel vehicles off U.S. roads and placate regulators even as VW struggles to devise an acceptable fix under an agreement with the U.S. government. Under the terms of Tuesday's deal, car owners will have the choice of having Volkswagen buy back their vehicles or install whatever pollution-control retrofit is eventually accepted by regulators. In either case, the drivers will get as much as $10,000 each in additional compensation.

The agreement includes two related settlements, one with the United States and the State of California, and one with the FTC. The FTC in March alleged that Volkswagen Group of America deceived consumers with advertising that promoted "clean diesel" VWs and Audis that were later discovered as being fit with illegal emission defeat devices. The FTC's settlement prohibits VW 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 test," the FTC said in a statement.

"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."

The agreements include a provision that VW pay $2.7 billion to federal and California regulators for a trust to fund pollution-reduction projects and also make a $2 billion investment in clean technology.

As part of the automaker's rebound effort, CEO Matthias Müller has mapped out a sweeping strategy overhaul focused on emphasizing electric cars, automated driving and services such as ride-hailing.

"We take our commitment to make things right very seriously and believe these agreements are a significant step forward," Mr. Müller said in a statement Tuesday. "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."

But the settlement figure is a sharp increase from the $10 billion Volkswagen had been expected to pay as recently as last week. It also far exceeds any previous U.S. civil settlement with an automaker, and it brings VW closer to the 16.2 billion euros ($17.85 billion) it has set aside to cover the costs of the scandal. But it won't put an end to VW's legal troubles spanning three continents as the company still faces civil and criminal actions in other jurisdictions.

The rising cost of the U.S. settlement raises the question of whether VW has set aside enough money to put the scandal behind it. Maryann Keller, an independent auto industry consultant in Stamford, Conn., said the answer depends on how non-U.S. consumers and governments react. The U.S. settlement is expected to make up the lion's share of VW's overall cost for the scandal, but the company still faces criminal investigations in the U.S., Germany and South Korea.

"The bigger problem is if people in other countries and other governments want a similar deal," Ms. Keller said. "If they do, I don't think $18 billion will cut it."

The announcement on June 23 that South Korean prosecutors had arrested a VW executive there may be "the tip of the iceberg," said Anthony Sabino, a law professor at St. John's University in New York who specializes in complex litigation.

If VW fails to get an 85% recall rate by June 30, 2019, it will have to pay $85 million more into the environmental mitigation trust for each percentage point of the shortfall. It will also have to pay an additional $13.5 million into the trust for each percentage point it fall below the 85% target in California.

VW, whose brands include Audi and Porsche, has admitted to systematically rigging environmental tests since 2009 to hide that its diesel vehicles were emitting far more pollutants than allowed under U.S. and California law.

Its settlement would be one of the largest in corporate history, exceeded by the $246 billion agreement between the tobacco industry and U.S. states in 1998 and the multiple payments to private parties and governments over the 2010 BP oil spill. BP's final bill isn't yet known, but it includes agreements to pay more than $25 billion to the U.S. and states and at least $12.9 billion for claims of private property and economic loss.

The VW plan may leave unresolved what will be done if car owners simply refuse to stop driving their cars, which would prolong the environmental effects.

"I'll probably just keep driving it," Marcus Frye, a mechanic from Redwood City, Calif., said of his 2010 VW Jetta diesel model. Frye recently tried to sell the car on Craigslist for $11,500, or about three-quarters of what he paid a year earlier.

But after he noticed that the Kelley Blue Book value had dropped to $6,000 because of the emissions scandal, he pulled the ad. "If the value of the car is basically junk, why would I give it away to anyone?"

-- Bloomberg News with E.J. Schultz

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