State v. Volkswagen AG

• Decision Date: 14 December 2018
• Docket Number: 1170528
• Citation: 279 So.3d 1109
• Parties: STATE of Alabama v. VOLKSWAGEN AG
• Court: Alabama Supreme Court

279 So.3d 1109

STATE of Alabama

v.VOLKSWAGEN AG

1170528

Supreme Court of Alabama.

December 14, 2018

Steve Marshall, atty. gen., and Corey L. Maze, spec. deputy atty. gen., and Noel S. Barnes, Winfield J. Sinclair, and Robert D. Tambling, asst. attys. gen., for appellant.

Harlan I. Prater IV and Samuel H. Franklin of Lightfoot, Franklin & White, LLC, Birmingham; and Robert J. Giuffra, Jr., and David M.J. Rein of Sullivan & Cromwell LLP, New York, New York, for appellee.

WISE, Justice.

The State of Alabama, the plaintiff below, appeals from the Jefferson Circuit Court's order that, among other things, dismissed its claims against Volkswagen AG ("VWAG").¹ We affirm.

Facts and Procedural History

On September 15, 2016, the State filed a complaint in the Jefferson Circuit Court ("the trial court"), in which it asserted "tampering" claims and sought penalties against VWAG and other defendants pursuant to the Alabama Environmental Management Act ("the AEMA"), § 22-22A-1 et seq., Ala. Code 1975, and the Alabama Air Pollution Control Act of 1971 ("the AAPCA"), § 22-28-1 et seq., Ala. Code 1975.

The trial court summarized the factual allegations from the State's complaint as follows:

"[The State] alleges that starting in 2009, Defendants installed and maintained in its new motor vehicles certain software which was designed to alter emissions readings on certain diesel engines installed in Audi, Porsche, and Volkswagen motor vehicles, which software was known as ‘defeat devices’.

"[The State] alleges that in the 1990s, Defendants developed a diesel turbocharged direct injection engine (‘TDI’) for marketing in the U.S., including the State of Alabama. [The State] alleges that the said engines evolved over time, but that the emissions control system remained constant in that all engines were equipped with a diesel particulate filter (‘DPF’) and an exhaust gas recirculation system (‘EGR’). The EGR reduced nitrous oxide emissions (NOX) and the DPF reduced soot emissions.

"Both systems, [the State] alleges, stressed the TDI engines and that Defendants chose to solve the engineering problems presented by installing defeat devices in the onboard computer software. [The State] alleges that Defendants developed, over the years, several generations of such defeat devices which became more and more sophisticated in defeating the emissions control devices, except when the said vehicles were being tested.

"For example, in 2006, [the State] alleges, Defendant Volkswagen developed the ‘Acoustic Function’ defeat device software which could detect when the vehicle was in street use as opposed to being operated on a dynamometer (‘dyno’) or a stationary testing device. When on the testing device, the Acoustic Function defeat device would allow the emission control devices on the vehicle to operate so that the vehicle could pass its emissions standards; when the vehicle was in street use, the said defeat device would override the emissions equipment so as to relieve stress on the engine."

The complaint alleged that the defendants had tampered with the emission-control systems or ordered third parties to tamper with the emission-control systems of vehicles that were licensed and registered in the State of Alabama. Specifically, the State alleged:

"81. The State has reason to believe that Defendants tampered with used Vehicles in Alabama on multiple occasions, including, but not limited to the two instances detailed below.

"82. The first instance concerns the installation of the ‘steering wheel recognition function’ on used vehicles in Alabama. In or about 2012, used Subject Vehicles began to develop hardware failures. [VWAG] engineers determined that the failures were a result of Subject Vehicles starting in ‘dyno’ testing mode, meaning that the emissions control system was turned on. [VWAG] and [Volkswagen Group of America, Inc. (‘VWGOA’),] employees decided to add a ‘steering wheel recognition function’ to new and used Subject Vehicles to allow those vehicles to start in ‘street’ mode, meaning that the vehicle now started with the emissions control system turned off. [VWAG] and/or VWGOA then ordered mechanics at Volkswagen-branded dealerships in Alabama to install the new software function on used vehicles in Alabama.

"....

"84. The second instance concerns fraudulent recalls of used vehicles in 2014 and 2015. As detailed further in ¶ 88, Defendants' scheme first came to light in March 2014. In the months that followed, [VWAG] and/or VWGOA sent recall notices to used car owners in Alabama, requesting those owners to bring their used vehicles to Volkswagen-branded dealerships for repairs to emissions-related software. While Volkswagen told used car owners that the recall was to improve their vehicles' emissions management software, the true reason for the recall was to install defeat device software that helped cover the Defendants' tracks."

In its complaint, the State alleged that the AEMA vests the Alabama Department of Environmental Management ("ADEM") with the authority to administer and enforce the AAPCA and the authority to establish rules and regulations governing emission-control systems for vehicles; that ADEM has established rules and regulations governing such emission-control systems in Chapter 335-3-9 of the Alabama Administrative Code; and that the defendants had violated Regulation 335-3-9-.06 (ADEM), Ala. Admin. Code. Regulation 335-3-9-.06, provides, in pertinent part:

"In addition to the other strictures contained in this Chapter, no person shall cause, suffer, allow, or permit the removal, disconnection, and/or disabling of a positive crankcase ventilator, exhaust emission control system, or evaporative loss control system which has been installed on a motor vehicle; nor shall any person defeat the design purpose of any such motor vehicle pollution control device by installing therein or thereto any part or component which is not a comparable replacement part or component of the device. Provided that:

"(a) The components or parts of emission control systems on motor vehicles may be disassembled or reassembled for the purpose of repair and maintenance in proper working order.

"(b) Components and parts of emission control systems may be removed and replaced with like components and parts intended by the manufacturer for such replacement."

In its complaint, the State alleged:

"By installing the defeat device on a subject vehicle, Defendants and/or persons acting on behalf of Defendants caused or allowed the disconnection or disabling of the exhaust emission control system(s) on that subject vehicle each and every time the subject vehicle was operating outside of dyno testing conditions."

On October 14, 2016, the defendants removed this action to the United States District Court for the Northern District of Alabama. The action, among others, was ultimately assigned to the United States District Court for the Northern District of California ("the MDL court"), which was handling various actions that were part of multidistrict litigation arising from the defendants' actions with regard to the installation of the defeat-device software. On May 23, 2017, the MDL court entered an order granting the motions to remand filed by various states, including Alabama.

The United States Department of Justice, on behalf of the Environmental Protection Agency ("the EPA"), filed criminal and civil actions against VWAG to enforce the federal Clean Air Act ("the CAA"). On March 14, 2017, VWAG pleaded guilty to three criminal felony counts and settled the civil charges.

On August 31, 2017, the MDL court released its decision in In re Volkswagen "Clean Diesel" Marketing, Sales Practices, and Products Liability Litigation, 264 F.Supp.3d 1040 (N.D. Cal. 2017). That case involved a complaint the State of Wyoming had filed against VWAG; Volkswagen Group of America, Inc.; Audi AG; Audi of America, LLC; and Porsche Cars North America, Inc. (hereinafter collectively referred to as "Volkswagen"), in the United States District Court for the District of Wyoming. That case was subsequently transferred to the MDL court. In its complaint, Wyoming asserted that every time one of the vehicles with defeat-device software was driven in that state, Volkswagen violated two provisions of Wyoming's Clean Air Act state-implementation plan. Volkswagen filed a motion to dismiss the claims against it on the ground that the claims were preempted by the CAA. The MDL court ultimately held that Wyoming's continuous-tampering claim was preempted by the CAA.²

On August 1, 2017, the State filed its first amended complaint. On September 18, 2017, the defendants filed a motion to dismiss the first amended complaint. In their motion to dismiss, the defendants argued that the State's claims were preempted by the CAA.

On October 12, 2017, the State filed its second amended complaint, seeking penalties under the AEMA and the AAPCA. The second amended complaint alleged, in part:

"1. The [AAPCA] forbids any person or business from causing or allowing the disconnection or disabling of a vehicle's exhaust emissions control system. Defendants intentionally violated the AAPCA for nearly a decade.

"2. Starting with model year 2009, Defendants installed and maintained software designed to cheat emissions standards in certain Audi, Porsche, and Volkswagen diesel engines vehicles (‘subject vehicles’). This software, known as a ‘defeat device,’ disabled a subject vehicle's exhaust emissions control system each time the vehicle was driven on roads and highways.

"3. Defendants have admitted the requisite facts. In a June 2016 Settlement Agreement with the State regarding their liability for deceptive advertising, Defendants admitted that the defeat device software that they installed and maintained on subject vehicles in Alabama ‘renders certain emission control systems in the vehicles inoperative when the [engine-control module] detects the vehicles are not undergoing Federal Test Procedures."³

The complaint went on...