Court Information

Ontario Court of Justice

Date: September 8, 2020

Between:

Her Majesty the Queen

— AND —

Volkswagen Aktiengesellschaft

Before: Justice Rondinelli

Reasons released on: September 8, 2020

Counsel

For the Public Prosecution Service of Canada: T. Lemon, J. Morische and B. Gluckman

For the Defendant: D. Humphrey, S. Weinstein and M. Biddulph

Judgment

Rondinelli J.:

Introduction

[1] On January 22, 2020, Volkswagen Aktiengesellschaft ("VW AG"), a German-based car manufacturer, pleaded guilty before me to 60 charges for offences under the Canadian Environmental Protection Act, 1999, S.C. 1999, c. 33 ("CEPA"). VW AG pleaded guilty to 58 counts of contravening section 154 of the CEPA by unlawfully importing into Canada vehicles that do not conform to prescribed vehicle emissions standards, which is an offence under paragraph 272(1)(a) of CEPA. The company further pleaded guilty to two counts of providing misleading information, an offence under paragraph 272(1)(k) of CEPA.

[2] Also on January 22, 2020, I delivered brief oral reasons for sentence, ordering VW AG to pay a fine of $196,500,000, payable in 30 days, with detailed reasons to follow. These are those reasons.

Agreed Statement of Facts

[3] As part of the guilty plea proceedings, the following agreed statement of facts was read into the record.

[4] Emissions regulations, vehicle standards and diesel engine variants vary significantly from country to country. The matters addressed herein relate solely to this proceeding in Canada, and nothing contained herein shall be construed as any admission in other proceedings, including with respect to Volkswagen Aktiengesellschaft's ("VW AG") alleged conduct outside Canada. Unless otherwise specified, all references to legal terms and emissions standards, to the extent contained herein, should be understood to refer exclusively to applicable Canadian laws and regulations, and such legal terms contained in this Statement of Facts are not intended to apply to, or affect, VW AG's rights or obligations under the laws or regulations of any jurisdiction outside Canada.

Relevant Entities

[5] During the charge period, VW AG was a motor vehicle manufacturer based in Wolfsburg, Germany. Under Canadian law, a company acts through its employees, and conduct undertaken by VW AG, as described herein, reflects conduct undertaken by certain employees in the course of their VW AG employment. VW AG admits, accepts, and acknowledges that under Canadian law it is responsible for the acts of its supervisors and other employees set forth in this Statement of Facts, which acts VW AG acknowledges were within the scope of the employees' employment. Any reference to "certain" supervisors or employees below are references to these supervisors and employees acting in the course of their employment within the meaning of Canadian law. Pursuant to applicable German stock corporation law, VW AG was led by a Management Board that was supervised by a Supervisory Board. Solely for purposes of this Statement of Facts, unless otherwise indicated, references in this Statement of Facts to "employees" and "supervisors" are to employees below the level of the VW AG Management Board. "Supervisors" include supervisors in charge of the VW (Volkswagen) Brand Engine Development department.

[6] During the charge period, AUDI AG was a motor vehicle manufacturer based in Ingolstadt, Germany and a subsidiary approximately 99.55% owned by VW AG. Conduct undertaken by AUDI AG, as described herein, reflects conduct undertaken by certain employees in the course of their AUDI AG employment.

[7] VW AG and AUDI AG are collectively referred to herein as "VW."

Canadian NOx Emissions Standards

[8] The purpose of the Canadian Environmental Protection Act, 1999, S.C. 1999, c. 33 ("CEPA") is to prevent pollution and to protect the environment and human health in order to contribute to sustainable development.

[9] Part 7, Division 5 of CEPA, together with its applicable regulations, establish Canada's vehicle, engine and equipment emissions regime.

[10] Under CEPA, the On-Road Vehicle and Engine Emission Regulations (the "Regulations") came into effect on January 1, 2004. The Regulations harmonized vehicle emissions standards in Canada with those of the U.S. Environmental Protection Agency ("EPA"). The U.S. Clean Air Act required the EPA to promulgate federal emissions standards for new motor vehicles, including light-duty diesel vehicles. The EPA established standards and test procedures for new light-duty motor vehicles imported and sold in the United States, which apply by extension in Canada as a result of Canada's adoption of the EPA standards in the Regulations.

[11] In particular, the EPA established federal emissions standards that were implemented in separate steps, or Tiers. The Tier II program included emissions standards for nitrogen oxide ("NOx") emissions for diesel vehicles (the "Prescribed EPA NOx Standards"). These Prescribed EPA NOx Standards were applicable to the United States. Canada adopted these standards as a result of the harmonization of CEPA and the Regulations with the EPA emissions regime for new light-duty vehicles.

[12] Under the Regulations, each new light-duty vehicle in Canada was required to be certified by its manufacturer to one of the Tier standards corresponding to those of the EPA for which there were specific emissions standards, including for NOx. In choosing a Tier standard to which individual vehicle models were certified in a given model year, a company was obligated to comply with the fleet average NOx standards associated with that model year. Certification to the Prescribed EPA NOx Standards, which were introduced in Canada in the 2009 model year ("MY"), applied through to MY 2016.

[13] Under subsection 153(1) of CEPA, companies were prohibited from importing into Canada new MY 2009-2016 light-duty vehicles for the purposes of sale unless such vehicles conformed to the Prescribed EPA NOx Standards at the time their main assembly or manufacture was completed, and unless evidence of such conformity was obtained. Subsection 153(3) of CEPA and the Regulations allowed companies to rely on the EPA certificate of conformity to U.S. federal emissions standards as evidence in Canada of conformity to the Prescribed EPA NOx Standards.

[14] Under section 35 of the Regulations, if a MY 2009-2016 light-duty vehicle sold in Canada was also sold concurrently in the United States, meaning that at least one equivalent vehicle of the same model year was sold in the United States during the model year specified on the EPA certificate of conformity, a company could rely upon the EPA certificate of conformity as evidence in Canada of such vehicle's compliance with the Prescribed EPA NOx Standards.

[15] When a vehicle fell under section 35 of the Regulations, the EPA certificate of conformity was to be submitted by a company to Environment and Climate Change Canada ("ECCC") upon written request from ECCC. It need not have been submitted before the vehicle left the control of the company and before the vehicle was presented for registration. Regardless of any written request from ECCC, the EPA certificate of conformity must have been obtained and capable of being produced in order to comply with subsection 153(1) of CEPA.

[16] To obtain a certificate of conformity from the EPA, a manufacturer was required to submit an application to the EPA for each model year and for each test group of vehicles that it intended to sell in the United States. The application was required to be in writing and to be signed by an authorized representative of the manufacturer. It was to include, among other things, the results of testing done pursuant to the published U.S. Federal Test Procedures that measure NOx emissions, and a description of the engine, emissions control system, and fuel system components, including a detailed description of each Auxiliary Emission Control Device ("AECD") to be installed on the vehicle.

[17] An AECD was defined under U.S. law as "any element of design which senses temperature, vehicle speed, engine RPM, transmission gear, manifold vacuum, or any other parameter for the purpose of activating, modulating, delaying, or deactivating the operation of any part of the emission control system." The manufacturer was also required to include a justification for each AECD. If the EPA, in reviewing the application for a certificate of conformity, determined that the AECD "reduced the effectiveness of the emission control system under conditions which may reasonably be expected to be encountered in normal vehicle operation and use," and that (1) it was not substantially included in the U.S. Federal Test Procedure, (2) the need for the AECD was not justified for protection of the vehicle against damage or accident, or (3) it went beyond the requirements of engine starting, the AECD was considered a "defeat device."

[18] The Regulations defined an "AECD" and "defeat device" in an identical manner to U.S. law. Whenever the term "defeat device" is used in this Statement of Facts, it refers to a defeat device as defined by U.S. law and the Regulations.

[19] The EPA would not certify motor vehicles equipped with defeat devices. Manufacturers could not sell motor vehicles in the United States without a certificate of conformity from the EPA. CEPA and the Regulations prohibit the import into Canada of vehicles equipped with defeat devices.

[20] Without a valid certificate of conformity from the EPA covering a vehicle, a vehicle could not be imported into Canada unless other evidence of conformity for the purpose of subsection 153(1) of CEPA was obtained and capable of being produced to ECCC before the vehicle left the control of the company and before the vehicle was presented for registration.

[21] In addition, subsection 157(1) of CEPA required that a company that imported any vehicle of a class for which standards were prescribed must have provided notice to ECCC of a defect in the design, construction or functioning of the vehicle that affected or was likely to affect its compliance with a prescribed standard, upon becoming aware of such defect.

VW Diesel Vehicles Imported into Canada

[22] The following vehicles containing 2.0 litre diesel engines were imported into Canada for the purpose of sale ("2.0 Litre Subject Vehicles"):

(a) MY 2009-2015 VW Jetta; (b) MY 2009 VW Jetta Wagon; (c) MY 2010-2013, 2015 VW Golf; (d) MY 2010-2014 VW Golf Wagon; (e) MY 2015 VW Golf Sportwagon; (f) MY 2010-2013, 2015 Audi A3; (g) MY 2013-2015 VW Beetle; and (h) MY 2012-2015 VW Passat.

[23] The following vehicles containing 3.0 litre diesel engines were imported into Canada for the purpose of sale ("3.0 Litre Subject Vehicles"):

(a) MY 2009-2016 VW Touareg; (b) MY 2009-2015 Audi Q7; (c) MY 2014-2016 Audi A6; (d) MY 2014-2016 Audi A7; (e) MY 2014-2016 Audi A8/A8L; and (f) MY 2014-2016 Audi Q5.

[24] VW AG developed the engines for the 2.0 Litre Subject Vehicles. AUDI AG developed the engines for the 3.0 Litre Subject Vehicles and MY 2013-2016 Porsche Cayenne diesel vehicles imported into and sold in Canada (the "Porsche Vehicles"). Conduct undertaken in respect of the 2.0 Litre Subject Vehicles, as described herein, reflects conduct undertaken by certain VW AG supervisors and other employees in the course of their VW AG employment. Conduct undertaken in respect of the 3.0 Litre Subject Vehicles and Porsche Vehicles, as described herein, reflects conduct undertaken by certain AUDI AG employees in the course of their AUDI AG employment.

[25] VW caused the 2.0 Litre Subject Vehicles and 3.0 Litre Subject Vehicles (collectively, the "Subject Vehicles") to be imported into Canada from VW and Audi plants located in the U.S., Mexico and Europe. The main manufacture and assembly of the Subject Vehicles was complete at the time of their import.

[26] Equivalent vehicles of the same model year as the Subject Vehicles were sold in the United States. Applications were prepared and submitted for certificates of conformity to the EPA to obtain authorization to sell each of the equivalent Subject Vehicles in the United States (the "Applications").

[27] The Applications to the EPA were accompanied by the following signed statement:

The Volkswagen Group states that any element of design, system, or emission control device installed on or incorporated in the Volkswagen Group's new motor vehicles or new motor vehicle engines for the purpose of complying with standards prescribed under section 202 of the Clean Air Act, will not, to the best of the Volkswagen Group's information and belief, cause the emission into the ambient air of pollutants in the operation of its motor vehicles or motor vehicle engines which cause or contribute to an unreasonable risk to public health or welfare except as specifically permitted by the standards prescribed under section 202 of the Clean Air Act. The Volkswagen Group further states that any element of design, system, or emission control device installed or incorporated in the Volkswagen Group's new motor vehicles or new motor vehicle engines, for the purpose of complying with standards prescribed under section 202 of the Clean Air Act, will not, to the best of the Volkswagen Group's information and belief, cause or contribute to an unreasonable risk to public safety.

All vehicles have been tested in accordance with good engineering practice to ascertain that such test vehicles meet the requirement of this section for the useful life of the vehicle.

[28] Based on the representations in the Applications, the EPA issued certificates of conformity for these vehicles (the "EPA Certificates"), allowing the equivalent Subject Vehicles to be sold in the United States.

[29] When the Subject Vehicles were imported into Canada for the purpose of sale, the EPA Certificates were relied upon as valid evidence of the vehicles' conformity with the Prescribed EPA NOx Standards, and VW affixed or caused to be affixed an emissions label to each of the Subject Vehicles' engines. These labels stated that the vehicles conformed to the Prescribed EPA NOx Standards. In addition, a National Emissions Mark ("NEM") was affixed to MY 2015-2016 VW and Audi Subject Vehicles.

Conduct at Issue

[30] VW, through certain employees, deceived the EPA, which, due to the harmonization of CEPA and the Regulations with the EPA emissions regime for new light-duty vehicles, had the effect of also deceiving ECCC, about whether the Subject Vehicles and the Porsche Vehicles, which were imported into North America from approximately December 2008 to approximately November 2015, complied with the Prescribed EPA NOx Standards. During their involvement with design, marketing and/or importation of the Subject Vehicles and the Porsche Vehicles in North America, certain VW supervisors and other employees: (a) knew that the Subject Vehicles and the Porsche Vehicles did not meet the Prescribed EPA NOx Standards; (b) knew that VW was using software to cheat the U.S. testing process by making it appear as if the Subject Vehicles and the Porsche Vehicles met the Prescribed EPA NOx Standards when, in fact, they satisfied the U.S. testing only by using a defeat device; and (c) attempted to and did conceal these facts from U.S. regulators and, therefore, ECCC.

The 2.0 Litre Defeat Device in the United States and Canada

[31] In or about 2006, VW AG employees were designing the new EA 189 2.0 litre diesel engine (later known as the Generation 1 or "Gen 1") for use in North America that would be the cornerstone of a new project to sell passenger diesel vehicles in the United States. Selling diesel vehicles in the U.S. market was a strategic goal of VW AG. This project became known within VW AG as the "US'07" project. The same diesel vehicles sold in the U.S. market would also be sold in Canada.

[32] Certain VW AG supervisors and employees, however, realized that they could not design a diesel engine that would both meet the Prescribed EPA NOx Standards that would become effective in the U.S. in 2007 and attract sufficient customer demand in the U.S. market. Instead of bringing to market a diesel vehicle that could legitimately meet the Prescribed EPA NOx Standards, VW AG employees acting at the direction of certain supervisors designed, created, and implemented a software function to detect, evade and defeat these U.S. emissions standards, which also applied in Canada.

[33] Certain VW AG supervisors and employees knew that U.S. regulators, including the EPA, would measure VW's diesel vehicles' emissions through standard U.S. tests with specific, published drive cycles. ECCC relies on these same prescribed cycles when measuring emissions during its own independent testing. VW AG employees acting at the direction of these supervisors and employees designed the 2.0 litre defeat device to recognize whether the vehicle was undergoing standard U.S. emissions testing on a dynamometer (or "dyno") or whether the vehicle was being driven on the road under normal driving conditions. The defeat device accomplished this by recognizing the standard drive cycles used by U.S. and Canadian regulators. If the vehicle's software detected that it was being tested, the vehicle performed in one mode, which satisfied the Prescribed EPA NOx Standards. If the defeat device detected that the vehicle was not being tested, it operated in a different mode, in which the effectiveness of the vehicle's emissions control systems was reduced substantially, causing the vehicle to emit substantially higher NOx, up to sometimes 27 times higher than the prescribed standard as determined by ECCC testing.

[34] In or around 2006, a certain VW AG supervisor authorized certain VW AG engineers to use the defeat device in the development of the US'07 project, despite concerns expressed by particular VW AG employees about the propriety of designing and activating the defeat device software.

[35] Starting with the first MY 2009 of the new engine for the 2.0 Litre Subject Vehicles through MY 2015, certain VW AG supervisors and employees then caused the defeat device software to be installed in the 2.0 Litre Subject Vehicles imported for purpose of sale in the United States and Canada.

The 3.0 Litre Defeat Device in the United States and Canada

[36] Starting in or around 2006, AUDI AG engineers designed a 3.0 litre diesel engine for the U.S. market. The 3.0 litre engine was more powerful than the 2.0 litre engine, and was included in larger and higher-end model vehicles. The 3.0 litre engine was ultimately placed in the 3.0 Litre Subject Vehicles and the Porsche Vehicles. In order to pass U.S. emissions tests, certain AUDI AG engineers designed and installed software designed to detect, evade and defeat U.S. emissions standards, which constituted a defeat device under U.S. law and under CEPA and the Regulations.

[37] Specifically, these AUDI AG engineers calibrated a defeat device for the 3.0 Litre Subject Vehicles and the Porsche Vehicles that varied injection levels of a solution consisting of urea and water ("AdBlue") into the exhaust gas system based on whether the vehicle was being tested or not, with less NOx reduction occurring during regular driving conditions. In this way, the vehicle consumed less AdBlue, and avoided a corresponding increase in the vehicle's AdBlue tank size, which would have decreased the vehicle's trunk size, and made the vehicle less marketable in the United States. In addition, the vehicle could drive further between service intervals, which was also perceived as important to the vehicle's marketability in the United States.

Certification of VW Diesel Vehicles in the United States

[38] There were meetings with U.S. regulators, including the EPA, to seek the certifications required to sell the Subject Vehicles to U.S. customers. During these meetings, certain VW employees misrepresented, or caused to be misrepresented, that the Subject Vehicles complied with the Prescribed EPA NOx Standards, when they knew the vehicles did not. During these meetings, these VW employees described, or caused to be described, VW's diesel technology and emissions control systems in detail but omitted the fact that the engines could not meet U.S. emissions standards without using the defeat device software.

[39] Also as part of the certification process for each new model year, certain VW supervisors and employees certified, or caused to be certified, to the EPA that the Subject Vehicles met U.S. emissions standards and complied with standards prescribed by the U.S. Clean Air Act. These VW supervisors and employees knew that if they had told the truth and disclosed the existence of the defeat device, VW would not have obtained the requisite EPA Certificates for the Subject Vehicles and could not have sold any of them in the United States.

Importation of VW Diesel Vehicles into Canada

[40] When the Subject Vehicles were imported into Canada, VW relied upon the same EPA Certificates as valid evidence of the vehicles' conformity with the Prescribed EPA NOx Standards, and affixed or caused to be affixed an emissions label to the vehicles' engines.

[41] Certain VW employees caused to be stated on the labels that the vehicles complied with the Prescribed EPA NOx Standards. If it had been disclosed that the Subject Vehicles did not meet the Prescribed EPA NOx Standards, VW would not have been able to import the vehicles into the United States. These vehicles also could not have had a NEM affixed to them, nor could they have been imported into Canada.

The Improvement of the 2.0 Litre Defeat Device in the United States and Canada

[42] Following the launch of the Gen 1 2.0 Litre Subject Vehicles in North America, certain VW AG supervisors and employees worked on a second generation of the vehicle (the "Gen 2"), which also contained software designed to detect, evade and defeat U.S. emissions tests. The Gen 2 2.0 Litre Subject Vehicles were launched in North America in or around 2011.

[43] In or around 2012, hardware failures developed in certain of the 2.0 Litre Subject Vehicles that were being used by customers on the road in North America. VW AG engineers hypothesized that vehicles equipped with the defeat device stayed in "dyno" mode (i.e., testing mode) even when driven on the road outside of test conditions employed by U.S. regulators. Since the 2.0 Litre Subject Vehicles were not designed to be driven for longer periods of time in "dyno" mode, VW AG engineers suspected that the increased stress on the exhaust system from being driven too long in "dyno" mode could be the root cause of the hardware failures.

[44] In or around July 2012, engineers from the VW Brand Engine Development department met, in separate meetings, with certain supervisors to explain that they suspected that the root cause of the hardware failures in the 2.0 Litre Subject Vehicles was the increased stress on the exhaust system from being driven too long in "dyno" mode as a result of the use of software designed to detect, evade and defeat U.S. emissions tests.

[45] VW AG engineers, having informed the supervisor in charge of the VW AG Engine Development department and within the VW AG Quality Management and Product Safety department of the existence and purpose of the defeat device in the 2.0 Litre Subject Vehicles, then sought ways to improve its operation in existing 2.0 Litre Subject Vehicles to avoid the hardware failures. To solve the hardware failures, VW AG engineers decided to start the 2.0 Litre Subject Vehicles in "street mode" and, when the defeat device recognized that the vehicle was being tested for compliance with U.S. emissions standards, switch to "dyno mode." To increase the likelihood that the vehicle in fact realized that it was being tested on the dynamometer for compliance with U.S. emissions standards, the VW AG engineers activated a "steering wheel angle recognition" feature. The steering wheel angle recognition interacted with the software by enabling the vehicle to detect whether it was being tested on a dynamometer (where the steering wheel is not turned), or being driven on the road.

[46] Some VW AG employees again expressed concern, specifically about the expansion of the defeat device through the steering wheel angle detection, and sought approval for the function from more senior supervisors within the VW AG Engine Development department. In or about April 2013, activation of the software underlying the steering wheel angle recognition function was authorized by a certain supervisor. VW AG employees then installed the new software function in new 2.0 Litre Subject Vehicles being sold in North America, and later installed it in existing 2.0 Litre Subject Vehicles in North America through software updates during maintenance. Specifically, the new software function was downloaded and installed into existing 2.0 Litre Subject Vehicles in Canada when an owner brought a vehicle into the dealership or an authorized service centre to be serviced. The service technician would download the software update and install it directly into the vehicle. The service technician at the dealership or an authorized service centre simply facilitated the transfer of the software update to the owner's vehicle, without knowing the specific purpose or effect of the software update.

[47] Certain VW AG employees falsely told, or caused others to tell, ECCC by way of Notices of Defect on or about December 12, 2014 for the Gen 2 2.0 Litre Subject Vehicles, and March 10, 2015 for the Gen 1 2.0 Litre Subject Vehicles, that the software update beginning in or around 2014 was intended to improve these 2.0 Litre Subject Vehicles when, in fact, these employees knew that the update also used the steering wheel angle of the vehicle as a basis to more easily detect when the vehicle was undergoing prescribed-cycle emissions tests, thereby improving the defeat device's precision in order to reduce the stress on the emissions control systems. These vehicles continued to have the defeat device that reduced the effectiveness of the emissions control systems, which caused the vehicles to emit substantially higher NOx than the prescribed standard.

The Disclosure of the Defeat Device in the United States – 2.0 Litre

[48] In or around March 2014, certain VW AG employees learned of the results of a study undertaken by West Virginia University's Center for Alternative Fuels, Engines and Emissions and commissioned by the International Council on Clean Transportation (the "ICCT study"). The ICCT study identified substantial discrepancies in the NOx emissions from certain 2.0 Litre Subject Vehicles when tested on the road compared to when these vehicles were undergoing prescribed drive cycle tests on a dynamometer as used by the EPA and ECCC.

[49] Following the ICCT study, U.S. regulators attempted to work with VW AG to determine the cause for the higher NOx emissions in the 2.0 Litre Subject Vehicles when being driven on the road as opposed to on the dynamometer undergoing standard emission test cycles. Certain VW AG employees decided not to disclose to U.S. regulators that the tested vehicle models operated with a defeat device. Instead, they decided to pursue a strategy of concealing the defeat device in responding to questions from U.S. regulators, while appearing to cooperate. By mid-2015, U.S. regulators threatened not to certify MY 2016 VW vehicles for sale in the United States.

[50] On or about September 3, 2015, it was admitted to the EPA that VW AG had installed a defeat device in the 2.0 Litre Subject Vehicles.

[51] On or about September 18, 2015, the EPA issued a public Notice of Violation to VW AG stating that the EPA had determined that VW AG had violated the U.S. Clean Air Act by manufacturing and installing defeat devices in the 2.0 Litre Subject Vehicles.

The Disclosure of the Defeat Device in the United States – 3.0 Litre

[52] On or about November 2, 2015, the EPA issued a Notice of Violation to VW AG, AUDI AG and Porsche AG, citing violations of the U.S. Clean Air Act related to the EPA's discovery that the 3.0 Litre Subject Vehicles and the Porsche Vehicles contained a defeat device that resulted in excess NOx emissions when the vehicles were driven on the road.

[53] On or about November 2, 2015, VW AG issued a statement that "no software has been installed in the 3-liter V6 diesel power units to alter emissions characteristics in a forbidden manner."

[54] On or about November 19, 2015, AUDI AG representatives admitted to the EPA that the 3.0 Litre Subject Vehicles contained at least three undisclosed AECDs. Upon questioning from EPA, AUDI AG representatives conceded that one of these three undisclosed AECDs met the criteria of a defeat device under U.S. law.

[55] On or about July 19, 2016, AUDI AG representatives conceded that elements of two of its undisclosed AECDs met the definition of a defeat device under U.S. law.

[56] Certain VW supervisors and employees caused defeat device software to be installed on all of the approximately 128,000 Subject Vehicles, which includes approximately 11,000 with a NEM affixed, and approximately 2,000 Porsche Vehicles imported into Canada from 2008 through 2015.

[57] VW AG has no prior infractions in Canada.

[58] On or about April 26, 2018, VW AG was notified that it was the subject of the ECCC investigation. ECCC received full cooperation with its investigation.

Remedial Efforts and Other Settlements in Canada

[59] VW AG has devoted significant resources to, and undertaken extensive measures for, the remediation of the Subject Vehicles and Porsche Vehicles in Canada.

[60] VW settled Canadian consumer claims by providing compensation and benefits for emissions modification and buyback options to remediate the Subject Vehicles and Porsche Vehicles, or remove them from the road. These settlements provided for benefits of up to a potential maximum of CAD $2.39 billion. The settlement programs were completed by August 31, 2019.

[61] VW incurred costs to develop EPA-approved emissions modifications for the Subject Vehicles and Porsche Vehicles in the U.S. and Canadian markets. The Porsche Vehicles and some of the 3.0 Litre Subject Vehicles are eligible for emissions modifications that bring the vehicles' NOx emissions into compliance with originally certified emissions standards. Most of the remaining population of Subject Vehicles are eligible for EPA approved emissions modifications that will reduce the vehicles' NOx emissions. ECCC has confirmed that all the emissions modifications meet their relevant NOx emissions standards through its own independent testing. VW has incurred and continues to incur costs to implement the emissions modifications in the Canadian market. Customer vehicles can receive the emissions modifications. Since the emissions modifications became available, Volkswagen Group Canada Inc. has been using best efforts to cause all eligible vehicles in its and its dealers' inventory, including vehicles with a NEM affixed, to receive their applicable emissions modifications before sale or re-sale. In addition, for those Subject Vehicles and Porsche Vehicles that receive the emissions modification, extended emissions warranty coverage is provided that covers the emissions control system of the vehicles for approximately up to four years from the date of completing the emissions modification.

[62] In Canada, VW AG supported the resolution of the Commissioner of Competition's consumer protection investigations into the Subject Vehicles and Porsche Vehicles, and accepted the civil administrative penalty of CAD $17.5 million.

[63] VW AG has instituted a more rigorous global compliance program and strengthened ethics policies.

Sentencing Analysis

The Governing Sentencing Principles

[64] The sentencing principles in CEPA are set out in s. 287.1 of the Act:

Sentencing principles

287.1 (1) In addition to the principles and factors that the court is otherwise required to consider, including those set out in sections 718.1 to 718.21 of the Criminal Code, the court shall consider the following principles when sentencing a person who is convicted of an offence under this Act:

(a) the amount of the fine should be increased to account for every aggravating factor associated with the offence, including the aggravating factors set out in subsection (2); and

(b) the amount of the fine should reflect the gravity of each aggravating factor associated with the offence.

Aggravating factors

(2) The aggravating factors are the following:

(a) the offence caused damage or risk of damage to the environment or environmental quality;

(b) the offence caused damage or risk of damage to any unique, rare, particularly important or vulnerable component of the environment;

(c) the offence caused harm or risk of harm to human health;

(d) the damage or harm caused by the offence is extensive, persistent or irreparable;

(e) the offender committed the offence intentionally or recklessly;

(f) the offender failed to take reasonable steps to prevent the commission of the offence despite having the financial means to do so;

(g) by committing the offence or failing to take action to prevent its commission, the offender increased revenue or decreased costs or intended to increase revenue or decrease costs;

(h) the offender committed the offence despite having been warned by an enforcement officer of the circumstances that subsequently became the subject of the offence;

(i) the offender has a history of non-compliance with federal or provincial legislation that relates to environmental or wildlife conservation or protection; and

(j) after the commission of the offence, the offender

(i) attempted to conceal its commission,

(ii) failed to take prompt action to prevent, mitigate or remediate its effects, or

(iii) failed to take prompt action to reduce the risk of committing similar offences in the future.

[65] By operation of s. 287.1(1) of CEPA, further consideration is to be made of the principles contained in s. 718.21 of the Criminal Code. That is:

718.21 A court that imposes a sentence on an organization shall also take into consideration the following factors:

(a) any advantage realized by the organization as a result of the offence;

(b) the degree of planning involved in carrying out the offence and the duration and complexity of the offence;

(c) whether the organization has attempted to conceal its assets, or convert them, in order to show that it is not able to pay a fine or make restitution;

(d) the impact that the sentence would have on the economic viability of the organization and the continued employment of its employees;

(e) the cost to public authorities of the investigation and prosecution of the offence;

(f) any regulatory penalty imposed on the organization or one of its representatives in respect of the conduct that formed the basis of the offence;

(g) whether the organization was — or any of its representatives who were involved in the commission of the offence were — convicted of a similar offence or sanctioned by a regulatory body for similar conduct;

(h) any penalty imposed by the organization on a representative for their role in the commission of the offence;

(i) any restitution that the organization is ordered to make or any amount that the organization has paid to a victim of the offence; and

(j) any measures that the organization has taken to reduce the likelihood of it committing a subsequent offence.

Aggravating Factors

[66] It is clear that the aggravating factors set out in s. 287.1(2)(a), (c), (e), (f), (g), and (j) of CEPA apply in this case. This was a very sophisticated illegal scheme. It was far from a simple plan like surreptitiously dumping pollutants in a river under cover of darkness. The deception in this case was prolonged, involved complex technology, and spanned throughout the globe. Much to the detriment of the environment and human health, and primarily for the benefit of the company's bottom line.

Mitigating Factors

[67] VW AG has no prior infractions in Canada. The company instituted resolution discussions from the outset of the Canadian investigation with a view of resolving this matter without a trial. There is little doubt that a trial in this matter would have been lengthy due to the anticipated expert testimony and the number of triable issues to be resolved. With courtroom time being a scarce commodity, it goes without saying that the saving of court time is an important factor in mitigation.

[68] Further, VW AG's commitment to resolve this matter went beyond simply admitting wrongdoing and paying a fine. As described in paragraphs 60-63 above, VW AG has undertaken significant remedial action in Canada that includes settling consumer claims and instituting a more rigorous global compliance program.

The Joint Position

[69] The Crown and VW AG have jointly submitted that a fine totaling $196,500,000 be imposed.

[70] In R. v. Anthony-Cook, 2016 SCC 43, the Supreme Court of Canada held that a trial judge should not depart from a joint submission on sentence unless the proposed sentence would bring the administration of justice into disrepute or is otherwise contrary to the public interest. The Court noted at para. 34, "[r]ejection denotes a submission so unhinged from the circumstances of the offence and the offender that its acceptance would lead reasonable and informed persons, aware of all the relevant circumstances, including the importance of promoting certainty in resolution discussions, to believe that the proper functioning of the justice system had broken down."

[71] Although Anthony-Cook dealt with a joint position in a criminal proceeding, CEPA has been declared to be valid legislation under the criminal law power: see R. v. Hydro-Québec, [1997] 3 SCR 213 at para. 110. As such, the principles stipulated in Anthony-Cook apply in this case.

[72] In considering the joint position, I cannot overlook the risk of damage to the environment and risk of harm to human health that was created by VW AG's actions. As Justice La Forest put it in Hydro-Québec at para. 123, environmental legislation is "a public purpose of superordinate importance; it constitutes one of the major challenges of our time." The importance of environmental protection has been recognized in legislative provisions such as the Declaration and Preamble of CEPA. Those provisions are worth repeating here:

Declaration

It is hereby declared that the protection of the environment is essential to the well-being of Canadians and that the primary purpose of this Act is to contribute to sustainable development through pollution prevention.

Preamble

Whereas the Government of Canada seeks to achieve sustainable development that is based on an ecologically efficient use of natural, social and economic resources and acknowledges the need to integrate environmental, economic and social factors in the making of all decisions by government and private entities;

Whereas the Government of Canada is committed to implementing pollution prevention as a national goal and as the priority approach to environmental protection;

Whereas the Government of Canada acknowledges the need to virtually eliminate the most persistent and bioaccumulative toxic substances and the need to control and manage pollutants and wastes if their release into the environment cannot be prevented;

Whereas the Government of Canada recognizes the importance of an ecosystem approach;

Whereas the Government of Canada will continue to demonstrate national leadership in establishing environmental standards, ecosystem objectives and environmental quality guidelines and codes of practice;

Whereas the Government of Canada is committed to implementing the precautionary principle that, where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation;

Whereas the Government of Canada recognizes that all governments in Canada have authority that enables them to protect the environment and recognizes that all governments face environmental problems that can benefit from cooperative resolution;

Whereas the Government of Canada recognizes the importance of endeavouring, in cooperation with provinces, territories and aboriginal peoples, to achieve the highest level of environmental quality for all Canadians and ultimately contribute to sustainable development;

Whereas the Government of Canada recognizes that the risk of toxic substances in the environment is a matter of national concern and that toxic substances, once introduced into the environment, cannot always be contained within geographic boundaries;

Whereas the Government of Canada recognizes the integral role of science, as well as the role of traditional aboriginal knowledge, in the process of making decisions relating to the protection of the environment and human health and that environmental or health risks and social, economic and technical matters are to be considered in that process;

Whereas the Government of Canada recognizes the responsibility of users and producers in relation to toxic substances and pollutants and wastes, and has adopted the "polluter pays" principle;

Whereas the Government of Canada is committed to ensuring that its operations and activities on federal and aboriginal lands are carried out in a manner that is consistent with the principles of pollution prevention and the protection of the environment and human health;

Whereas the Government of Canada will endeavour to remove threats to biological diversity through pollution prevention, the control and management of the risk of any adverse effects of the use and release of toxic substances, pollutants and wastes, and the virtual elimination of persistent and bioaccumulative toxic substances;

Whereas the Government of Canada recognizes the need to protect the environment, including its biological diversity, and human health, by ensuring the safe and effective use of biotechnology;

And whereas the Government of Canada must be able to fulfil its international obligations in respect of the environment.

[73] The proposed fine in this case lends legitimacy to Canada's role in fulfilling its international obligation in respect of the environment. It is difficult to see how the quantum of the proposed fine could be construed merely as "the price of doing business" – even in light of the size of this global corporate offender. It is approximately 26 times more than the largest fine ever imposed for environmental infractions in Canada to date.[1] In my view, the proposed fine signals a new era of substantial fines for environmental infractions and is sufficient in achieving the required deterrence and denunciation.

Conclusion

[74] Very experienced counsel have presented a joint position that has been meticulously crafted over a significant period of time. In my view, the proposed sentence adequately addresses the sentencing principles set out in both CEPA and the Criminal Code. Further, it provides an adequate degree of deterrence and denunciation in seeking to protect the environment and the health of Canadians.

[75] For the above reasons, I accede to the joint submission and the fine imposed is as follows: for counts 1 to 19, a fine of $754,000 per count; for counts 20 to 58, a fine of $4,466,000 per count; and for counts 59 to 60, a fine of $4,000,000 per count. The total amount of the fine is $196,500,000, payable in 30 days.

[76] Finally, as requested by the parties, an order is made under s. 294.1(2) of CEPA, recommending that, to the extent possible, the fines credited to the Environmental Damages Fund as a result of these convictions be paid out to support the implementation of projects, proposals or programs nationally or in a province or territory on the basis of excess NOx emissions occurring in each province or territory, taking into account the number of vehicles equipped with a defeat device that were imported into a province or territory.

Released: September 8, 2020

Signed: Justice Rondinelli

Footnote

[1] See, "Bloom Lake General Partner must pay $7.5 million for environmental infractions," December 24, 2014, Government of Canada website: https://www.canada.ca/en/environment-climate-change/services/environmental-enforcement/notifications/bloom-lake-general-partner-infractions.html