Image source: Volkswagen.
In a surprise move, Volkswagen (VWAGY -0.33%) said on Thursday that it has retained attorney Kenneth Feinberg to help administer a "program" that will offer settlements to claims related to its diesel-cheating scandal in the U.S.
What is VW up to here?
VW's new CEO wants to settle claims quickly
Simply put, it appears to be one more move by VW CEO Matthias Mueller to get his company past the cheating scandal as quickly as possible.
Settlement funds are Feinberg's specialty. He won praise for his work administering funds for victims of the Sept. 11 and Boston Marathon attacks, and most recently administered a fund set up by General Motors (GM -0.17%) to compensate victims of accidents related to its defective ignition switches.
Feinberg's work on those funds involved evaluating claims and coming up with fair settlements. In the case of General Motors, the fund was to some extent an effort to pre-empt potential litigation that could drag on for years: Those who accepted settlements from the fund administered by Feinberg agreed not to sue.
That seems to be what VW has in mind. It's already facing over 500 lawsuits in the United States from owners of the roughly 482,000 diesel-powered vehicles that emit pollution far in excess of legal limits, as well as another 85,000 equipped with a 3.0 liter diesel engine that is also facing questions. It's also contending with additional claims from VW dealers who have lost significant business as the scandal has unfolded.
If allowed to run their courses, those suits could drag on for several years and end up costing VW billions. I think the hope is that VW will be able to settle many of those claims quickly with a fund backed by the credibility of Feinberg's reputation.
What kinds of claims is VW facing?
The lawsuits that have been filed so far make a variety of claims, including consumer fraud and violations of civil racketeering laws as well more "garden variety" claims that the software that enables the emissions cheating amounts to a defect that reduces the value of the vehicles.
Many owners are concerned about what VW might be required to do to their cars in order to bring them into compliance. Many bought VW's "clean diesels" because the cars promised to be environmentally friendly and fuel-efficient while also being fun to drive.
It appears that VW's engineers resorted to the software, which turns off most of the cars' emissions controls in normal driving, in order to meet aggressive performance and fuel economy goals without significantly raising the cost of the vehicles. The fear is that any repair required by federal regulators might hurt the cars' performance, fuel economy, or both.
Feinberg might end up buying back a lot of VWs
It's even possible that VW will be forced to buy back some or all of the 482,000 vehicles in the U.S. equipped with the 2.0 liter four-cylinder "TDI" diesel that is at the center of the scandal. Mary Nichols, chief of the powerful California Air Resources Board (CARB), told the German business newspaper Handelsblatt last month that she thought it "quite likely" that VW will have to buy back at least a portion of the vehicles.
We'll know a lot more next week. VW has filed a plan to recall and repair the cars with CARB and the U.S. Environmental Protection Agency (EPA); the agencies have until Monday to respond. I expect them to make a detailed statement on Monday, explaining what VW has proposed and whether it passes muster.
But clearly VW thinks it's in for a whole lot of litigation and wants to head it off with a Feinberg-administered settlement fund. We'll learn a lot more about the likely consequences for VW's bottom line next week. Stay tuned.
