A federal judge in suburban Los Angeles has given his preliminary approval to a settlement estimated to be worth as much as $1.4 billion in a collection of cases involving the unintended acceleration of Toyota Motor Co. products – but the deal only resolves what one observer described as the “easy” part of the litigation facing the Japanese giant.
If given the court’s final okay sometime next year, the agreement would resolve claims that the unintended acceleration problems led to a sharp decline in the value of Toyota vehicles.
But it does not resolve scores of additional claims filed by those who allege they were injured during “runaway car” crashes or on behalf of others who were killed.
The new Toyota settlement resolves “an economic value lawsuit,” stresses Joe Phillippi, of AutoTrends Consulting. And while that may involve the majority of the lawsuits Toyota was facing, he notes it’s “the highly emotional lawsuits yet to be heard. And when you start parading in front of a jury grizzly images of people injured or killed that makes for great headlines.”
Since late 2009, Toyota has recalled more than 14 million vehicles due to unintended acceleration issues. The maker, internal company documents later revealed, had initially resisted pressure to make repairs but shifted into gear after a widely-reported accident claimed the lives of a California Highway Patrol Officer and several family members.
The first recall involved so-called carpet entrapment, where loose floor mats could inadvertently jam the accelerator pedal wide open. But early in 2010, Toyota added millions more vehicles because of potentially sticky accelerator assembles.
The issue has continued to plague the maker, Toyota adding another 154,000 Lexus RX luxury crossovers to the list last July due to carpet entrapment problems. The delay in recalling those vehicles led to a record $17.4 million fine for the automaker – on top of $48.8 million the National Highway Traffic Safety Administration dunned the maker in 2010 for delaying recalls for unintended acceleration and other safety-related issues.
The maker took a deep hit to sales in the immediate wake of the 2009 and 2010 announcements but has since regained most, if not all, of its marketplace momentum. And clearly, the new settlement is designed to avoid further problems for a brand that has traditionally boasted a solid reputation for quality, reliability and safety.
“Toyota seems to be putting this piece of the puzzle behind it (having recognized) the significant impact recalls can have on a brand,” says Mike Rozembajgier, Vice President of Recalls for Stericycle ExpertRECALL, a firm that helps large companies deal with recall issues.
The agreement announced last Wednesday targets a specific group of lawsuits consolidated under the U.S. District Court in Santa Ana, California – cases involving claims that the recalls and subsequent publicity led to a loss of value for Toyota vehicle owners and lease customers.
The maker will offer cash payments of about $250 million to eligible customers who sold or turned in leased vehicles between September 2009 and December 2010. The maker also plans to expand warranty coverage for specific vehicle components that could be involved in unintended acceleration issues. It will retrofit 3.2 million vehicles with brake override systems that automatically reduce power once the brake is touched – even if the accelerator is also being pressed.
And Toyota will use some of the remaining funds to expand safety research and conduct new driver education programs.
The maker says it will take a one-time, $1.1 billion pre-tax charge against earnings – though Steve Berman, one of the lead plaintiffs attorneys, said his understanding is that the total value of the proposal is between $1.2 billion and $1.4 billion.
“We are pleased that the court gave such swift preliminary approval of the settlement,” said Berman, managing partner of Hagens Berman Sobol Shapiro LLP, and co-lead counsel for Toyota owners and lessees in the case. “We are eager to move the process forward so we can ultimately distribute funds to Toyota owners as well as install brake-override systems in more than three million vehicles.”
U.S. District Judge James Selna plans to hold a fairness hearing next year before issuing a final ruling on the settlement. But he has also scheduled hearings to begin in February on the wrongful death and injury lawsuits that could drag the unintended acceleration case back into the headlines.
Toyota has settled some claims, notably from the estate of the California trooper and family members killed in the October 2009 crash. But the maker has also been battling other claimants. It has been particularly adamant in cases where the lawsuits point to mysterious electronic gremlins alleged to have caused Toyota products to race out of control unexpectedly.
And the maker does have significant ammunition to back itself up: a pair of studies conducted on behalf of NHTSA by the National Academy of Sciences and by NASA found no such gremlins but did point to driver error as the likely cause of most unintended acceleration crashes.
The question, says recall expert Rozembajgier, is whether Toyota could lose by winning these cases.
Audi faced similar claims of mysterious problems in the unintended acceleration scandal that swirled around its once-popular Audi 5000 model back in the late 1980s. The maker adamantly insisted the issue was one of driver error – and though federal regulators ultimately agreed, the damage done to the brand was severe. Sales plunging, Audi nearly left the U.S. market in 1992 and is only now beginning to gain momentum on luxury market leaders like BMW and Mercedes-Benz.
So, with one settlement in hand, Toyota has “got to balance whether they want the story to continue or to move on and protect themselves in the marketplace,” said Rozembajgier, perhaps by settling the remaining wrongful death cases as quickly and as quietly as possible to keep the gruesome trial photos out of the 24-hour news cycle.