Fordham Law

Toyota to take bitter medicine / Carmaker agrees to pay fine to avoid long dispute, minimize damage

Howard M. Erichson in Yomiuri Shimbun (Japan), April 21, 2010

Media Source

Akihiro Okada, Taro Koyano and Nobuyuki Kojima / Yomiuri Shimbun Staff Writers

Toyota Motor Corp. has decided to swallow a bitter pill and pay a record 16.4 million dollars fine for failing to swiftly report problems with accelerator pedals to U.S. authorities, apparently because it sees no merit in fighting a protracted court battle.

"There would be no benefits to battling the U.S. government," a senior Toyota official said. The fine is the largest the U.S. government has ever levied against an automaker.

Toyota hopes to prevent criticism from reigniting in the United States. However, the U.S. Transportation Department has hinted at the possibility of an additional penalty against the automaker, making it uncertain whether the situation will settle down.

When the department unveiled its plan on April 5 to impose the penalty against Toyota, many at the company believed it would oppose the fine.

"We have never done anything to violate the law," one Toyota official said.

There were fears that if the automaker accepted the fine too readily, it would damage its position in class-action lawsuits filed by Toyota owners who claim the safety recalls caused their vehicles to lose value.

As if to restrain Toyota from taking a hard-line stance, however, U.S. Transportation Secretary Ray LaHood strongly criticized the company, saying it covered up defects in its vehicles for several months.

Later it was learned that the department indicated the possibility of an additional penalty against Toyota in the letter notifying the automaker of the 16.4 million dollars fine.

This led Toyota to lean toward paying the fine. Executives reportedly felt that if the problem remained unsettled for a prolonged period, criticism against Toyota could reignite, and resisting the fine would only lead to one unfavorable piece of information being revealed after another.

Even some senior company officials who had earlier opposed accepting the fine came to admit that different dynamics were at work than they had expected.

In the end, the automaker was forced to make a hard decision to keep the possible damage to its corporate image and sales to a minimum.

Toyota announced it would recall 2.3 million vehicles in the United States in January to address sticking accelerator pedals, although Toyota discovered the pedal defects in Europe in late September.

The U.S. Transportation Department fined Toyota for, it said, failing to meet its legal obligation to report defects to the U.S. National Highway Traffic Safety Administration (NHTSA) within five business days of their discovery.

In Monday's announcement, LaHood issued a statement saying, "I am pleased that Toyota has accepted responsibility for violating its legal obligations to report any defects promptly."

However, Toyota refuted that allegation, saying when the defects were found in Europe, it could not know similar problems would occur in the United States. In accepting the fine, Toyota said Monday, "We agreed to this settlement in order to avoid a protracted dispute and possible litigation."

Thus the two remain wide apart on the justification of the fine, leaving a source of possible conflict.

Howard Erichson, a professor of law at Fordham University, said Toyota's agreement to pay the fine would give momentum to the plaintiffs in the lawsuits.

The first hearing in one of the class-action lawsuits is expected to be held May 13. Toyota may see its business performance deteriorate if the automaker is ordered by a court to pay hefty damages.

On the other hand, the U.S. Transportation Department, criticized for failing to prevent a massive recall, has not changed its hard-line stance. By hinting at an additional penalty, the department is indicating its intention to thoroughly investigate Toyota.

The prevailing view is that it may take some time for Toyota to be trusted again in the United States.

(Okada and Koyano are Yomiuri Shimbun correspondents stationed in the United States.)