It Is Time For A Comprehensive Auto Whistleblower Act

Katz, Marshall & Banks partner Alexis H. Ronickher published an article in Law360 on October 5, 2015, entitled “It Is Time For A Comprehensive Auto Whistleblower Act.”  The article discusses the pressing need for protections for automobile whistleblowers in the wake of the Volkswagen scandal, and addressed several important gaps in the protections and incentives offered by the automobile industry whistleblower legislation currently before Congress.


 

Law360, New York (October 5, 2015, 11:08 AM ET) --

 
 

Whistleblower protections in the auto industry are long overdue. Volkswagen AG's fraudulent diesel emissions scandal is only the latest in a decades-long parade of wrongdoing by the automobile industry. Over the years, automobile manufacturers have demonstrated that they are willing to time and again place profit over consumer safety and complying with the law — many times resulting in the loss of life.

Laws that protect and incentivize whistleblowing are proven to be effective tools in fighting fraud and misconduct. The Sarbanes-Oxley Act and the U.S.Securities and Exchange Commission's whistleblower rewards program established by the Dodd-Frank Act are well-recognized as helping to uncover and stop corporate fraud and misconduct. Congress has also provided protections to whistleblowers in a wide range of other critical regulatory areas, such as nuclear energy, aviation, consumer product safety and food safety.

There is no defensible reason that auto whistleblowers should not have the same protections and incentives as these other whistleblowers, particularly given the auto industry’s history of disregard for public safety and the law. Who can forget the Ford Pinto scandal of the 1970s? Ford sold the car for years knowing that it contained a critical defect that resulted in the passenger compartment filling with fuel and igniting because Ford Motor Co. determined that fixing the problem would be more costly than resolving possible lawsuits. At least 27 people dead because of this defect.

More recently, in 2012, Toyota Motor Corp. finally admitted that several of its Toyota and Lexus models would suddenly accelerate on their own and recalled them, but only after years of concealing the problem and lying to regulators. Again, this defect led to documented deaths. The ongoing Takata Corp. airbag recall has affected at least 17 million cars sold around the world. For at least four years, Takata knowingly manufactured airbags that in certain conditions could shower the car interior with shrapnel and chemicals. Honda Motor Co. Ltd. also knowingly used those airbags in its cars.

This September, just weeks prior to the Volkswagen scandal breaking, General Motors Co. finally agreed to pay criminal penalties for its cover-up of the faulty ignition switch in its Chevy Cobalt that led to at least 90 reported deaths. Now we discovery that Volkswagen sold 11 million diesel vehicles worldwide with software that turned on the vehicle’s pollution controls only when it was undergoing an emissions test. For the diesels sold in the United States, this software resulted in the vehicles’ emissions being up to 35 times the legal limited.

Earlier this year there was some action to promote whistleblowing in the automobile industry, although it was not nearly enough and it stalled over the summer. On April 28, 2015, the Senate passed the Motor Vehicle Safety Whistleblower Act ("MVSWA") and referred it to the House of Representatives, which has taken no action on the bill. More importantly, however, as written the bill does not provide the protections needed to truly combat the ongoing wrongdoings of the automobile industry.

The MVSWA would create a whistleblower reward program modeled off of the SEC’s whistleblower reward program. As drafted, the MVSWA defines a whistleblower as an employee or contractor of a motor vehicle manufacturer, part supplier or dealership, who provided information to the U.S. Department of Transportation relating to any motor vehicle defect, regulatory noncompliance or violation of any notification or reporting requirement, provided that the defect or violation was likely to cause unreasonable risk of death or serious physical injury. If the information leads to a successful administrative or judicial action that resulted in monetary sanctions exceeding $1 million, the whistleblower is eligible for an award of up to 30 percent of the total monies collected.

The first problem with the MVSWA as drafted is that it is limited to defects or violations that would likely result in “unreasonable risk of death or serious physical injury.” As the Volkswagen scandal illustrates, consumer safety — while vitally important — is not the only type of misconduct that the public needs protection from. Volkswagen’s fraudulent emissions have defrauded millions of customers and resulted in the gross pollution of the environment, which could hypothetically result in up to $18 billion in penalties against the company. As proposed, a whistleblower who reported this fraud would not be eligible to recover any award under the program. Given the signs that Volkswagen’s misdeeds may not be isolated — a European environmental group is now reporting that there are signs that several other automakers (BMW, Mercedes-Benz and General Motors’ Opel unit) may also have engaged in similar conduct — it is essential that any auto industry whistleblower reward program cover both public safety, public health and fraud.

Equally as important, the MVSWA does not protect whistleblowers from retaliation, unlike Dodd-Frank. Nothing in the MVSWA prohibits employers from retaliating against an employee who provides information to the government, meaning that employees risk their jobs by participating in the rewards program with no recourse — a risk that most employees are not willing to take. Nor does it protect whistleblowers who report misconduct internally, which is also a fatal flaw. The prevalence of internal whistleblowing is demonstrated by the Volkswagen scandal itself. German news outlets are reporting that in 2011 a Volkswagen employee alerted the company to the fact that it was breaking the law by hiding the actual emissions of its diesel vehicles. With the vast majority of whistleblowers first reporting internally, failing to provide protection from retaliation to these whistleblowers ensures that employees who know about misconduct will stay quiet.

Finally, the MVSWA limits participation in the reward program to employees and contractors to auto industry participants. Again, the Volkswagen scandal illustrates why the rewards program should be available to anyone with information regarding misconduct. Volkswagen’s fraud was uncovered not by an employee or a contractor, but by an environmental group and an academic institution. As currently drafted, neither organization nor individuals in those organizations would have qualified for any award under the program. The SEC program does not include a similar limitation for who is eligible for an award and there is no reason to apply it in the auto industry context.

The efficacy of laws that protect and incentivize whistleblowing is without doubt, which is why such laws have multiplied over the past decade. The only reason that there are no whistleblower protections for auto whistleblowers is that the auto industry has been able to wield its significant political influence to prevent such protections. Instead of simply holding hearings and investigating the Volkswagen scandal, Congress needs to take real action by amend the MVSWA to address its shortfalls and then quickly passing it.

—By Alexis H. Ronickher, Katz Marshall & Banks LLP

Alexis Ronickher is a partner in Katz Marshall & Banks' Washington, D.C., office.

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