Auto Industry Under Siege Over Defects, Mileage Ratings

A record number of product-safety recalls and massive civil and criminal penalties for such compliance failure as mis-stated mileage ratings have put all manufacturers and suppliers in the automotive industry on notice—and things are only just starting to rev up.  

Ever since General Motors issued its massive recall over defective ignition switches, automakers have been in overdrive issuing voluntary recalls of their own for fear of suffering the same fate. “You don’t want to be the manufacturer who gets caught with a problem who hasn’t reported it,” says Daniel Sharkey, co-founder and member of the law firm Brooks Wilkins Sharkey & Turco. “The GM ignition switch recall raised everybody’s antennae.”

The auto industry has been erring on the side of caution ever since the National Highway Traffic Safety Administration hit GM with a record $35 million penalty—the maximum fine allowed—for failing to report safety defects in its vehicles that have been linked to 29 deaths. GM also faces several other investigations, including a criminal probe by the Department of Justice that looks a lot like the one it brought against Toyota. That investigation culminated with a record $1.2 billion criminal penalty—the largest of its kind in the auto industry—for intentionally concealing and misleading the public about safety defects in its automobiles related to susceptibility of accelerators in its cars to get stuck under floor mats.

According to the NHTSA, automakers have recalled over 43 million vehicles this year through July 31. Compliance Week counted another three million recalls in October through Nov. 5, already putting the total number of vehicle recalls in 2014 at its second highest since 1999, when automakers recalled 55.6 million vehicles. The NHTSA won’t issue a final tally until the end of the year.

“You don’t want to be the manufacturer who gets caught with a problem who hasn’t reported it. The GM ignition switch recall raised everybody’s antennae.”
Daniel Sharkey, Member, Brooks Wilkins Sharkey & Turco

“The numbers speak for themselves,” Sharkey says. “I have dealt with more client calls about recalls this year than I have in all other years combined, and I’ve been practicing for twenty years.”

“The regulations require automakers to report any defect within five business days of making a determination that it is safety-related,” Sharkey adds. Therefore, very few recalls have been externally required by NHTSA, and nearly are all self-initiated. In the current political climate, “automakers have been aggressively issuing recalls, rather than risk NHTSA’s scrutiny for having failed to,” he says.

Few automakers appear unscathed. Among the latest companies to issue recalls: Audi for front air bags that may not deploy in the event of impact; Infiniti for software errors that may cause unexpected acceleration; and Toyota for fuel leaks that increase the risk of fire.

Recalls already are expected to surpass the record set in 1999, particularly after the NHTSA’s latest notice issued last month to 10 automakers over defective airbags made by Japan-based airbag supplier Takata that can inflate violently, ripping from their brackets and causing an explosion of shrapnel. That notice could lead to a recall of 7.8 million vehicles.

Auto companies affected by that notice include GM, Toyota, Honda, Mazda, BMW, Nissan, Mitsubishi, Subaru, Chrysler, and Ford. “We’re leaving no stone unturned in our aggressive pursuit to track down the full geographic scope of this issue,” NHTSA Acting Chief David Friedman said in a statement.

Product safety problems are not the only type of violations regulators are focused on. This month, federal prosecutors, together with the Environmental Protection Agency, slapped South Korea automakers Hyundai and Kia with a record $100 million civil penalty—the largest in Clean Air Act history—for understating the mileage rating on cars. Both companies must also spend approximately $50 million on measures to prevent future violations. 

“This unprecedented resolution with Hyundai and Kia underscores the Justice Department’s firm commitment to … relentlessly pursuing companies that make misrepresentations and violate the law,” Attorney General Eric Holder said in a statement.  “This type of conduct quite simply will not be tolerated, and the Justice Department will never rest or waver in our determination to take action against any company that engages in such activities—whenever and wherever they are uncovered.”

NHTSA Enforcement

The NHTSA has a lot to prove amid a firestorm of criticism from Congress for the way it handled—or rather didn’t handle—GM’s ignition-switch recall. A scathing 45-page report issued in September by the House Energy and Commerce Committee revealed that the same pervasive problems that plagued GM also plagued its regulator.

“The NHTSA, too, suffered from a lack of accountability, poor information-sharing, and a fundamental misunderstanding of the vehicles—all of which contributed to the failure to identify and fix this deadly defect,” Rep. Tim Murphy (R-Penn.), chair of the Oversight and Investigations Sub-committee, said in a statement.

Mounting criticism effectively translates into enhanced regulatory oversight for the auto industry. “The NHTSA is under fire from Congress. In turn, the automakers are under fire from the NHTSA, and the entire supply base is under fire from the automakers,” Sharkey says.

Furthermore, the Obama administration is anticipated to soon nominate a new leader of the NHTSA, replacing Friedman. “That new leader is going to have to shake things up,” Sharkey says. With the amount of Congressional pressure being applied to the NHTSA, the president is going to want to appoint somebody who is going to be seen as a force to be reckoned with, he says.

Stiffer Penalties

That’s not to say that the NHTSA’s enforcement has been lax. Since 2010, the agency has slapped automakers with the maximum statutory penalty at least seven times, says Christopher Grigorian, a partner with law firm Foley & Lardner.

“This level of enforcement is unprecedented in the NHTSA’s history,” Grigorian says. “I expect the NHTSA will continue its aggressive enforcement, with a particular emphasis on recall timeliness.”

The NHTSA’s biggest target of late is Honda, which has been ordered to produce documents under oath describing its reporting procedures regarding Takata’s defective air bags. “The NHTSA is also concerned that Honda’s reporting failures go beyond the Takata incidents,” the agency stated. “The NHTSA has received information from Honda indicating that Honda may have failed to meet its TREAD reporting obligations, including reporting other death or injury incidents.”

The TREAD Act requires that automakers submit to the NHTSA, on a quarterly basis, early warning reports on each and every incident involving death or injury. These reports must be submitted to the NHTSA no later than 60 days after the last day of each calendar quarter.

Automakers aren’t the only ones being swept into these product-safety investigations. NHTSA, for example, is also investigating whether Takata failed to report the safety defect.

New Regulations?

LATEST RECALLS

Below is a partial list of the latest recalls announced by auto manufacturers:

Nov. 5: 101,938 Audi vehicles from 2013-2015, including Allroad and A3 models, recalled for the front air bags which may not deploy in the event of a secondary impact.

Nov. 5: 6,562 Infiniti vehicles from 2013-2015, including Q70 and M35 hybrid models, recalled for a potential software error which may cause unexpected acceleration.

Nov. 5: 135 Pierce emergency vehicles from 2009-2013, including Quantum and Velocity models, recalled for front lower control arms that may crack and fracture.

Nov. 4: 5,412 Infiniti hybrid vehicles from 2014, including Q50 and Q70 models, recalled for a software error which may cause the electric motor to stop working.

Nov. 4: 817 Infiniti hybrid vehicles from 2014, including Q50 and Q70 models, recalled for potentially damaged transmission housings which could crack and disable the vehicle.

Oct. 31: 20,000 Toyota vehicles from 2014-2015, including Toyota Sienna and Lexus RX350 models, recalled for a potential fuel leak, increasing the risk of a fire.

Oct. 31: 1,848 Infiniti QX56 and QX80 vehicles from 2013-2014, recalled for the air bag inflator which may have been manufactured with an incorrect part, causing the inflator to rupture.

Oct. 30: 23,053 Chrysler Ram ProMaster vehicles from 2014, recalled for the Tire Pressure Monitoring System which may not notify drivers of low tire pressure.

Oct. 29: 314,704 Chrysler vehicles from 2010-2014, including Ram 2500 and 5500 models, recalled for the electrical connectors of the diesel fuel heater which may overheat, causing a leak in the fuel heater.

Oct. 29: 132,223 Chrysler vehicles from 2014, including Dodge Durango and Jeep Grand Cherokee models, recalled for an issue with software that may disable the Electronic Stability Control.

Oct. 28: 126,772 Chrysler vehicles from 2014, including Dodge Durango and Jeep Grand Cherokee models, recalled for a fault in the Occupant Restraint Control that may disable the front airbags, seat belt pretensioners, and side airbags.

Oct. 28: 37,145 Mitsubishi Outlander vehicles from 2007-2009, recalled for the brake light switch which may malfunction, causing the brake lights to not illuminate.
Source: NHTSA.

Legal experts expect that this level of regulatory scrutiny in the auto industry will continue for the foreseeable future. “The industry may face new enforcement regulations and even higher penalties as a result of Congressional response to the GM ignition switch investigation and hearings,” Grigorian says.  

“In light of these risks, it is critical that manufacturers adopt compliance policies that provide the necessary internal guidance for identifying, investigating, and reporting safety defects,” Grigorian adds.

If government scrutiny is not reason enough for automakers and their suppliers to improve their internal policies and procedures, the Occupational Safety and Health Administration has also put employees of automakers, part suppliers, and dealerships on notice of their rights to report any safety-related defects.

According to a fact sheet issued by OSHA, employees are protected from retaliation if they provide information to their employer or the Department of Transportation relating to any motor vehicle defect. Employees are also are protected from retaliation if they file, testify, assist, or participate in a proceeding concerning any defect.

“Given the ongoing publicity about auto recalls and penalties assessed against auto manufacturers, motor vehicle and parts manufacturers and dealerships should be careful not to take adverse action against an employee who may later argue that they have engaged in protected conduct,” Howard Mavity, a partner with law firm Fisher & Phillips, said in a client alert. “Carefully document actions taken to show that any alleged protected actions were not the cause of the adverse action.”

Another important measure is to have a cross-functional team in place before a product quality problem even arises, Sharkey advises. Members of that team should include subject-matter experts—such as the manufacturers and engineers who worked on the vehicles parts and components—as well as legal, compliance, quality experts, and more. “Just having that product quality team in place so that you’re dealing with issues ahead of time is very important,” he says.

In the event an issue does arise, it’s imperative to meet within one to two business days to address the problem as soon as possible, Sharkey adds. Any company that fails to be properly prepared, and fails to provide truthful documentation when requested, can expect to suffer the same fate as GM, and now, Honda—or, worse yet, face criminal prosecution as in Toyota’s case.