November 2022 Issue
At the beginning of 2015, the automotive market had little idea that manufacturers of diesel cars were heading toward one of the most expensive corporate scandals in history, the fallout from which would wipe out over a third of Volkswagen’s (VW’s) market capitalisation in a matter of days.
Volkswagen has since reportedly spent more than $30bn on the Dieselgate scandal in vehicle refits, legal fees and payouts, finally settling the long running consumer class action against it in the UK in May 2022. However, despite Volkswagen’s efforts to settle up and move on, a recent decision by the European Court of Justice (ECJ) handed down on 14 July 2022 suggests that the legal tab may need to be reopened, and Volkswagen is unlikely to be the only target this time.
The EA189 VW engine
On 18 September 2015, VW was told to recall 482,000 of its cars in the US on account of including software known as a ‘defeat device’ that enabled them to cheat the emissions test. Two days later, Martin Winterkorn, chief executive of VW, issued a public apology. Within a week, he had resigned, parallel criminal investigations had been announced in the US and Europe, and civil suits had been issued against VW in the US and UK.
To explain, every new car is required to undergo a test drive cycle during which the emissions produced by the vehicle, including harmful nitrogen oxides (NOx), are measured to check that they are below the legal limit in the applicable legislation. Historically, these tests were only conducted in a lab using a ‘rolling road’ which simulated the conditions of a fixed test drive track. A software device in certain of VW’s diesel cars – in particular those with an EA189 engine – was capable of detecting with near certainty when the car was undergoing the test drive cycle.
During the test cycle, the vehicle’s emission controls would be fully operational so that the NOx emissions produced were within the legal limits. However, if the software detected that the vehicle was not undergoing the test drive cycle then the emissions controls would be switched off with the result that, in ‘normal’ driving conditions, the vehicles were producing up to 40 times the legal limit of NOx emissions.
In late 2015, the relevant authority in Germany wrote to VW on a number of occasions stating that, in its view, the software constituted a defeat device under EU law. On 21 April 2017, VW was fined $2.8bn in the US after admitting that its EA189 engines contained a defeat device, as that term is defined in US law, and that the US emissions test could not have been passed without it.
On 17 December 2017, the ECJ ruled against VW and concurred with the German authority that the EA189 engines contained a defeat device under EU law. In June 2021, Mr Winterkorn agreed to pay almost £10m to VW to settle its claims against him in respect of the scandal.
‘Thermal windows’
Despite various 2016 studies published by the UK Department of Transport and Emissions Analytics, an industry leader in emissions testing, appearing to find that nearly all diesel cars tested on the road were emitting NOx emissions in excess of the legal limits, the majority of diesel car manufacturers escaped relatively unscathed from the original scandal surrounding VW’s EA189 engine.
However, temperatures across the industry have begun to rise again following fresh complaints about the widespread use of so-called ‘thermal windows’. Engines using this software detect when the ambient temperature falls outside a certain range and either reduce or switch off the vehicle’s emissions controls. Since the ambient temperature during the test cycle is always within the range in which the emissions controls function, the performance of the emissions controls in test conditions is not impacted by the device. Temperature is likely only one of the conditions which engine software uses to gauge adjustments to the performance of emissions controls, in addition to conditions such as altitude, distance travelled and engine load.
New ruling by the ECJ
Once again, VW became the lead target of the controversy surrounding the use of ‘thermal windows’ when a number of claims issued by consumers before the Austrian courts were referred to the ECJ. The claims concern a software update implemented by VW in certain of its diesel car engines. Upon the ambient temperature falling below 15 degrees Celsius or rising above 33 degrees Celsius, the software reduces the effectiveness of the emission control technology used by the vehicle with the effect that it emits NOx emissions above the legal limit.
The consumers in the Austrian cases argue, among other things, that average temperatures in various European Union (EU) countries, including Austria, average below 15 degrees Celsius for several months a year. Therefore, they say, the vehicles are producing emissions in excess of the legal limit under normal driving conditions. However, VW argues that the software falls within an exception to the prohibition on defeat devices under EU Regulation No. 715/2007 (known as the EU Emissions Regulation). This exception permits devices which are needed to protect the engine against damage or accident, and for the safe operation of the vehicle.
On 14 July 2022, the ECJ issued its long-awaited decision in which it ruled that VW’s software update should be considered an unlawful defeat device unless it is needed to avoid an immediate risk of damage or accident to the engine of the vehicles. The damage or accident which the device seeks to avoid must be caused by a malfunction of a component of the exhaust gas recirculation system of such a serious nature as to result in a specific hazard when the vehicle is driven. The ECJ also confirmed that a device which, under normal driving conditions, operates during most of the year cannot fall within the exception. The ECJ’s decision is consistent with the opinion which Athanasios Rantos, advocate general at the ECJ, issued on the case last year, on 23 September 2021.
Following the ECJ ruling, VW issued a statement that: “the thermal windows used in cars by VW remain permissible”.
The cases have been returned to the Austrian court to determine whether the ECJ’s criteria is met in VW’s case. The Austrian court will be bound by the ECJ’s previous ruling of 17 December 2020 in the original VW case, in which it ruled that an “accident” must be unforeseen and sudden, and damage must be sudden and exceptional. As a result, the ECJ held that: “the clogging up and aging of the engine cannot be regarded as an ‘accident’ or ‘damage’”.
A new wave?
While VW is the immediate target of the Austrian cases which came before the ECJ, the issue has much broader implications for car manufacturers. Unlike the software in VW’s EA189 engine, the use of software which limits the performance of emissions controls when certain ambient conditions are met, including, in particular, when the temperature falls outside a certain ‘thermal window’, is thought to be widespread among car manufacturers.
As a result, the fallout from this latest decision could have the potential to rival the costly heights of the scandal in 2015. Indeed, class action lawyers are already galvanising consumers for a new wave of civil actions against manufacturers such as Mercedes-Benz, BMW, Fiat, Hyundai, Kia and even American stalwart Ford Motors.
A flurry of consumer claims were issued against vehicle manufacturers in English courts in the first half of 2022, ahead of a potential limitation deadline. However, since the ECJ’s rulings post-date the UK’s ‘exit day’ from the EU, while English courts may still have regard to the rulings in reaching their own decision about the lawfulness of ‘thermal windows’, they are not bound by the ECJ’s decisions.
Therefore, it remains to be seen whether English courts will agree with the ECJ’s strict interpretation of the exception to the prohibition on defeat devices, which also forms part of English law. Equally, it is not yet known how the courts would regard a thermal window if it were set more broadly than VW’s relatively narrow 15 to 33 degrees Celsius. Either way, one thing which the market can count on is that the Dieselgate litigation is not over yet.
Katie Reith is a senior associate at Quinn Emanuel Urquhart & Sullivan, LLP. She can be contacted on +44 (0)20 7653 2045 or by email: katiereith@quinnemanuel.com.
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Katie Reith
Quinn Emanuel Urquhart & Sullivan, LLP