Vehicle and Engine Manufacturers Warned of Higher CARB Diet to Come

It has been five years since the September 18, 2015 Notices of Violation from US EPA and the California Air Resources Board (CARB) initiating enforcement against Volkswagen alleging use of defeat devices in approximately one-half million Volkswagen diesel cars in the United States. Signaling its view that its pursuit of "defeat device" enforcement against vehicle and engine manufacturers is far from over, CARB issued a "Mail-Out" alert last week. Mail-Out #ECC 2020-06 (Oct. 14, 2020) (the Alert). CARB's Alert amounts to a warning that it is continuing testing and investigations that are uncovering widespread ongoing violations and that offending manufacturers should self-disclose before the end of this year or face more serious enforcement consequences. Although the "Dieselgate" moniker assigned to the largest enforcement cases against Volkswagen, FCA and Mercedes-Benz have involved light-duty diesel automobiles, CARB's Alert suggests a much wider scope of its interest encompassing heavy-duty on-road and off-road diesel engines as well as a full range of gasoline on-highway and off-road vehicles and engines.

CARB's Alert seems to express frustration with industry's failure to heed CARB's warning at the time of the Volkswagen announcement in 2015 that CARB would be using screening tests to identify noncompliance and urging manufacturers to self-disclose. The Alert acknowledges that "a handful of manufacturers stepped forward," but says "the vast majority did not," noting the "sad litany" of additional settlements and investigations resulting from CARB's expanded testing program. Referring to CARB's new testing laboratory set to open next year, the Alert warns that "[t]his situation will not continue" and that it will "inevitably detect any violations you may have."

As manufacturers consider how to respond, and whether to conduct internal reviews or initiate discussions with the regulators, a number of important factors should be considered, including the potential federal implications. The Alert exhorts manufacturers to self-disclose violations by December 31, 2020, with the promise of "substantially mitigate[d]" penalties through a confidential process, or face the potential for "a lengthy investigation and enforcement action" with penalties up to $37,500 per vehicle or engine per violation. As compared to the very public Notices of Violation CARB and US EPA together issued to Volkswagen and to FCA at the outset of each case, which triggered a cascade of litigation long before settlement, CARB's Alert suggests a more preferable non-public process for those who come forward. Joint enforcement of these regulatory requirements against vehicle and engine manufacturers under parallel US EPA and CARB regulations has been one area of strong cooperation between the agencies in an otherwise contentious relationship in recent years.  Although CARB's Alert does not mention US EPA, manufacturers should be mindful in considering their response of the implications for US EPA enforcement with regard to the larger population of engines and vehicles sold nationwide.

Summary and Comments on Identified Compliance Issues

The Alert identifies "several types of systemic violations" that its recent tests and investigations have uncovered. Because CARB's regulations generally parallel US EPA regulations, each of the relevant regulatory requirements also applies under the federal framework. These include the following:

1. Disclosure of AECDs. The regulations require disclosure of each "Auxiliary Emissions Control Device" (AECD) in the application for certification. An AECD is an element of design that senses any engine operating parameter—such as temperature, vehicle speed or engine RPM—to modulate any part of the emissions control system. In modern engines, this is most often a software feature. Especially for engines with dynamic emissions controls such as exhaust gas recirculation (EGR), diesel particulate filters, and selective catalytic reduction (SCR) systems, many engine electronic control features manage the emissions controls based on input from various engine sensors. Even less complicated engine systems may often modulate emissions controls in response to operating parameters. Ensuring complete disclosures can be complex, including specifically identifying AECDs as distinct from general descriptions in the certification application of emissions control systems.
2. Defeat Devices. An AECD is a defeat device if it reduces the effectiveness of emissions controls under conditions that may be reasonably expected in normal operation and use, unless the conditions are substantially included on the emissions test, or the AECD is justified as necessary to protect against vehicle damage or limited to engine starting or emergency vehicles. The concept is that the regulators rely on the emissions test as representing "real world" emissions, and designs that alter the emissions controls to reduce effectiveness under real world conditions not included on the test and not otherwise justified as necessary would upset that reliance. It is important to be attentive to the impact of an AECD under any real world conditions not reflected on the test, even if those conditions are not pervasive in real world operation. Further, although historically the focus has been on nitrogen oxide (NOx) emissions impacts, with the advent of greenhouse gas emissions standards attention should also be given to strategies that affect such emissions. Although there is ample room for nuance and debate about what constitutes a "defeat device," what might be justified, and the significance of the impacts of any resulting "reduction in the effectiveness of emissions controls," CARB's Alert and public perception equate a "defeat device" with "cheating," and so warrants manufacturers' particularly close attention.
3. Running Changes and Field Fixes. Following US EPA and CARB certification of an engine or vehicle configuration, manufacturers regularly make subsequent updates during the model year on the production line to address operational or emissions issues that might be identified when the products are introduced to the field. These changes are then often made through a "field fix" to vehicles and engines that have already left the production line to conform to the update. Changes on the production line must be reported to the agencies in advance as an amendment to the certification application (known as a "running change"). Running changes do not require pre-approval, but subject the manufacturer to recalling the units if the agencies later determine that the change violated the regulations. Depending on the circumstances, manufacturers may or may not require US EPA pre-approval of field fixes. Failure to submit running change notices before making a change on the production line could result in the agencies regarding the resulting product as not certified because it does not conform to the configuration covered by the certification. And unauthorized field fixes may be pursued as unlawful tampering with emissions controls.
4. In-Use Defect Information and Onboard Diagnostics (OBD). The Alert also identifies failure to file required warranty claims data and other information according to thresholds in the regulations, which may be indicative of a defect warranting a recall. Similarly, CARB is concerned that manufacturers complete required testing of in-use engines and vehicles used to monitor for defects. And CARB notes that corrections of emissions defects should follow prescribed voluntary recall procedures. In addition, the Alert identifies as potential sources of noncompliance requirements to test production engines and vehicles to check the functionality of OBD systems, which are designed to notify the operator by illuminating a dashboard light of emissions malfunctions. And the Alert identified a concern that manufacturers might design the OBD system to identify malfunctions during certification testing but not in the real world.
5. Test Procedures and Adjustable Parameters. The Alert states rather simply that manufacturers must submit truthful information and must follow the required emissions test procedures. In fact, the regulations prescribe very detailed laboratory procedures that in practice require vigilance to follow. Manufacturers may from time to time arrange for laboratory audits, which may be difficult to pass with perfection. In the event deficiencies are identified, legitimate questions may arise regarding the impact on emissions measurements, and retesting could pose substantial burdens. These circumstances can pose particular challenges for self-disclosure and resolution. In addition, the Alert identifies the obligation to disclose "adjustable parameters" that downstream consumers and mechanics can themselves adjust that affects emissions. If such changes can be made in-use, then the manufacturer has to show that the emissions remain compliant across the adjustable range. Related issues can involve the degree to which manufacturers must secure their products against such changes, and whether consumers realistically would make such adjustments.

CARB Testing Capability

In 2017, CARB broke ground on a brand new headquarters in Riverside, California, which "will be one of the largest and most advanced vehicle emissions testing and research facilities in the world."¹ The 380,000-square-foot building will contain light-, medium- and heavy-duty test cells and space for enhanced onboard diagnostics and portable emissions measurement system development, and a separate chemistry laboratory. CARB notes that there will be space especially for testing of heavy-duty vehicles. Of the $419 million in estimated construction costs, $154 million comes from fines paid by Volkswagen for air quality violations related to its diesel defeat device case. In contrast to US EPA fines, which are paid to the US Treasury, this facility reflects the dramatic impact that CARB's ability to direct penalties to its Air Pollution Control Fund can have. The facility is slated to be completed in early 2021.

CARB's New Enforcement Policy

CARB's Alert also emphasizes the benefits of self-disclosure under CARB's updated Enforcement Policy announced in October 2017, and which CARB subsequently updated most recently in April 2020.² The new Enforcement Policy has several important elements that are relevant to how CARB might implement enforcement pursuant to the Alert. The contours of that policy, together with potential US EPA enforcement implications, are important in considering how to respond to the CARB Alert.

In 2017, the California Legislature increased the statutory maximum penalties for mobile source violations from $5,000 per violation to $37,500 per violation. See Health & Safety Code §§ 43016(a)(1), 43154(a), 43211(a) & (b), 43212(a)(1). The Legislature also established that those maximum penalties be adjusted annually based on changes in the California Consumer Price Index. As of April 2020, the maximum penalty is $40,050 per violation. See Memorandum from Todd Sax, Enforcement Division Chief, to Enforcement Division Staff re: Increase in Maximum Penalties Based on 2019 California Consumer Price Index (Apr. 8, 2020).³ This is now aligned with the maximum penalties for the same violations under the federal Clean Air Act, which provides for penalties up to $48,192 per violation.⁴

In light of the significantly increased statutory maximum penalties, CARB modified its penalty calculation methodology in its updated Enforcement Policy. Previously, CARB had taken the position that the "statutory maximum is the presumptive starting point, subject to reductions based on the mitigating factors a violator can establish."⁵ Several courts in California had also taken this "top-down" approach in calculating penalties under California law. In the new Enforcement Policy, however, CARB explained that, "[w]hile maximum penalties are established by statute, CARB measures the severity of the violation by considering all relevant circumstances" and imposes penalties based on a case-by-case consideration of the eight statutory penalty factors:

1. The extent of harm to public health, safety and welfare caused by the violation;
2. The nature and persistence of the violation, including the magnitude of the excess emissions;
3. The compliance history of the defendant, including the frequency of past violations;
4. The preventative efforts taken by the defendant, including the record of maintenance and any program to ensure compliance;
5. The innovative nature and the magnitude of the effort required to comply, and the accuracy, reproducibility, and repeatability of the available test methods;
6. The efforts of the defendant to attain, or provide for, compliance prior to violation;
7. The cooperation of the defendant during the course of the investigation and any action taken by the defendant, including the nature, extent, and time of response of any action taken to mitigate the violation; and
8. The financial burden to the defendant.

These penalty factors are generally similar to the penalty factors considered by US EPA in its Mobile Source Civil Penalty Policy.⁶ Importantly, however, US EPA's policy, though not legally binding on the agency, is much more highly prescriptive, providing detailed and quantitative calculation methods taking into account engine size, number of violating units and increments of emissions exceedance, among other factors.⁷ CARB's policy is much more discretionary. Further, CARB's policy specifically supports use of "Supplemental Environmental Projects" (SEPs), whereby a portion of penalties may be satisfied by performing a project that benefits air quality. In contrast, the US Department of Justice has recently issued a memorandum precluding such SEPs to offset penalties.⁸

Importantly, CARB's Alert specifically encourages voluntary self-disclosure of violations by emphasizing the Enforcement Policy provision for potential reduction in penalties of 25 to 75%, depending on the facts and circumstances. The criteria that the Enforcement Policy specifies generally match the criteria for voluntary self-disclosure penalty reductions under EPA's Audit Policy, 65 Fed. Reg. 19,618 (April 11, 2000). These criteria include such factors, among others, as whether the violation was discovered through a self-audit or other systematic procedure, prompt disclosure within 21 days of self-discovery, prompt correction, and the absence of a requirement to self-disclose or as a response to a pending government investigation. As with the Enforcement Policy more generally, however, the CARB policy is more discretionary, allowing CARB to consider the factors all together, whereas US EPA's policy specifies 100% mitigation of gravity-based penalties where all of the criteria are met or 75 percent mitigation in the event that all criteria are met other than discovery through a self-audit or environmental management system. In addition, in the context of "defeat device" enforcement that has, in some cases, been the subject of criminal inquiries, the EPA Audit Policy specifies that US EPA will generally not recommend criminal prosecution of disclosing entities, whereas CARB's policy does not address this issue. 

Given the high likelihood of joint or overlapping enforcement between CARB and US EPA of parallel vehicle and engine emissions regulations—often including a single penalty negotiation—self-disclosure should take into account how the agencies would together treat the matter. Perhaps most significantly, CARB's Alert encouraging self-disclosure before the end of 2021 appears to offer the benefit of significant penalty mitigation for those manufacturers that might already be aware of violations but have not yet "stepped forward." In this regard, where CARB's policy identifies self-disclosure within 21 days of knowing of the violation as one of many factors, EPA's Audit Policy sets that 21-day threshold as a precondition for penalty mitigation under that policy. Although US EPA may well take non-qualifying self-disclosures into account for penalty mitigation as an element of "cooperation credit," that is much more discretionary.

Observations and Recommendations

CARB intended its Alert as a warning that it understands vehicle and engine emissions violations are not isolated cases but are widespread, and that it plans to utilize its new testing facility to expand its enforcement program substantially. The Alert promises lower penalties and a lower-profile confidential discussion for those who self-disclose, and more severe consequences for those who do not. Manufacturers considering specific compliance issues or the possibility of undertaking compliance audits or reviews need to consider many factors in responding to such an Alert. As noted above, treatment under US EPA's parallel enforcement program is an important factor. Additional considerations may include the nature of the compliance issue, whether it is clear-cut or not, and the significance of any emissions impacts. Also, with Model Year 2021 certification processes well underway, manufacturers might consider whether the compliance issue pertains to ongoing production or is only historical, and whether it can be readily redressed. Special attention to potential "defeat device" allegations is especially appropriate given the perception, whether warranted or not, that such violations constitute "cheating." Overall, all stakeholders would be well-served in this complicated regulatory arena by promoting good faith attention to the broader and shared regulatory goal that emissions controls adopted to achieve compliance during prescribed certification test procedures are achieved throughout the life of vehicles and engines, and that deficiencies identified through certification processes and in-use testing are redressed.