Legal risks
For this risk category, the likelihood of occurrence is classified as medium (previous year: medium) and the potential extent of damage is classified as medium (previous year: high).
The most significant risks from the regular GRC process and QRP are associated with the diesel issue.
Litigation
Volkswagen AG and the companies in which it is directly or indirectly invested are involved in a substantial number of legal disputes and governmental proceedings in Germany and abroad. Such legal disputes and other proceedings occur, among other things, in connection with products and services or in relation to employees, public authorities, dealers, investors, customers, suppliers, or other contracting parties. For the companies in question, these disputes and proceedings may result in payments such as fines or in other obligations or consequences. In particular, substantial compensatory or punitive damages may have to be paid and cost-intensive measures may have to be implemented. In this context, specific estimation of the objectively likely consequences is often possible only to a very limited extent, if at all.
Various legal proceedings are pending worldwide, particularly in the USA, in which customers are asserting purported product-related claims, either individually or in class actions. These claims are as a rule based on alleged vehicle defects, including defects alleged in vehicle parts supplied to the Volkswagen Group. Compliance with legal or regulatory requirements (such as the GDPR) is another area in which risks may arise. This is particularly true in gray areas where Volkswagen and the relevant public authorities may interpret the law differently.
In connection with their business activities, Volkswagen Group companies engage in constant dialogue with regulatory agencies including the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority). It is not possible to predict with assurance how government regulators will assess certain issues of fact and law in a particular situation. For this reason, the possibility that certain vehicle characteristics and/or type approval aspects may in particular ultimately be deemed deficient or impermissible cannot be ruled out. This is fundamentally a question of the regulatory agency’s specific evaluation in a concrete situation.
Risks may also result from actions for infringement of intellectual property, including infringement of patents, trademarks, or other third-party rights, particularly in Germany and the USA. If Volkswagen is alleged or determined to have violated third-party intellectual property rights, it may have to pay damages, modify manufacturing processes, or redesign products, and may be barred from selling certain products; this may result in delivery and production restrictions or interruptions.
Criminal acts by individuals, which even the best compliance management system can never completely prevent, are another potential source of legal risks.
Appropriate insurance has been taken out to cover these risks where they were sufficiently definite and such coverage was economically sensible. Where necessary based on the information currently available, identified and correspondingly measurable risks have been reflected by recognizing provisions in amounts considered appropriate or disclosing contingent liabilities, as the case may be. As some risks cannot be assessed or can only be assessed to a limited extent, the possibility of material loss or damage not covered by the insured amounts or by provisions cannot be ruled out. This is, for instance, the case with regard to the legal risks assessed in connection with the diesel issue.
Diesel issue
On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain Volkswagen Group vehicles with 2.0 l diesel engines in the USA. In this context, Volkswagen AG announced that noticeable discrepancies between the figures recorded in testing and those measured in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. On November 2, 2015, the EPA issued a “Notice of Violation” alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines.
The so-called diesel issue is rooted in a modification of parts of the software of the relevant engine control units – which, according to Volkswagen AG’s legal position, is only unlawful under US law – for the type EA 189 diesel engines that Volkswagen AG was developing at that time. The decision to develop and install this software function was taken in late 2006 below Board of Management level. No member of the Board of Management had, at that time and for many years to follow, knowledge of the development and implementation of this software function.
There are furthermore no findings that, following the publication in May 2014 of the study by the International Council on Clean Transportation, an unlawful “defeat device” under US law was disclosed either to the Ausschuss für Produktsicherheit (Product Safety Committee) or to the persons responsible for preparing the 2014 annual and consolidated financial statements as the cause of the high NOx emissions in certain US vehicles with 2.0 l type EA 189 diesel engines. Rather, at the time the 2014 annual and consolidated financial statements were being prepared, the persons responsible for preparing these financial statements remained under the impression that the issue could be resolved with comparatively little expense.
In the course of the summer of 2015, however, it became progressively apparent to individual members of Volkswagen AG’s Board of Management that the cause of the discrepancies in the USA was a modification of parts of the software of the engine control unit that was later identified as an unlawful “defeat device” as defined by US law. This culminated in Volkswagen’s disclosure of a “defeat device” to the EPA and the California Air Resources Board, a department of the Environmental Protection Agency of the State of California, on September 3, 2015. According to the assessment at the time by the responsible persons dealing with the matter, the magnitude of the costs expected to result for the Volkswagen Group (recall costs, retrofitting costs, and financial penalties) was not fundamentally dissimilar to that in previous cases involving other vehicle manufacturers. It therefore appeared to be manageable overall considering the business activities of the Volkswagen Group. This assessment by Volkswagen AG was based, among other things, on the advice of a law firm engaged in the USA for regulatory approval issues, according to which similar cases had in the past been amicably resolved with the US authorities. The EPA’s publication of the “Notice of Violation” on September 18, 2015, which the Board of Management had not expected, especially at that time, then presented the situation in an entirely different light.
The AUDI AG Board of Management members in office at the time in question have likewise stated that they had no knowledge of the use of “defeat device” software that was prohibited by US law in the type V6 3.0 l TDI engines until the EPA issued its November 2015 “Notice of Violation”.
Within the Volkswagen Group, Volkswagen AG has development responsibility for the four-cylinder diesel engines such as the type EA 189, and AUDI AG has development responsibility for the six- and eight-cylinder diesel engines such as the type V6 3.0 l and V8 4.2 l diesel engines.
As a consequence of the diesel issue, numerous judicial and regulatory proceedings were initiated in various countries. Volkswagen has in the interim succeeded in making substantial progress and ending many of these proceedings. In the USA, Volkswagen AG and certain affiliates reached settlement agreements with various government authorities and private plaintiffs, the latter represented by a Plaintiffs’ Steering Committee in a multidistrict litigation in the US state of California. The agreements in question include various partial consent decrees as well as a plea agreement that resolved certain civil claims as well as criminal charges under US federal law and the laws of certain US states in connection with the diesel issue. Although Volkswagen is firmly committed to fulfilling the obligations arising from these agreements, a breach of these obligations cannot be completely ruled out. In the event of a violation, significant penalties could be imposed as stipulated in the agreements, in addition to the possibility of further monetary fines, criminal sanctions and injunctive relief. The last remaining vehicle class settlement program for customers in the United States, which pertained to second Generation 3.0 l TDI vehicles, ended in May 2020.
In agreement with the respective responsible authorities, the Volkswagen Group is making technical measures available worldwide for virtually all diesel vehicles with type EA 189 engines. For all clusters (groups of vehicles) within its jurisdiction, the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) determined that implementation of the technical measures would not result in any adverse changes in fuel consumption, CO2 emissions, engine output, maximum torque, and noise emissions.
Following the studies carried out by AUDI AG to check all relevant diesel concepts for possible irregularities and retrofit potential, measures proposed by AUDI AG have been adopted and mandated by the KBA in various recall orders pertaining to vehicle models with V6 and V8 TDI engines. AUDI AG currently anticipates that the total cost, including recall expenses, of the ongoing largely software-based retrofit program that began in July 2017 will be manageable and has recognized corresponding balance-sheet risk provisions. AUDI AG has in the meantime developed software updates for many of the affected powertrains and, after approval by the KBA, already installed these in the vehicles of a large number of affected customers. The software updates still being developed are expected to be submitted to the KBA in 2021 for approval.
In connection with the diesel issue, potential consequences for Volkswagen’s results of operations, financial position and net assets could emerge primarily in the following legal areas:
1. Criminal and administrative proceedings worldwide (excluding the USA/Canada)
Criminal investigations, regulatory offense proceedings, and/or administrative proceedings have been commenced in some countries. Criminal investigations into the core factual issues are being conducted by the Offices of the Public Prosecutor in Braunschweig and Munich.
In May 2020, the criminal proceedings against the current Chairman of the Board of Management of Volkswagen AG and a former member of its Board of Management (currently Chairman of the Supervisory Board) regarding alleged market manipulation relating to capital market disclosure obligations in connection with the diesel issue were definitively terminated by the Braunschweig Regional Court against payment in each case of a court-imposed sum of €4.5 million, thereby also terminating to the same extent the proceedings against Volkswagen AG as collateral participant. After permitting the charges against a former Chairman of the Board of Management of Volkswagen AG and the related action against Volkswagen AG to go forward in September 2020, the Braunschweig Regional Court in January 2021 terminated these proceedings – provisionally as regards the indictment which is for the time being still pending against the former Chairman of the Board of Management, but definitively as regards Volkswagen AG.
In September 2020, the Braunschweig Regional Court accepted the indictment of the same former Chairman of the Board of Management of Volkswagen AG and others on charges that include fraud in connection with the diesel issue involving type EA 189 engines and opened the main trial proceedings.
In June 2020, the Munich II Regional Court accepted the substantially unchanged indictment of the Munich II Office of the Public Prosecutor, which also names the former Chairman of the Board of Management of AUDI AG, and opened the main trial proceedings on charges of, among other things, fraud in connection with the diesel issue involving 3.0 l TDI engines. Trial proceedings commenced in September 2020.
In August 2020, the Munich II Office of the Public Prosecutor issued a further indictment charging three former members of the Board of Management of AUDI AG and others with, among other things, fraud in connection with the diesel issue involving 3.0 l and 4.2 l TDI engines.
In connection with the diesel issue, the Stuttgart Office of the Public Prosecutor is conducting a criminal investigation on suspicion of fraud and illegal advertising; this investigation also involves a member of the Board of Management of Dr. Ing. h.c. F. Porsche AG.
The respective Group companies have appointed renowned law firms to clarify the matters underlying the public prosecutor’s accusations. The Board of Management and Supervisory Board receive regular updates on the current status.
As the type approval authority of proper jurisdiction, the KBA is moreover continuously testing Audi, Volkswagen, and Porsche brand vehicles for problematic functions. If certain functions are deemed impermissible by the KBA, the affected vehicles are recalled pursuant to a recall order or they are brought back into compliance by means of a voluntary service measure.
Moreover, additional administrative proceedings relating to the diesel issue are ongoing in other jurisdictions.
The companies of the Volkswagen Group are cooperating with the government authorities.
Risks may furthermore result from possible decisions by the European Court of Justice construing EU type approval provisions.
Whether the criminal and administrative proceedings will ultimately result in fines or other consequences for the Company, and if so what amounts these may entail, is currently subject to estimation risks. According to Volkswagen’s estimates, the likelihood that a sanction will be imposed is 50% or less in the majority of these proceedings. Contingent liabilities have therefore been disclosed where the amount of such liabilities could be measured and the likelihood of a sanction being imposed was assessed at not less than 10%. Provisions were recognized to a small extent.
2. Product-related lawsuits worldwide (excluding the USA/ Canada)
A general possibility exists that customers in the affected markets will file civil lawsuits or that importers and dealers will assert recourse claims against Volkswagen AG and other Volkswagen Group companies. Besides individual lawsuits, various forms of collective actions (i.e. assertion of individual claims by plaintiffs acting jointly or as representatives of a class) are available in various jurisdictions. Furthermore, in a number of markets it is possible for consumer and/or environmental organizations to bring suit to enforce alleged rights to injunctive relief, declaratory judgment, or damages.
Customer class action lawsuits and actions brought by consumer and/or environmental organizations are pending against Volkswagen AG and other Volkswagen Group companies in a number of countries including Australia, Belgium, Brazil, England and Wales, France, Germany, Italy, the Netherlands, Portugal, and South Africa. Alleged rights to damages and other relief are asserted in these actions. The pending actions include in particular the following:
In Australia, various class action lawsuits had been pending against Volkswagen AG and other Volkswagen Group companies, including the Australian subsidiaries. In December 2019, Volkswagen AG reached tentative agreements with the Australian class action plaintiffs terminating the litigation; the court approved these agreements in April 2020. Volkswagen AG anticipates that the total cost of settling these actions will be approximately AUD 180 million. Two civil suits filed against Volkswagen AG and other Group companies by the Australian Competition and Consumer Commission (ACCC) were settled in the second half of 2019. The settlement is not yet legally final, however, as an appellate court has yet to rule on the amount of the fine. Depending on the appellate court decision, Volkswagen AG continues to anticipate payment of a fine of up to AUD 125 million.
In Belgium, the Belgian consumer organization Test Aankoop VZW has filed a class action to which an opt-out mechanism has been held to apply. Given the opt-out rule, the class action potentially covers all vehicles with type EA 189 engines purchased by consumers on the Belgian market after September 1, 2014, unless the right to opt out is actively exercised. The asserted claims are based on purported violations of unfair competition and consumer protection law as well as on alleged breach of contract.
In Brazil, two consumer protection class actions are pending. The first of these class actions pertains to some 17 thousand Amarok vehicles and the second to roughly 67 thousand later generation Amaroks. In the first class action, an appeals judgment was rendered in May 2019 that only partially upheld the lower court’s decision. This judgment initially reduced the damage liability of Volkswagen do Brasil considerably to around BRL 172 million plus interest. This amount can increase as a result of the adjudicated inflation rate and the assertion of individual claims alleging declines in the value of affected Amarok vehicles. The appeals judgment remains non-final since Volkswagen do Brasil has appealed it to a higher court. So far no judgment has been rendered in the second class action proceeding.
In Germany, Volkswagen AG and Verbraucherzentrale Bundesverband e.V. (Federation of Consumer Organizations) entered into an out of court settlement on February 28, 2020 terminating the consumer action for model declaratory judgment. The terms of the settlement require Volkswagen AG to offer individual settlements to consumers who registered claims under the action for model declaratory judgment and meet the settlement criteria. As a result, Volkswagen AG entered into individual settlements in the reporting year with some 245 thousand customers in an aggregate amount of roughly €770 million. The process of settling the consumer action for model declaratory judgment is thus almost complete. Verbraucherzentrale Bundesverband e.V. withdrew the action for model declaratory judgment on April 30, 2020.
In addition, various actions have been brought against companies of the Volkswagen Group in several German regional courts by financialright GmbH, which is asserting rights assigned to it by a total of approximately 45 thousand customers in Germany, Slovenia, and Switzerland.
In England and Wales, suits filed in court by various law firms have been joined in a single collective action (group litigation). Because of the opt-in mechanism, not all vehicles with type EA 189 engines are automatically covered by the group litigation; potential claimants must instead take action in order to join. To date, some 90 thousand plaintiffs have registered claims under the group litigation, for which the opt-in period has expired. In these proceedings, the High Court in England and Wales ruled in April 2020 that the switch logic in the EA 189 engine constituted an unlawful defeat device; the court believed that it was also bound by the findings of the KBA (German Federal Motor Transport Authority) in this respect. In August 2020, the Court of Appeal rejected Volkswagen’s appeal against the High Court’s ruling on these preliminary questions; this decision is final. The question of liability on the part of Volkswagen was not a matter addressed by the High Court’s ruling and will be dealt with at a later stage of the proceedings. The main trial proceedings are to begin in January 2023.
In France, the French consumer organization Confédération de la Consommation, du Logement et du Cadre de Vie (CLCV) filed a class action in September 2020 against Volkswagen Group Automotive Retail France and Volkswagen AG for up to 950 thousand French owners and lessees of vehicles with type EA 189 engines. This is an opt-in class action in which the affected consumers are not required to opt into the class action until a legally final judgment is rendered.
In Italy, a class action lawsuit filed by the consumer association Altroconsumo on behalf of Italian customers is pending before the Venice Regional Court. This litigation involves damage claims based on alleged breaches of contract as well as claims based on purported violations of Italian consumer protection law. Some 82 thousand customers have registered for the class action, whereby the validity of the majority of the registrations is still unclear.
In the Netherlands, Stichting Volkswagen Car Claim has brought an opt-out class action seeking declaratory rulings. Any individual claims would then have to be established afterwards in separate proceedings. In November 2019 the Regional Court in Amsterdam held the requests for relief to be inadmissible in part. Proceedings in the matter are presently suspended. Furthermore, in April 2020 an opt-out class action lawsuit seeking monetary damages on behalf of Dutch consumers was served on Volkswagen by the Diesel Emissions Justice Foundation. It is currently unclear whether other consumers in addition to those in the Netherlands may join this class action. The class action relates to vehicles with type EA 189 engines, among others.
In Portugal, a Portuguese consumer organization has filed an opt-out class action. Potentially, up to approximately 139 thousand vehicles with type EA 189 engines are affected in the Portuguese market. The complaint seeks vehicle return and alleges damages as well.
In South Africa, an opt-out class action seeking damages is pending that pertains to some 8 thousand vehicles with V6 and V8 TDI engines in addition to approximately 72 thousand vehicles with type EA 189 engines.
Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in various countries; most of these lawsuits are seeking damages or rescission of the purchase contract.
In Germany, over 55 thousand individual lawsuits are currently pending. In May 2020, the Bundesgerichtshof (BGH – Federal Court of Justice) handed down its first decision ever in an individual product-related lawsuit in connection with the diesel issue. The BGH held that the buyer, who had purchased a vehicle with a type EA 189 engine prior to public disclosure of the diesel issue, had a claim for damages against Volkswagen AG. While the buyer can require reimbursement of the vehicle’s purchase price, he must accept a deduction for the benefit derived from using the vehicle and must return it to Volkswagen AG. The judgment clarified the BGH’s stance on the fundamental issues underlying a large number of the individual diesel lawsuits then still pending in Germany. On this basis, it has since been possible to conclude settlements and thus significantly reduce the number of individual lawsuits pending. In a series of fundamental judgments rendered in July 2020, the BGH decided further legal issues of major importance for the litigation still pending with regard to vehicles with type EA 189 engines. The BGH held that plaintiffs who purchased their vehicle after the ad hoc announcement of September 22, 2015 have no claim for damages. The court furthermore ruled that purchasers of affected vehicles are not entitled to tort interest under section 849 of the German Civil Code. The court also made it clear that a plaintiff’s potential damage claim may be completely offset by the benefit derived from using the vehicle.
Volkswagen estimates the likelihood that the plaintiffs will prevail to be 50% or less in the great majority of cases: customer class actions, complaints filed by consumer and/or environmental organizations, and individual lawsuits. Contingent liabilities are disclosed for these proceedings where the amount of such liabilities can be measured and the chance that the plaintiff will prevail was assessed as not remote. Since most of these actions are still in an early procedural stage, it is in many cases not yet possible to quantify the realistic risk exposure. Furthermore, provisions were recognized to the extent necessary based on the current assessment.
At this time, it cannot be estimated how many customers will choose to file lawsuits in the future in addition to those already pending and what prospect of success such lawsuits might have.
3. Lawsuits filed by investors worldwide (excluding the USA/ Canada)
Investors from Germany and abroad have filed claims for damages against Volkswagen AG – in some cases along with Porsche Automobil Holding SE (Porsche SE) as joint and several debtors – based on purported losses due to alleged misconduct in capital market communications in connection with the diesel issue.
The vast majority of these investor lawsuits are currently pending before the Braunschweig Regional Court. In August 2016, the Braunschweig Regional Court issued an order referring common questions of law and fact relevant to the investor lawsuits pending before it to the Higher Regional Court in Braunschweig for binding declaratory rulings pursuant to the Kapitalanleger-Musterverfahrensgesetz (KapMuG – German Capital Investor Model Declaratory Judgment Act). In this proceeding, common questions of law and fact relevant to these actions are to be adjudicated by the Braunschweig Higher Regional Court in a single consolidated proceeding (model case proceedings). The lawsuits filed with the Braunschweig Regional Court are stayed pending resolution of the common issues, unless the cases can be dismissed for reasons independent of the common issues that are to be adjudicated in the model case proceedings. The resolution in the model case proceedings of the common questions of law and fact will be binding for the pending cases that have been stayed as described. The model case plaintiff is Deka Investment GmbH. Oral argument in the model case proceedings before the Braunschweig Higher Regional Court began in September 2018 and will be continued at subsequent hearings.
Further investor lawsuits have been filed with the Stuttgart Regional Court against Volkswagen AG, in some cases along with Porsche SE as joint and several debtor. A further investor action for model declaratory judgment is pending before the Stuttgart Higher Regional Court against Porsche SE; Volkswagen AG is involved in this action as a third party intervening in support of a party to the dispute. The Wolverhampton City Council, Administrating Authority for the West Midlands Metropolitan Authorities Pension Fund, has been appointed model case plaintiff. The first hearing for oral argument in these proceedings has yet to take place.
Additional investor lawsuits have been filed with various courts in Germany and the Netherlands.
Excluding the United States and Canada, claims in connection with the diesel issue totaling roughly €9.7 billion are currently pending worldwide against Volkswagen AG in the form of investor lawsuits, judicial applications for dunning and conciliation procedures, and claims under the KapMuG. Volkswagen AG remains of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized for these investor lawsuits. Contingent liabilities have been disclosed where the chance of success was estimated to be not less than 10%.
4. Proceedings in the USA/Canada
In the USA and Canada, the matters described in the EPA’s “Notices of Violation” are the subject of various types of lawsuits and requests for information that have been filed against Volkswagen AG and other Volkswagen Group companies, in particular by customers, investors, salespersons, and various government agencies in Canada and the United States, including the attorneys general of several US states.
The attorneys general of five US states (Illinois, Montana, New Hampshire, Ohio, and Texas) and some municipalities have suits pending in state and federal courts against Volkswagen AG, Volkswagen Group of America, Inc., and certain affiliates, alleging violations of environmental laws. The claims asserted by Illinois have been dismissed in full, but Illinois has appealed the dismissal of a subset of its claims. Certain claims asserted by Montana, Ohio, Texas, two Texas counties, Hillsborough County (Florida), and Salt Lake County (Utah) have also been dismissed, but these suits are currently proceeding as to other claims. Volkswagen has asked the US Supreme Court to review a decision by the US Court of Appeals for the Ninth Circuit that declined to dismiss certain claims brought by Hillsborough and Salt Lake Counties. A Texas appellate court dismissed claims asserted by Texas against Volkswagen AG and AUDI AG for lack of personal jurisdiction. Texas has indicated that it will seek discretionary review by the Texas Supreme Court of that decision.
In March 2019, the US Securities and Exchange Commission (SEC) filed a lawsuit against, among others, Volkswagen AG, Volkswagen Group of America Finance, LLC, and VW Credit, Inc., asserting claims under US federal securities law based, among other things, on alleged misstatements and omissions in connection with the offer and sale of certain bonds and asset-backed securities. In August 2020, the US District Court for the Northern District of California granted in part and denied in part Volkswagen’s motion to dismiss. The claims dismissed by the court included all claims against VW Credit, Inc. related to asset-backed securities. In September 2020, the SEC filed an amended complaint that, among other things, removed the dismissed claims.
Furthermore, in December 2019, the Canadian federal environmental regulator filed charges against Volkswagen AG in respect of 2.0 l and 3.0 l Volkswagen and Audi diesel vehicles at the conclusion of its criminal enforcement-related investigation into the diesel emissions issue. Volkswagen AG cooperated with the investigation and agreed to a plea resolution addressing all of the charges. In January 2020, Volkswagen AG pleaded guilty to the charges and agreed to pay a penalty of CAD 196.5 million, which was approved by the court. Following this approval, the Ontario provincial environmental regulator withdrew its action against Volkswagen AG charging a quasi-criminal enforcement-related offense with respect to certain Volkswagen and Audi 2.0 l diesel vehicles. As to private civil law matters, in an environmental class action lawsuit seeking punitive damages on behalf of the residents of the Province of Quebec, after authorizing the case to proceed as a class, a Quebec court ruled in October 2020 that issues raised as to the viability of plaintiffs’ damages theory should be deferred until trial. On that basis, the court denied a motion to dismiss by Volkswagen. The case remains in the early stages.
In line with IAS 37.92, no statements have been made concerning estimates of financial impact or regarding uncertainty as to the amount or maturity of provisions and contingent liabilities in relation to proceedings in the USA/ Canada. This is so as to not compromise the results of the proceedings or the interests of the Company.
5. Special audit
In a November 2017 ruling, the Higher Regional Court of Celle ordered, upon the request of three US funds, the appointment of a special auditor for Volkswagen AG. The special auditor is to examine whether the members of the Board of Management and Supervisory Board of Volkswagen AG breached their duties in connection with the diesel issue from June 22, 2006 onwards and, if so, whether this resulted in damages for Volkswagen AG. The ruling by the Higher Regional Court of Celle is formally unappealable. However, Volkswagen AG has filed a constitutional complaint with the German Federal Constitutional Court alleging infringement of its constitutional rights. Following the formally unappealable ruling from the Higher Regional Court of Celle, the special auditor appointed by the court indicated that he was not available to conduct the special audit on grounds of age. In April 2020, the Celle Higher Regional Court issued a ruling appointing a different special auditor. Volkswagen AG has filed a constitutional complaint with the Federal Constitutional Court contesting this formally unappealable decision as well on grounds of infringement of its constitutional rights and has suggested joinder of this matter with its initial constitutional complaint against the decision to appoint the special auditor. It is currently unclear when the Federal Constitutional Court will rule on the two constitutional complaints. The constitutional complaints have no suspensory effect.
In addition, a second motion seeking appointment of a special auditor for Volkswagen AG to examine matters relating to the diesel issue has been filed with the Regional Court of Hanover. This proceeding has been stayed pending a decision by the Federal Constitutional Court in the initial special auditor litigation.
6. Risk assessment regarding the diesel issue
An amount of around €1.9 (2.9) billion has been included in the provisions for litigation and legal risks as of December 31, 2020 to account for the currently known legal risks related to the diesel issue based on the presently available information and the current assessments. Where adequately measurable at this stage, contingent liabilities relating to the diesel issue have been disclosed in the notes in an aggregate amount of €4.2 (3.7) billion, whereby roughly €3.5 (3.4) billion of this amount results from lawsuits filed by investors in Germany. The provisions recognized, the contingent liabilities disclosed, and the other latent legal risks in the context of the diesel issue are in part subject to substantial estimation risks given the complexity of the individual relevant factors, the ongoing coordination with the authorities, and the fact that the fact-finding efforts have not yet been concluded. Should these legal or estimation risks materialize, this could result in further substantial financial charges. In particular, adjustment of the provisions recognized in light of knowledge acquired or events occurring in the future cannot be ruled out.
In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or regarding uncertainty as to the amount or maturity of provisions and contingent liabilities in relation to the diesel issue. This is so as to not compromise the results of the proceedings or the interests of the Company.
Additional important legal cases
In 2011, ARFB Anlegerschutz UG (haftungsbeschränkt) filed a claim for damages against Volkswagen AG and Porsche SE for allegedly violating disclosure requirements under capital market law in connection with the acquisition of ordinary shares in Volkswagen AG by Porsche SE in 2008. The damages being sought based on allegedly assigned rights currently amount to approximately €2.26 billion plus interest. In April 2016, the Hanover Regional Court formulated numerous objects of declaratory judgment that the antitrust panel of the Higher Regional Court in Celle will decide on in model case proceedings under the KapMuG. At the first hearing in October 2017, the court already indicated that it currently sees no justification for claims against Volkswagen AG, both because the pleadings are not sufficiently specific and for substantive legal reasons. Volkswagen AG sees the court’s statements as confirmation that the claims against the Company are absolutely baseless. The Higher Regional Court has yet to render a decision as many hearings have been canceled, among other things due to motions for recusal filed by the plaintiff side (so far in all cases without success) and, more recently, as a result of the Covid-19 pandemic.
In Brazil, the Brazilian tax authorities commenced tax proceedings against MAN Latin America; at issue in these proceedings are the tax consequences of the acquisition structure chosen for MAN Latin America in 2009. In December 2017, an adverse administrative appeal ruling was rendered against MAN Latin America. MAN Latin America challenged this ruling before the regular court in 2018. Estimation of the risk in the event the tax authorities prevail on all points is subject to uncertainty because of differences in the amount of penalties and interest that might then apply under Brazilian law. However, a positive outcome for MAN Latin America remains the expectation. Should this not occur, a risk of about BRL 3.1 billion could result for the contested period from 2009 onwards; this amount has been included in contingent liabilities in the notes.
In 2011, the European Commission conducted searches at European truck manufacturers for suspected unlawful exchange of information during the period from 1997 to 2011; in November 2014, the Commission issued a statement of objections to MAN, Scania, and the other truck manufacturers concerned. In its settlement decision of July 2016, the European Commission assessed fines against five European truck manufacturers. MAN’s fine was waived in full as the company had informed the European Commission about the irregularities as a key witness.
In September 2017, the European Commission fined Scania €0.88 billion. Scania has appealed to the European Court of Justice in Luxembourg and will use all means at its disposal to defend itself. Scania had already recognized a provision of € 0.4 billion in 2016.
Furthermore, antitrust lawsuits seeking damages have been received from customers. As is the case in any antitrust proceedings, this may result in further lawsuits for damages. No provisions have been recognized or contingent liabilities disclosed for these cases as most of them are still in an early stage and currently cannot be assessed for this reason. In other cases, the chance of a decision by a court of last resort that awards damages against MAN or Scania currently appears remote.
In April 2019, the European Commission issued a statement of objections to Volkswagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG in connection with the Commission’s antitrust investigation of the automobile industry. These objections state the European Commission’s preliminary evaluation of the matter and afford the opportunity to comment. The subject matter of the proceedings is limited to the cooperation of German automobile manufacturers on technical questions in connection with the development and introduction of SCR systems and gasoline particulate filters for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. After receiving access to the investigation files starting in July 2019, Volkswagen in December 2019 filed its reply to the European Commission’s statement of objections. The Chinese, South Korean, and Turkish competition authorities have also instituted proceedings in this matter.
In October 2020, the US District Court for the Northern District of California dismissed two antitrust class action complaints. The plaintiffs in these actions alleged that several automobile manufacturers including Volkswagen AG and other Group companies had conspired to unlawfully increase vehicle prices in violation of US antitrust and consumer protection law. The court held that the plaintiffs have not stated a claim for relief because the allegations in the complaints do not plausibly support that the alleged agreements unreasonably restrained competition in violation of US law. Plaintiffs have appealed this ruling. Plaintiffs in Canada filed claims with similar allegations on behalf of putative classes of purchasers against several automobile manufacturers, including Volkswagen Group Canada Inc., Audi Canada Inc., and other Volkswagen Group companies. Neither provisions nor contingent liabilities are stated because the early stage of the proceedings makes an assessment of the realistic risk exposure currently impossible.
In addition, a few national and international authorities have initiated antitrust investigations. Volkswagen is cooperating closely with the responsible authorities in these investigations. An assessment of the underlying situation is not possible at this early stage.
A settlement between Volkswagen and the Plaintiffs’ Steering Committee resolving civil claims relating to approximately 98 thousand gasoline-powered Volkswagen, Audi, Porsche, and Bentley vehicles with automatic transmissions received final approval from the US District Court for the Northern District of California in February 2020.
Porsche AG has discovered potential regulatory issues relating to vehicles for various markets worldwide. There are questions as to the permissibility of specific hardware and software components used in type approval measurements. Differences compared with production versions may also have occurred in certain cases. Based on the information presently available, current production is not affected, however. The issues are unrelated to the defeat devices that were at the root of the diesel issue. Porsche AG is cooperating with the relevant authorities including the Stuttgart Office of the Public Prosecutor, which is investigating the matter in Germany. Based on the available information, no formal criminal investigation has been opened against the company, however. Porsche’s own internal investigations are still in progress.
Five complaints related to these matters were filed with the US District Court for the Northern District of California. The complaints alleged that the affected vehicles used certain software and/or hardware that resulted in increased emissions and/or overstated fuel economy estimates as compared to the results of certification testing. The suits named Volkswagen AG, Dr. Ing. h.c. F. Porsche AG, AUDI AG, and Porsche Cars North America, Inc. as defendants; however, each defendant was not named in all the complaints. A consolidated complaint merging the five putative class actions into a single lawsuit was filed in January 2021. AUDI AG is no longer named as a defendant in the consolidated complaint.
Provisions were recognized by Volkswagen Bank GmbH and Volkswagen Leasing GmbH for possible claims in connection with financial services provided to consumers. These relate to actions involving certain features of customer loan and leasing agreements that may toll the running of the statutory cancellation time periods.
In February 2020, Volkswagen AG and another defendant were served with a lawsuit filed by GT Gettaxi Ltd. The lawsuit in particular alleges large damage claims. Volkswagen is assessing the alleged claims and defending itself against them.
In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or regarding uncertainty as to the amount or maturity of provisions and contingent liabilities in relation to additional important legal cases. This is so as to not compromise the results of the proceedings or the interests of the Company.
Tax risks
Volkswagen AG and its subsidiaries have operations worldwide and are audited by local tax authorities on an ongoing basis. Amendments to tax laws and changes in legal precedent and their interpretation by the tax authorities in the respective countries may lead to tax payments that differ from the estimates made in the financial statements.
Risks arise particularly from tax assessment of the cross-border supply of intragroup goods and services. Through organizational measures, such as the implementation of an advance pricing agreement, as well as the monitoring of transfer prices, Volkswagen constantly monitors the development of tax risks, as well as the impact thereof on the consolidated financial statements.
Tax provisions were recognized for potential future tax payments for former years, while other provisions were recognized for ancillary tax payments arising in this connection.