No protection against malicious actions

– How FIFA, Microsoft, WPs, BP and the Mafia are sued under the same law –

VW is – hopefully – not a criminal organization, just like Microsoft, BP, the FIFA or auditors (WPs) of Russian companies. Surely VW only admitted the objective circumstances in a legally preventive way, or rather admitted something of which perhaps until today one did not even know for sure whether one had done it at all – but probably believed it. However, as reality shows, this does not protect against lawsuits brought by lawyers and their clients who may be malicious or greedy.


Racketeer Influenced and Corrupt Organizations Act

On October 15, 1970 the “Racketeer Influenced and Corrupt Organizations Act” (RICO Act) was enacted as a US federal law. This federal law “18 U.S.C. §§ 1961-1968” was initially directed against gang-based crime, especially union corruption, the Cosa Nostra and drug trafficking. Many a German engineer with a doctorate also realises too late that, in addition to criminal convictions, there are also private law actions for various claims for damages for third parties who feel they have suffered damage.

These third parties are regularly actively recruited as plaintiffs by U.S. law firms, often to file a class action, usually on a contingency basis for the plaintiff’s firm.


Celebrities in the pillory or their existence endangered ?

Previous (sometimes only attempted) indictments, especially under the RICO Act, were directed (not always successfully) against the “Hells Angels” (suspicion: drug and arms trafficking), the Mafia (suspicion: corruption in connection with the RICO Act), the police (suspicion: corruption in the Mafia) and the police (suspicion: corruption in the Mafia).m trade unions), the “Phillip Morris USA” (suspicion: cartel formation), “Microsoft” (suspicion: fraud, violation of data protection), “Wirtschaftsprüfer” (suspicion: falsification of audits), “BP” (suspicion: blowout at fault), and “FIFA” (suspicion: corruption). However, the bulk of RICO decisions do not concern organised crime, but rather commercial law combined with the prospect of compensation of up to three times the actual damage. Such sentences are then called “punitive damages”.


Protection of business and property from deception about clean cars

As a company, one cannot hope for immunity – Air France, for example, was sentenced to “treble damages” plus legal costs, even though it was then 98% state-owned. The protection of life, body and health is subject to other US laws. Specifically, the “patterns of prohibited conduct” within the meaning of the RICO Act exist if the U.S. Federal Postal Service, radio, television or telephone are used for fraudulent purposes. Each individual use is considered a criminal offence. Conviction is subject to a fraudulent plan (i.e. to deception) and to implementation at least twice in 10 years – without any damage having already occurred, and to evidence that the conduct will continue.


Better to shoot the sheriff than fake the tax return

Every single state in the USA has its own laws. Anyone who steals a car or robs a bank will only deal with the local county sheriff – the FBI must not be interested in him. It’s no different when he shoots the sheriff. There are reasons why the sheriff is treated in relevant films as a joker who wants to put the delinquent in a wild chase before the state border – only particularly “stupid” sheriffs continue the chase – illegally – behind the state border. The, FBI as a different caliber, you get to deal with when you break a federal law – the mistake Al Capone made by cheating on his tax return, and public enemy no. 1 John Dillinger by crossing a state border with a stolen car, thus breaking a federal law.


RICO as Federal Law

In order for the federal government to prosecute an offence under RICO, it must be affected – this is the case if US postal services or US telecommunications were used in any way in the offence – in other words, in economic crimes almost always. This opens up the possibility to sue at all in the USA and then immediately at the federal level, i.e. also for large class actions.


Dieselgate: The car ?

The accusation could be for RICO-Act, for example, with system and intention to pretend environmentally friendly cars, including advertising by mail, telecommunication and television. Related commercials disappeared immediately – but not completely on the Internet.

RICO can thus be applied, for example, so that individual private individuals can receive compensation for damages as Punitive Damage. But also e.g. pension funds to get the share losses replaced, or the disability benefits they have to pay due to lung diseases caused by VW engines. The same applies to states and health insurers because of the medical costs incurred, plus employers who agreed to provide these as company benefits (instead of a private health insurer). In addition, there is the skimming off of profits and the tripling of the amount of damages according to RICO. In addition, one could come up with the idea of using not only the profit, but also all wages and salaries as well as commissions that the “helpers” have earned as the basis for the calculation of damages, in order to then extrapolate the tripling from this for the assessment of the penalty.


Manager insurance as a way out?

A manager insurance (D&O) does not apply anyway, if it is an intentional act. Occasionally, however, it makes a war chest available as defensive cover until the conviction – with the reservation of recovery. There is also the opportunity for misjudgement in this field, if you work with the German legal culture in the USA; for example, if the manager’s insurer is located in England or the USA.

If one reads in the trade press that the management has insured a sum insured of around 500 million EURO and that this is offset by losses in the double-digit billion range, it seems that there is a huge gap in coverage. The question of documentation concerning risk assessment and object inspection by insurance brokers and insurers will therefore be an exciting one. Even too low a level of cover that a company cannot afford with liquid capital indicates liability on the part of those responsible in the company – including quasi-reinsurance at the expense of, for example, industrial insurance brokers, agents, and insurers, §§ 6, 60, 61 of the German Insurance Contract Act (VVG). If, as in about 85 percent of the cases, the documentation is missing, the burden of proof is regularly reversed. If such a document exists, a consulting deficit can often be proven in black and white.


Questionable damage – highly questionable fraud?

If eleven million vehicles, each with a net sales price of only 20,000 euros, are affected, this makes 220 billion euros in revenue, which has also been generated by advertising with environmental friendliness.

In addition, it has enabled a market launch to be achieved and a dealer network and production capacity to be built up, worldwide, which will secure the future situation. Experience shows that crises of this kind are overcome quickly – then the advantages gained during this time come to light.

From a purely economic point of view, it might therefore have made sense to even consciously take these risks instead of working with the truth. If the management credibly reckoned with a certain profit, it will hardly be possible to reach a conviction for malice aforethought.

Thus, if necessary, no damage has occurred, but the benefit outweighs the damage. Without the measures taken at that time, VW might have had fewer assets today and would be in a worse position worldwide for the future. With then the question of where the basis should be to demand compensation from someone if a comparatively even more favourable price must now be paid for the advantages gained. A D&O could also argue like this. For a contingent price, which one was consciously prepared to pay for advantages gained, but would have liked to save money, no insurance company pays. Although their payment can of course be part of the calculation. Just as Winterkorn’s salary compensated for the risk he had taken.

The Federal Constitutional Court (BVerfG, ref. 2 BvR 1235/11, decision of 01.11.2012) decided that due to a breach of duty it is not permissible to conclude that the court has quantified the economic damage in terms of the amount (prohibition of disfigurement). In future, if an expert determines that on balance there is no damage, breaches of duty would not be uninsured on the one hand and would not be punishable as a property offence such as fraud on the other.


Objective No intention to defraud

It is not very credible that VW was surprised by these events. It is unlikely that one wanted to cheat or even did so in an objective sense. That a US authority could see this differently, however, was within the realm of possibility, if the legal technical specifications were interpreted to the supposedly still safe limits. It is questionable whether somewhere at VW there was an elaborated scenario that could be found today for this case. However, eliminating a few “culprits” is an efficient means of further limiting the damage to reputation.

The board of directors and lawyers can probably convince any technician to carry out an appropriate reassessment of his supposedly identified “legal” risks, or someone else is commissioned to carry out the assessment and the person concerned learns nothing of it. In a company based on the division of labour this is possible. If someone does not disagree, many companies have methods to convince, if only to admit that their own opinion may be wrong. For example, because the technician assumes his own idiosyncratic interpretation of undefined legal terms.


Intent despite confession?

Intention must not be assumed at VW because VW admits that an “illegal” shutdown device was present. This is a legal assessment which is not immediately apparent from the underlying facts. This is not simply because the device switches off occasionally or in many situations. On the contrary, it must almost always switch off during operation, so to speak, without this being objectively necessary. However, it may have been necessary in order to comply with the maintenance intervals.

VW could have registered its vehicles in the USA with higher limit values, which would then have had to be complied with more often in normal operation. There are no such low targets, nor is there a commitment that they will be met on average during normal operation. So the point is that VW itself operated and advertised with the low values.

It could be argued that the pollutants have caused illnesses and deaths which would not have occurred if the advertising had not been misleading, because VW’s products would not have been sold. In concrete terms: not diesel, but petrol or electric vehicles. It was advertised – and this was a decisive factor in the sale of diesel – that the vehicles were particularly clean.

Under the RICO Act, a plaintiff would have to prove that companies had not only committed large-scale fraud in the past, but that the fraud continued and that there was a “likelihood that the criminal conduct would continue”. And this is likely to be all the more difficult, the more responsible persons from the upper management levels have to leave the company in the meantime, also to limit the damage.


Schwarzbuch VW: Duty of risk management

Since May 1, 1998, the “Law on Control and Transparency in the Corporate Sector” (KonTraG) has already required the managing directors of at least medium-sized GmbHs to manage risk. The “Schwarzbuch VW” plant, for example, provided neuralgic potential for misguided development, provided that one really wanted to avoid personal (internal) liability under German law even as a board member.

The declaration of not having known anything as a managing director therefore does not lead to the objective of the release from liability – a daily newspaper commented on the conviction (LG Munich I, judgement of 10.12.2013, file no. 5HK O 1387/10) of a financial director to, among other things, 15 million euros in damages with the title “Organised irresponsibility”: However, it would be more accurate to speak of unorganised responsibility which ended with a suicide of the executive board.

The fact that a supplier of software for exhaust gas regulation is said to have warned of illegal use as early as 2007 (“for test purposes only”) – and that only this year the revision is said to have brought to the attention of the supervisory board a warning from its own company, known since 2011, of “illegal practices in connection with exhaust gas values”. These would be indications of organisational failures in communication that could endanger the existence of the company.

There are plenty of busybodies and worriers in large companies. They are characterized by the fact that you are not sure of your own case, do not pursue it further, and leave it at a one-time report. It is an absolutely useful test to determine the seriousness of their concerns by showing them that they are not being taken seriously. Whoever makes a serious effort will not be deterred by this and will not let the matter rest on itself. In any case, it would be nonsensical to pursue every such report with intensity.


Marketing instead of legal advice?

Certainly, it is more trustworthy for VW if someone is deliberately responsible for it, which has now been eliminated, than if it came out that VW exports everywhere, although VW was perhaps only unaware of the legal risks involved. Some companies had to impose a travel ban on their employees afterwards because arrest or extradition abroad would have been expected.

Should one tell the shareholders that one has gotten into this completely unsuspectingly and that this can happen everywhere again and again – maybe even worse? It is better to present the culprit – let him resign, and do the same with other “responsible persons”. What remains is a cleaned up company that can be trusted.


Rectification of the diesel conspiracy?

A Canadian professor of chemistry (without VW shares) commented on the industry’s announcement to “improve” diesel pollutants with the words “you can forget” – and justified this with the fact that it would mean years of development work and the advantages of the diesel engine would then fall by the wayside. The energy expert Franz Alt refers to the WHO and in Europe alone hundreds of thousands of deaths from particulate matter, including those with previous brain shrinkage and heart disease in humans.


Permitted exhaust gas manipulation in the EU – Not permitted in the USA?

A board member of the automotive industry recently stated: “We basically adhere to the legal requirements and have not carried out any manipulations on our vehicles” – and further: “A Defeat Device, i.e. a function that unacceptably limits the effectiveness of the exhaust aftertreatment, is not used for [Marke].

No Defeat Defice is therefore an aggregate and software which only limits the exhaust gas cleaning as permitted.

According to the statement of the Federal Government, however, the demarcation can hardly be brought under control. It is ultimately a legal question as to when such a technique is permitted. Presumably, as a German car manufacturer in the USA, one was subject to a legal error – but perhaps it is also a mistake to believe that one has done something forbidden. The claim to have only permissibly restricted exhaust emission control is not just a technical statement, but a legal opinion or a declaration of intent to comply with the laws as they are understood.


Destruction of existence due to legal errors of the management?

The existence of entire industries is based on the belief that any shaky legal assessment on which one depends would hold. In the past, the Federal Court of Justice (BGH) had then examined an “existence-destroying intervention” – today the appropriate term is then “intentional immoral damage”. The Federal Court of Justice (BGH) has repeatedly ruled, to the detriment of the management, and also in criminal proceedings, that the highest requirements, which can hardly be fulfilled, must be placed on legally erroneous expert opinions by lawyers if they are to serve as an excuse in the end. In addition, the management must also be aware of all financial risks at all times, especially those that cannot be read from the balance sheet (BGH, judgement by default of 1906.2012, file no. II ZR 243/11). This of course includes uninsured and uninsurable risks, such as intent and the RICO Act. Only to the extent that one can bear the risks oneself due to one’s own capital resources, insurance coverage is therefore not required.


Existence of the clean diesel car legend due to legally prescribed incorrect measurement?

Since 1993, the legislator has required exhaust emission testing (AU) by devices that have been suitable since 1965 to determine smoke opacity, i.e. whether the diesel is smoking – but not to determine even more dangerous ultra-low particulate matter (Frontal21, broadcast of 25.11.2008). As early as the 1990s, the workshops for the AU tuned the engine to pass the test – and then again to ensure that the car drove optimally. Perhaps the Finance Minister should ask himself which diesel vehicles are currently incorrectly classified in the vehicle tax table?

The EU apparently does not plan more precise measurements until 2021, while in the USA the diesel car has now been generally put up for discussion in the media.

Clean diesel advertising has disappeared since the US Environmental Protection Agency imposed a $37,500 fine per diesel vehicle (with 482,000 vehicles already potentially up to more than $18 billion), particularly for violation of the Clean Air Act.

According to our understanding of the law, there may be higher values on the road: Because the standard values only have to be adhered to in defined standard operation, and even then not always. So if, for example, in high-load operation, at high coolant temperatures, among other things, the emission reduction is switched off in order to protect the engine and is increased at lower loads, this makes sense. This is not a specific manipulation for the test operation.

Admittedly, technicians could come up with the idea of programming the software specifically to achieve supposedly different goals in such a way that the best results are achieved in test operation. Properly done, it is actually hardly possible to prove this. When alleged experts speak of manipulation, this is mood swaying and difficult to prove.

It may be that this is an efficient behaviour for the purpose of best performance.

It is possible that the operating condition-dependent emission reduction control in the USA follows the legal EU model, but the soft limits for manipulation have been deliberately overdrawn for test environments. Where appropriate, without being aware of the crossing of borders?

So it makes sense that while someone is stuck in the snow, the front wheels spin when accelerating, but the rear wheels don’t get out of place – and the person is not damaged by pollutants sucked in. A particularly thorough pollutant cleaning can be programmed for this. The same applies to switching off the air conditioning system to prevent exhaust fumes from being sucked in. If the controller encounters the same situation on the test bench, it will react in the same way, but not – which only particularly malicious people might suspect – specifically because of the test situation.


Directive 2001/27/EC of the EU Commission of 10 April 2001

An emission control strategy that technically modifies, switches on or off the emission control under certain operating conditions is generally permissible, technically necessary and desirable. On the other hand: The use of a defeat device or abnormal emission control strategies is prohibited.

However, a device that switches off the emission reduction under defined conditions is not yet a prohibited shutdown device for this reason alone. Stronger cleaning under certain conditions is also permitted during normal operation. This also protects the engine. In the EU, it is permitted to switch off or reduce emission reductions in certain operating situations, but to increase them in others where possible. All in all, a sensible use of control technology.


The car: EU law allows standard cut-off devices

Commission Directive 2001/27/EC of 10 April 2001 states

“Directive 1999/96/EC introduced new emission measurement cycles and provisions to prevent the use of defeat devices and abnormal emission control strategies. It is now appropriate to give greater effect to this Directive and to provide authorities with a tool to determine whether, under normal operating conditions, defeat devices or abnormal emission control strategies are used to manipulate engine performance in order to increase pollutant emissions.

“‘defeat device’ means a device which measures or senses operating variables (vehicle speed, engine speed, gear engaged, temperature, intake manifold vacuum or other) to activate, alter, delay or deactivate the operation of any part of the emission control system so as to reduce the effectiveness of the emission control system under normal operating conditions, unless the conditions under which this occurs are specifically provided for in the certification test procedures used “abnormal emission control strategy” means a strategy or measure which reduces the effectiveness of the emission control device under normal operating conditions to less than that required by the applicable emission test procedure […].” The use of a defeat device or abnormal emission control strategies is prohibited […].

6.1.4. In order to verify whether a strategy or measure is to be considered a defeat device as defined in section 2.28 or an abnormal emission control strategy as defined in section 2.30, the type-approval authority may require an additional NOx measurement using the procedure provided for in the ETC test cycle; this may be carried out at the same time as the type-approval test or the conformity of production test.


The question of organisation and personal responsibility

Supervisory Board members are responsible for obtaining expert advice in good time (see Munich Regional Court, judgement of 31 May 2007, in: NZI 2007, 609), because in addition to economic efficiency and expediency they must also monitor legality, §§ 116, 93 AktG: This does not without exception also include the obligation to regress possible damages to the executive board (BGH, judgement of 21 April 1997, in: NJW 1997, 1926 f.). The burden of proof for its diligence in the performance of its duties also lies with the Executive Board (BGH, decision of 18 February 2008, file no. II ZR 62/07). If carefully documented and reviewed, investigations can be completed quickly.

Some former managing directors were in the press with single and multi-digit severance payments. Meanwhile, the actual payments were sometimes made solely to the liability insurer or a manager’s insurance company for compensation. The situation becomes particularly explosive when a tortious act is involved – because in this respect, in the event of domestic insolvency there is hardly any prospect of shaking off creditors by means of residual debt discharge at least after a few years.

Some managers have had to make do with the garnishment-exempt amount of currently 1,073.88 euros for years – despite up to more than 20,000 euros monthly company pension payments – in order to compensate for the damage caused, for example because a manager’s insurance policy had extended this, but the insurance conditions had unnecessarily provided for possibilities of recourse. A business economist in auditing will hardly notice this.


Change of behaviour leads to the release from liability with regard to the RICO Act.

When it comes to RICO, which would triple the damage, it makes a difference whether a continuation of the behaviour is to be feared. It is therefore helpful if the company shows that it has comprehensively purified itself by all actual measures and announcements for immediate implementation:

“I give you my word that we will proceed with the necessary transparency and openness in all this,” said Winterkorn. “We will do everything we can to gradually regain your trust.”

Winterkorn did not speak of resigning, but asked to be excused. “I am infinitely sorry that we have betrayed that trust. I formally apologize to our customers, the authorities and the public at large for the misconduct.”

VW and manipulation – that should never happen again, said Winterkorn. “The irregularities in our Group’s diesel engines contradict everything that Volkswagen stands for. I don’t have the answers to all the questions at this time either.”


Confession of allowed manipulation?

EPA did not have the programming code for the engine control software, and EPA’s findings were not suitable to actually prove – beyond circumstantial evidence – targeted manipulation only for the test bench.

EPA threatened that the 2016 model would not be approved – only in response VW admitted to having deliberately manipulated.

But if you now look at the further course of events, VW did not even know whether VW had deliberately (and illegally) manipulated. VW could also have fought through the discussion (which had already been going on for a year) and made it a dispute with EPA. The damage of a possible non-registration of the 2016 model in the USA might have been less?

So far, it has been a matter of admitting an accusation that may have been unjustified in order to avoid greater damage – in retrospect probably a wrong decision, or not.

Apparently VW still does not know today whether the software – which objectively works like this – should actually manipulate the measurements during the exhaust emission test. And certainly not who should have commissioned and implemented this in what way.


An impunity offense?

It seems that VW has admitted something without first having examined more closely whether the accusation is true at all. This is also apparently not known up to now. Only nobody says this, but one accuses the purposeful manipulation, but does not know who is supposed to have manipulated purposefully without permission. Things take on a momentum of their own, you can’t go back. It may be necessary to present guilty parties, although there are none at all, and there has not been any deliberate “manipulation”. Or without it being possible to prove this in the legal sense even if all the facts were disclosed.

If a perpetrator admits to an act which he considers to be punishable under the law, this is referred to as an unpunished electoral or putative offence. Something like this happened recently to a renowned criminal defence lawyer who advised his client to say as a confession within the framework of a “deal” of the public prosecutor’s office “in 2013 I made the decision to evade my taxes for the then current year”: An electoral offence, because one can only make the resolution regarding taxes from 2013 if the obligation to make a declaration was legally created in the following year 2014. The public prosecutor’s office has apparently not noticed this so far. All those who are later prosecuted for aiding and abetting are likely to clap their hands on their thighs – because aiding and abetting unpunished behaviour remains unpunished.

Then VW would only have to deal with a wrong decision in crisis PR this year, and the focus would later be on quite different actions and parties involved. One can only assume that the person who admitted the manipulation in the USA did not know whether the manipulation had actually taken place. The fact that VW’s board of directors and supervisory board were prepared to believe this without their own knowledge, and to hold the alleged culprits responsible for a merely suspected act, could at least show that VW is capable of such behaviour.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


by courtesy of (published on 18.08.2017)




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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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