Germany: What Ever Happened To The Diesel Scandal? Current Developments And A Glimpse Into The Future

We last provided an overview of the current status of the diesel scandal back in September 2021 and showed that the legal process is still ongoing even years after public disclosure of the allegations. Several things have happened since then, but the "Dieselgate" chapter is still far from closed.

The courts have recently issued landmark decisions on both consumer law issues and capital market law claims.

ECJ clears the way for "thermal window" lawsuits

The ECJ, for example, prominently stated in its judgement of 21 March 2023 (Case: C-100/21) that car buyers are already entitled to damages if the EU regulations on exhaust gas purification have been negligently violated by car manufacturers and not only in the case of intentional and immoral damage resulting from the use of an illegal engine control system. According to the ECJ, namely, the European legal requirements on exhaust emission limits are not only of regulatory significance, but are also intended to quite specifically protect the individual vehicle buyer. In its judgement of 14 July 2022 (Case: C-128/20), the ECJ already ruled that the much-discussed so-called thermal windows - an engine control logic that reduces exhaust gas purification in certain temperature windows - are illegal defeat devices - unless the purpose of these thermal windows is to prevent acute engine damage, which the ECJ did not consider to be the case with the control logic used by VW.

The opinion that the use of thermal windows violates applicable EU law was also shared by the Administrative Court of Schleswig (judgement of 20 February 2023, Case: 3 A 113/18), after the Environmental Action Germany (Deutsche Umwelthilfe, "DUH") had filed a complaint against the approval of software updates by the German Federal Motor Transport Authority (Kraftfahrt-Bundesamt, "KBA").

The ECJ therewith cleared the way for damage claims in Germany due to the use of thermal windows. German case law had previously assumed that car manufacturers were only liable in case of the intentional use of defeat devices, as only in this case was the characteristic of immorality fulfilled. The prohibition of thermal windows under European law, which may have been violated only negligently by the car manufacturers, was not considered by German judges to have any protective effect for car buyers, which is why such claims were always dismissed.

Landmark decision of the German Federal Court of Justice - and doubts of the Higher Regional Court of Stuttgart

Indeed, it did not take long before the Federal Court of Justice (FCJ), based on the interpretation of EU law by the ECJ, declared damage claims due to the negligent installation of thermal windows to be fundamentally justified and also stated that the reduction in value caused by the possible threat of immobilisation of a vehicle fitted with thermal windows is approx. 5-15% of the purchase price (judgements of 26 June 2023, Cases: VIa ZR 335/21, VIa ZR 533/21 and VIa ZR 1031/22).

However, the FCJ only ruled on the abstract legal situation, as these were decisions in model case proceedings. The question of whether the control programmes used by the individual vehicle manufacturers really constitute thermal windows within the meaning of the relevant EU regulations and whether the manufacturers acted negligently in installing such thermal windows will have to be decided by the lower courts. The hurdles for the car manufacturers are high, however, because they have to represent and prove that they neither acted intentionally nor negligently failed to realise that such a thermal window was installed in the vehicle.

The Higher Regional Court of Stuttgart is nevertheless sceptical about Daimler AG's liability towards car buyers for the thermal windows used in diesel vehicles. In a preliminary assessment dated 27 July 2023 (Case 24 U 1796/22 inter alia), the court took the view that Daimler AG had been subject to an unavoidable error as to the prohibited nature of the act, since the KBA had approved the thermal windows. Previously, the Stuttgart Regional Court had upheld the action for intentional immoral damage (judgement of 28 January 2022, Case: 17 O 711/19). A final decision by the Stuttgart Higher Regional Court is still pending.

Investors are also demanding damages

Shareholders of VW AG also feel that their rights have been violated due to the omitted and delayed capital market information about the use of inadmissible defeat devices. In the autumn of 2016, the Braunschweig Regional Court therefore received a veritable flood of investor lawsuits, with which institutional investors such as investment and pension funds also sued Volkswagen for damages. The Higher Regional Court of Braunschweig consolidated the thousands of individual claims into a capital investor model case, in which the main issues have now been clarified since the spring of 2017. In July 2023, the Higher Regional Court of Braunschweig subsequently issued an order for evidence, on the basis of which - after almost seven years of hefty exchanges of written arguments, evidence is now going to be heard. The list includes the questioning of a total of 86 witnesses, among them prominent names such as former VW CEO Prof. Martin Winterkorn. The hearing of evidence will take at least the entire year 2024.

A further defendant in the Braunschweig capital investor model case is the group's parent company Porsche SE, against which a separate capital investor model case is also pending before the Higher Regional Court of Stuttgart. The Stuttgart judges, however, have been somewhat more decisive and already issued a model decision in March 2023. This decision determined, among other things, that any knowledge of VW board members regarding the use of defeat devices cannot automatically be attributed to the - possibly identical - board members of Porsche SE. The Higher Regional Court of Stuttgart thus ultimately rejected an obligation on the part of Porsche SE to publish capital market information on the use of defeat devices. The investors can now pursue their claims against Porsche SE before the FCJ.

Magnitude of the financial impact still not foreseeable

Even beyond the billions in damages claimed by investors against VW AG and the compensation payments to car buyers that have either already been paid out or are still pending, it will remain expensive for the VW Group. How high the total costs of the diesel scandal will turn out to be for Volkswagen is still completely open, even almost 10 years after the violations became known.

Already back in 2018, the public prosecutor's office in Braunschweig fined VW a record sum of one billion euros, a whopping 995 million euros of which was for skimming unlawfully gained economic benefits. But VW has also had to pay astronomical amounts in other jurisdictions:

In the USA, the diesel scandal has already cost the VW Group more than 20 billion US dollars. Another 85 million US dollars have recently been added to this - VW and its subsidiary Audi accepted a penalty payment in this amount imposed by the state of Texas in May 2023.

In the northern neighbour Canada, VW had to pay billions relatively early on in the scandal. In 2016, the authorities imposed fines of almost 2.5 billion Canadian dollars; in 2020, this was followed by a further 135 million euros.

Precisely how much more has been incurred worldwide for legal and consulting services in connection with the diesel scandal is unknown. What does seem certain, however, is that the supposedly generous provisions of around 23 billion euros set aside by Volkswagen in 2016 have long since been used up.

Click here for our first overview of the diesel scandal (2021).

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