Toyota Gets Prosecution Deferred, No Corporate Crime Plea, No Individuals Charges

You have to hand it to James Johnson, Matthew Fishbein and Helen Cantwell of Debevoise & Plimpton.

They represented Toyota Motor Co. and in the face of a mountain of evidence pointing to criminal wrongdoing.

And they still got from the federal government what the giant automaker wanted — no criminal plea agreement, no individuals charged.

Instead, a deferred prosecution agreement.

Federal officials this morning charged that Toyota criminally defrauded consumers by issuing misleading statements about safety issues in Toyota and Lexus vehicles.

In the deferred prosecution agreement, Toyota admitted that it misled consumers by concealing and making deceptive statements about two safety issues affecting its vehicles, each of which caused a type of unintended acceleration.

The admissions are contained in a detailed statement of facts attached to the agreement.

The agreement, which is subject to judicial review, requires Toyota to pay a $1.2 billion financial penalty – the largest penalty of its kind ever imposed on an automotive company.

The agreement also imposes on Toyota an independent monitor to review and assess policies, practices and procedures relating to Toyota’s safety-related public statements and reporting obligations.

The criminal charge is contained in an information alleging one count of wire fraud.

If Toyota abides by all of the terms of the agreement, the government will defer prosecution on the information for three years and then seek to dismiss the charge.

When asked why there was no criminal prosecution of the company or any executives involved, U.S. Attorney Preet Bharara said that “I’m not foreclosing anything necessarily.”

“But we believe this to be a final resolution of the case, of course pending successful completion of the probationary period of three years, ” Bharara said.

“As you might imagine, when you have a company with individuals who are responsible for unlawful conduct in other jurisdictions, there are problems of evidence and problems of proof. It happens to be the case that the rules of evidence sometimes do not allow you to use certain kinds of evidence and certain documents against certain individuals, although they might be admissible against the company itself. Although there is an admission that there were individuals who engaged in conduct which provides for a basis to bring a case against the company, they are not charged there.”

As for the company, Bharara said that “criminal charges have been filed.”

“They are merely held in abeyance while the company undertakes these reforms, including the imposition of a monitor, including payment of the unprecedented penalty, which is a fairly aggressive action. We take into account all things, including what the interests of justice require and exposure of the facts. I urge everyone to read the very detailed, single spaced, twelve page statement of facts in which the company admits a lot of things that you seldom see corporations as institutions admit. That is one of the most important things about this case — not just financial penalty, but the admissions that are made, that tell everyone else in the industry — this is what people will know about you if you commit this conduct.”

One reporter asked — “”Are you saying — it’s more important to get the fine than it is to pursue the criminal charges? Or are you saying — you are getting out of this agreement what you would have gotten with a conviction anyway?”

“I’m not sure I’m saying either one of those things,” Bharara said. “What we are saying is — you take into account all of the facts and circumstances of the case and if you are fulfilling the interests of the criminal justice system, which includes specifically deterring that company from doing this kind of conduct again, deterring other people through general deterrence from doing this conduct again, making sure there is a substantial penalty, which is basically a clawback of all of the money that is associated with the profits the company made on cars that should have been recalled in the time period, then a lot of the interests of the criminal justice have been vindicated. And by the way, just to be clear, criminal charges have been filed. We are just deferring prosecution in the light of a robust admission of misconduct, the financial penalty, the imposition of the monitor and a probationary period. And if there is a failure to abide by the terms of the agreement, then everything is back on the table.”

Attorney General Eric Holder said that “rather than promptly disclosing and correcting safety issues about which they were aware, Toyota made misleading public statements to consumers and gave inaccurate facts to Members of Congress.”

“When car owners get behind the wheel, they have a right to expect that their vehicle is safe,” Holder said. “If any part of the automobile turns out to have safety issues, the car company has a duty to be upfront about them, to fix them quickly, and to immediately tell the truth about the problem and its scope. Toyota violated that basic compact. Other car companies should not repeat Toyota’s mistake: a recall may damage a company’s reputation, but deceiving your customers makes that damage far more lasting.”

“Toyota stands charged with a criminal offense because it cared more about savings than safety and more about its own brand and bottom line than the truth,” Bharara said. “In its zeal to stanch bad publicity in 2009 and 2010, Toyota misled regulators, misled customers, and even misstated the facts to Congress. The tens of millions of drivers in America have an absolute right to expect that the companies manufacturing their cars are not lying about serious safety issues; are not slow-walking safety fixes; and are not playing games with their lives. Companies that make inherently dangerous products must be maximally transparent, not two-faced. That is why we have undertaken this landmark enforcement action. And the entire auto industry should take notice.”

In the fall of 2009, Toyota deceived consumers and its U.S. regulator, the National Highway Traffic Safety Administration (NHTSA), by claiming that it had “addressed” the “root cause” of unintended acceleration in its vehicles through a limited safety recall of eight models for floor-mat entrapment, a dangerous condition in which an improperly secured or incompatible all-weather floor mat can “trap” a depressed gas pedal causing the car to accelerate to a high speed.

Federal officials said that such public assurances deceived customers and NHTSA in two ways — first, at the time the statements were made, Toyota knew that it had not recalled some cars with design features that made them just as susceptible to floor-mat entrapment as some of the recalled cars.

Second, only weeks before these statements were made, Toyota had taken steps to hide from NHTSA another type of unintended acceleration in its vehicles, separate and apart from floor-mat entrapment: a problem with accelerators getting stuck at partially depressed levels, known as “sticky pedal.”

Federal officials said that Toyota issued its misleading statements, and undertook its acts of concealment, against the backdrop of intense public concern and scrutiny over the safety of its vehicles following a widely publicized Aug. 28, 2009 accident in San Diego, Calif., that killed a family of four.

A Lexus dealer had improperly installed an incompatible all-weather floor mat into the Lexus ES350 in which the family was traveling, and that mat entrapped the accelerator at full throttle. A 911 emergency call made from the out-of-control vehicle, which was speeding at over 100 miles per hour, reported, “We’re in a Lexus . . . and we’re going north on 125 and our accelerator is stuck . . . there’s no brakes . . . we’re approaching the intersection . . . Hold on . . . hold on and pray . . . pray.” The call ended with the sound of the crash that killed everyone in the vehicle.

The San Diego accident was not the first time that Toyota had faced a problem with floor-mat entrapment. In 2007, following a series of reports alleging unintended acceleration in Toyota and Lexus vehicles, NHTSA opened a defect investigation into the Lexus ES350 model (the vehicle involved in the 2009 San Diego accident), and identified several other Toyota and Lexus models it believed might likewise be defective.

Toyota, while denying to NHTSA the need to recall any of its vehicles, conducted an internal investigation in 2007 which revealed that certain Toyota and Lexus models, including most of the ones that NHTSA had identified as potentially problematic, had design features rendering entrapment of the gas pedal by an all-weather floor mat more likely.

Toyota did not share these results with NHTSA.

In the end, the company negotiated a limited recall of 55,000 mats (no vehicles) – a result that Toyota employees touted internally as a major victory: “had the agency . . . pushed for recall of the throttle pedal assembly (for instance), we would be looking at upwards of $100 million + in unnecessary costs.”

Shortly after Toyota announced its 2007 mat recall, company engineers revised internal design guidelines to provide for, among other things, a minimum clearance of 10 millimeters between a fully depressed gas pedal and the floor.

But Toyota decided those revised guidelines would only apply where a model was receiving a “full model redesign” – something each Toyota and Lexus model underwent only about once every three to five years.

As a result, even after the revised guidelines had been adopted internally, many new vehicles produced and sold by Toyota – including the Lexus ES350 involved in the 2009 San Diego accident – did not comply with Toyota’s 2007 guidelines.

After the fatal and highly publicized San Diego accident, Toyota agreed to recall eight of its models, including the ES350, for floor-mat entrapment susceptibility. Thereafter, as part of an effort to defend its brand image, Toyota began issuing public statements assuring customers that this limited recall had “addressed the root cause of unintended acceleration” in its U.S.-sold vehicles.

As Toyota knew from internal testing it had completed by the time these statements were made, the eight-model recall had not in fact “addressed the root cause” of even the floor-mat entrapment problem. Models not recalled – and therefore still on the road – bore design features rendering them just as susceptible to floor-mat entrapment as those within the recall population.

One engineer working at a Toyota facility in California had concluded that the Corolla, a top-selling car that had not been recalled, was among the three “worse” vehicles for floor-mat entrapment.

In October 2009, Toyota engineers in Japan circulated a chart showing that the Corolla had the lowest rating for floor-mat entrapment under their analysis. None of these findings or this data were shared with NHTSA at the time.

Federal officials said that what is more misleading, at the same time it was assuring the public that the “root cause” of unintended acceleration had been “addressed” by the 2009 eight-model floor-mat entrapment recall, Toyota was hiding from NHTSA a second cause of unintended acceleration in its vehicles: the sticky pedal.

Sticky pedal, a phenomenon affecting pedals manufactured by a U.S. company and installed in many Toyota brand vehicles in North America as well as Europe, resulted from the use of a plastic material inside the pedals that could cause the accelerator pedal to become mechanically stuck in a partially depressed position.

The pedals incorporating this plastic were installed in, among other models, the Camry, the Matrix, the Corolla, and the Avalon sold in the United States.

The sticky pedal problem surfaced in Europe in 2008.

There, reports reflected instances of “uncontrolled acceleration” and unintended acceleration to “maximum RPM,” and customer concern that the condition was “extremely dangerous.”

In early 2009, Toyota circulated to European Toyota distributors information about the sticky pedal problem and instructions for addressing the problem if it presented itself in a customer’s vehicle.

These instructions identified the issue as “Sudden RPM increase/vehicle acceleration due to accelerator pedal sticking,” and stated that should a customer complain of pedal sticking, the pedal should be replaced with pedals manufactured by a company other than A-Pedal Company.

Contemporaneous internal Toyota documents described the sticky pedal problem as a “defect” that was “important in terms of safety because of the possibility of accidents.”

Toyota did not then inform its U.S. regulators of the sticky pedal problem or conduct a recall.

Instead, beginning in the spring of 2009, Toyota quietly directed A-Pedal Company to change the pedals in new productions of affected models in Europe, and to plan for the same design changes to be rolled out in the United States (where the same problematic pedals were being used) beginning in the fall of 2009.

The design change was to substitute the plastic used in the affected pedal models with another material and to change the length of the friction lever in the pedal.

Meanwhile, the sticky pedal problem was manifesting itself in U.S. vehicles.

On or about the same day the San Diego floor-mat entrapment accident occurred, staff at a U.S. Toyota subsidiary in California sent a memorandum to staff at Toyota in Japan identifying as “critical” an “unintended acceleration” issue separate and apart from floor-mat entrapment that had been identified in an accelerator pedal of a Toyota Matrix vehicle in Arizona.

The problem identified, and then reproduced during testing of the pedal on September 17, 2009, was the sticky pedal problem. Also in August, the sticky pedal problem cropped up in a U.S. Camry.

On September 9, 2009, an employee of a U.S. Toyota subsidiary who was concerned about the sticky pedal problem in the United States and believed that Toyota should address the problem prepared a “Market Impact Summary” listing (in addition to the August 2009 Matrix and Camry) 39 warranty cases that he believed involved potential manifestations of the sticky pedal problem. This document, which was circulated to TOYOTA engineers and, later, to staff in charge of recall decisions in Japan, designated the sticky pedal problem as priority level “A,” the highest level.

By no later than September 2009, Toyota recognized internally that the sticky pedal problem posed a risk of a type of unintended acceleration – or “overrun,” as Toyota sometimes called it – in many of its U.S. vehicles.

A September 2009 presentation made by a manager at a U.S. Toyota subsidiary to Toyota executives gave a “current summary of O/R [overrun] types in NA [North American] market” that listed the three confirmed types as: “mat interference” (i.e., floor-mat entrapment), “material issue” (described as “pedal stuck and . . . pedal slow return/deformed”) and “simultaneous pedal press” by the consumer.

The presentation further listed the models affected by the “material issue” as including “Camry, Corolla, Matrix, Avalon.”

Toyota had by this time developed internal plans to implement design changes for all A-Pedal-Company-manufactured pedals in U.S. Toyota models to address, on a going-forward basis, the still-undisclosed sticky pedal problem that had already been resolved for new vehicles in Europe. On Oct. 5, 2009, TOYOTA engineers issued to A-Pedal Company the first of the design change instructions intended to prevent sticky pedal in the U.S. market. This was described internally as an “urgent” measure to be implemented on an “express” basis, as a “major” change – meaning that the part number of the subject pedal was to change, and that all inventory units with the old pedal number should be scrapped.

On October 21, 2009, however, in the wake of the San Diego floor-mat entrapment accident, and in the midst of Toyota’s discussions with NHTSA about its eight-model entrapment recall, engineers at Toyota and the leadership of Toyota’s recall decision group decided to cancel the design change instruction that had already been issued and to suspend all remaining design changes planned for A-Pedal Company pedals in U.S. models. U.S. Toyota subsidiary employees who had been preparing for implementation of the changes were instructed, orally, to alert the manufacturing plants of the cancellation.

They were also instructed not to put anything about the cancellation in writing. A-Pedal Company itself would receive no written cancellation at this time; instead, contrary to Toyota’s own standard procedures, the cancellation was to be effected without a paper trail.

Toyota decided to suspend the pedal design changes in the United States, and to avoid memorializing that suspension, in order to prevent NHTSA from learning about the sticky pedal problem.

In early November 2009, Toyota and the leadership of a U.S. TOYOTA subsidiary became aware of three instances of sticky pedal in U.S. Corollas.

Shortly thereafter, the leadership of the recall decision group within Toyota discussed a plan to finally disclose the sticky pedal problem to NHTSA.

The recall decision group was aware at this time not only of the problems in the three Corollas in the United States but also of the problems that had surfaced in a Matrix and a Camry in August 2009 and been reproduced through testing in September 2009.

The group was also familiar with the sticky pedal problem in Europe, the design changes that had been implemented there, and the cancellation and suspension of similar planned design changes in the United States.

Knowing all of this, the group’s leadership decided that it would not disclose the September 2009 Market Impact Summary to NHTSA; if any disclosure were to be made to NHTSA, it would be limited to a disclosure that there were some reports of unintended acceleration apparently unrelated to floor-mat entrapment; and NHTSA should be told that Toyota had made no findings with respect to the sticky pedal problem reflected in the reports concerning the three U.S. Corollas, and that the investigation of the problem had just begun.

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