Toyota Motor Corp. will pay $1.2 billion in what U.S. Attorney General Eric Holder said was the largest criminal penalty ever levied on an automaker in the U.S. to settle a criminal investigation. The sudden unintended acceleration led to the recall of more than 10 million vehicles for problems including faulty brakes, sticky gas pedals, and improper or misplaced floor mats that resulted in fatal accidents. Toyota fully admitted wrongdoing, and agreed to pay the penalty. Toyota will also be charged with wire fraud, with the prosecution deferred for three years, as long as the company continues to cooperate with authorities.
Toyota’s conduct showed a blatant disregard for laws designed to protect consumers. Toyota executives faced congressional hearings in 2010 concerning why it took so long to warn customers and recall the vehicles. Christopher Reynolds, chief legal officer of Toyota Motor North America, stated, “At the time of these recalls, we took full responsibility for any concerns our actions may have caused customers, and we rededicated ourselves to earning their trust.” In addition to fixing the floor mats and pedals, Toyota added more checks and balances to the vehicle development process to ensure safe, quality vehicles and to rebuild the public’s trust. Toyota also restructured to provide more power and autonomy in its regional centers instead of controlling everything from its headquarters in Japan.
The National Highway Traffic Safety Administration investigated the software and electronics in Toyota’s vehicles, but did not find any electrical malfunction that may have contributed to sudden acceleration. Nevertheless, Toyota was deluged by personal injury and wrongful death lawsuits. While the $1.2 billion penalty is the biggest ever for a carmaker, it still represents a very small fraction of the $60+ billion that Toyota has in cash reserves.
Toyota is not the only carmaker that has safety problems. The Justice Department is now investigating General Motors (G.M.) failure to fix cars equipped with defective ignition switches that can shut off engines and disable air bags. G.M. knew not only that the ignition switches in these cars were faulty, but also, it knew that the problem was exacerbated by the position of the switch where it is easily bumped. 1.6 million vehicles have been recalled because of these defective ignition switches.
Mary T. Barra recently became the new chief executive of General Motors. In a conference room at G.M. headquarters, Barra stated “Our goal is to make sure that something like this never happens again.” She admitted that she learned in late December that internal safety committees were analyzing defects in the Chevrolet Cobalt, more than a month before the company decided to issue its recall, but she said she did not know the serious nature of the defects until Jan. 31, when she was informed that two safety committees had concluded that a recall is necessary. Her performance was a marked departure from the norm in the auto industry, where corporate chiefs routinely avoid discussing recalls unless subpoenaed by Congress.
Barra still faces investigations from two congressional committees, federal safety regulators and the Justice Department — all paying keen attention to any public statements she makes. Ms. Barra apologized for G.M.’s failings in a video to employees, named a new top executive to oversee safety issues, and participated in a session with reporters to take responsibility for the company’s inexplicable delay in addressing the safety problem.
G.M. was recently hit with a lawsuit demanding that the company be held liable for allegedly concealing ignition problems before its 2009 bankruptcy. Authorities are also investigating whether G.M. understated the defect to federal safety regulators. G.M. is a different legal entity than the one that filed the 2009 bankruptcy that shook the U.S. economy. The so-called new G.M. is not responsible under the terms of its bankruptcy agreement for legal claims relating to incidents that took place before July, 2009.
Consumer complaints and claims came to G.M. in a variety of ways — through lawsuits, calls, letters and emails, warranty claims, and insurance claims. G.M.’s legal staff was the recipient of lawsuits, insurance information, accident reports and any other litigation-related paperwork. Warranty claims and customer calls were routed through the sales and service division — a vast bureaucracy that occupies most of one tower at G.M.’s headquarters in Detroit. Because the legal staff reports to the chief executive, and the sales department to the head of G.M. North America, it is unclear whether they share information related to a specific car, like the Cobalt. An even bigger communication gap on the Cobalt appeared to exist between the engineers in Warren, MI, and the company lawyers in Detroit. The most glaring example was that G.M. officials meeting with federal regulators in March 2007 did not know about a fatal Cobalt wreck in 2005 — even though G.M.’s legal department had an open file on the case for almost two years.
Within the product development system was an isolated subgroup of engineers assigned to Cobalt safety tests. According to the chronology G.M. has submitted to federal safety regulators, an unknown number of engineers were involved in opening and closing four separate inquiries on the Cobalt between 2004 and 2009. Records showed beyond any doubt that substandard ignition switches had been made for the Cobalt at a Delphi plant from 2004 to late 2006. The part had been changed, and every switch made before the change was potentially a fatal accident waiting to happen.
The Motor Vehicle Safety Act was a proposal in 2010 that would have provided more money to the National Highway Traffic Safety Administration to investigate auto defects and make more information available to the public from a database maintained by the government of early warnings made up of notices from carmakers about potential defects. This proposal would have significantly helped force carmakers to recall problematic vehicles before many people died. Unfortunately, this bill was never passed.
The Toyota and G.M. cases suggest that significant defects can easily escape the National Highway Traffic Safety Administration’s notice. This is a growing problem because the complexity of electronics and other technology in cars that make it more difficult to identify flaws and their causes. The agency needs more investigators — it had only 28 investigators last year, barely up from 26 in 2001 just after Congress passed the last major auto-safety law in the wake of the Ford Explorer-Firestone tire debacle. In that case, the treads peeled off tires, causing the sport utility vehicles to roll over, a defect that was eventually linked to 271 deaths.
Congress should increase the National Highway Traffic Safety Administration’s resources. Lawmakers should also give the agency the power to levy much bigger fines. The law currently allows fines of up to $5,000 per car, up to a maximum of $35 million, on carmakers that fail to disclose a defect in a timely manner. Either lawmakers should eliminate that upper limit or raise it substantially to deter automakers from delaying or avoiding recalls. Legislators should also give officials the power to pursue criminal penalties in cases where automakers actively conceal information about defects. Toyota and G.M. failed the public, but federal regulators and a Congress that denied them the weapons they need are complicit in that failure.