Dirty Diesel: The Challenge of Isolating Compensable Losses in a Motion for Certification
January 28th, 2022
In 2015, the Environmental Protection Agency of the United States (EPA) made waves when it determined that millions of Volkswagen “clean diesel” cars sold worldwide were cheating government emissions tests. By using something called a “defeat device” in their diesel engines, these cars were capable of changing their performance upon detecting that they were being tested, thereby improving test results. In reality, these cars emitted pollutants at levels 25 to 40 times higher than the legal limit.
In Mackinnon v. Volkswagen Group Canada, Inc ., 2021 ONSC 5941, Justice Edward Belobaba of the Ontario Superior Court of Justice denied certification to a “highly creative” but “fundamentally flawed” proposed class action on behalf of these Volkswagen clean diesel-engine owners and lessees.
In 2010, Stuart Mackinnon, a retired teacher and member of the Green Party passionate about the environment, leased a new clean diesel-engine Volkswagen Jetta. He returned it 4 years later without complaint. Then, in 2015, “Dieselgate” resulted in billions of dollars in fines, penalties, and settlements for Volkswagen, but it was not until two years later that Mr. Mackinnon proposed this class action.
When the American regulatory authorities announced that Volkswagen had been violating clean air laws, owners and lessees commenced a number of class actions to recover the losses they suffered as a result of the sharp decline in Volkswagen’s brand value and the pricing of its securities and vehicles. These lawsuits settled for billions of dollars in both the United States and Canada. In fact, in April 2017, just months before Mr. Mackinnon brought this action, Justice Belobaba himself approved a $2.1 billion Canadian settlement.
Although Mr. Mackinnon had already returned his leased Jetta without complaint, the news of the scandal understandably upset him. After all, he had happily paid a premium for his Jetta, largely based on the promise that he was doing his part to help the environment. Given that owners and lessees of these cheater vehicles who experienced losses after Volkswagen’s disclosure had been successful in recovering millions of dollars for their losses, Mr. Mackinnon brought this class action on behalf of owners and lessees who had sold or returned their vehicles before the announcement.
The Obstacle to Certification
Mr. Mackinnon’s claim was straightforward: the class members paid more money for a clean diesel/low emissions benefit that they never received. As such, they should be compensated for their losses.
However, class action certification requires evidence of a compensable loss and a plausible methodology to measure that loss on a class-wide basis. Justice Belobaba found that neither of these elements were present.
There was no doubt that the owners and lessees of the impugned vehicles paid several thousands of dollars more than they would have for a gasoline-engine equivalent vehicle. There was also no doubt that they did not receive the promised low emission or clean diesel benefit. The issue, according to Justice Belobaba, was integrating these facts. Could it be determined, based on the evidence, that owners and lessees paid an extra premium for the clean diesel benefit? Could this feature be isolated and quantified in monetary terms and measured on a class-wide basis?
While it would certainly be a possible, if not reasonable, conclusion that owners and lessees paid more money for the clean diesel feature, proving this using a class-wide methodology is another issue. It’s not as if there was a “clean diesel” line item in the sales invoice or leasing agreement to prove that the customer paid something extra for the low emissions feature. In such a complex product, it was too difficult to determine exactly what amount was paid for which feature.
Class counsel explained that they assumed the clean diesel premium was $1,000 because, in their view, that was the finding Justice Belobaba had made when he approved the post-disclosure Volkswagen settlement. Justice Belobaba disagreed and clarified the issue. In the post-disclosure context, the loss was easy to quantify, as it was based upon a calculation in the average drop in resale value of the vehicles in the month after the announcement of the scandal. Given the wide-ranging effects of the announcement of a high-level corporate fraud, this drop in resale value reflected much more than customer disappointment in light of broken promises.
The required methodology for measuring a loss on a class-wide basis cannot be purely theoretical or hypothetical, but must be grounded in the facts of the case and there must be evidence of the availability of data to apply to the methodology to. The challenge in this case was to find such evidence in a pre-disclosure context where the fraud had not yet been revealed, the market had not yet responded, and the requirement to show some evidence of economic loss was nearly impossible to establish.
Justice Belobaba conceded that if there had been some evidence of economic loss and a plausible methodology for class-wide measurement of that loss, he would probably have certified the class action. Unfortunately for Mr. Mackinnon, the certification motion was dismissed.