Feedback
Business

VW to Pay Dealers $1.2 Billion in Diesel Scandal

Two months after agreeing to a $14.7 billion deal with federal regulators over its cheating on diesel emissions tests, Volkswagen has reached another settlement covering its 650 U.S. dealers.

The maker will pay $1.2 billion over the next 18 months to cover the losses dealers claim to have run up as a result of the scandal, in large part due to a sharp drop in the maker's sales. Along with cash payments, VW will provide "additional benefits" to those dealers.

An American flag flies next to a Volkswagen car dealership in San Diego, California
An American flag flies next to a Volkswagen car dealership in San Diego, California, U.S. September 23, 2015. REUTERS/Mike Blake/File Photo

The announcement moves Volkswagen closer to resolving its ongoing legal problems, though it still faces a number of additional challenges, including lawsuits by shareholders.

"We believe this agreement in principle with Volkswagen dealers is a very important step in our commitment to making things right for all our stakeholders in the United States," said Hinrich J. Woebcken, CEO of the North American Region, Volkswagen. "This agreement, when finalized, will strengthen the foundation for our future together and further emphasize our commitment both to our partners and the U.S. market."

According to sources who spoke to Reuters, the settlement includes about $1.2 billion in payments for the reduction in value of VW dealerships, additional payments for vehicles that could not be sold, plus incentive payments to some dealers.

The scandal was touched off last September when the U.S. Environmental Protection Agency charged Volkswagen with using a so-called defeat device to rig the results of emissions tests on its 2.0-liter diesel engines. The EPA later accused the automaker of rigging a more upscale 3.0-liter diesel, as well. VW subsequently acknowledged the subterfuge.

Among other things, that has forced the automaker to stop selling its diesel-powered vehicles in the U.S., with an estimated 12,000 of them sitting on dealer lots across the country as of July. Diesel-powered vehicles accounted for about a quarter of Volkswagen of America's sales prior to the revelations. The maker has tried to counter the impact of the scandal by offering hefty incentives on its gas models, but sales for the first seven months of this year were off 13.6 percent.

Read More: Fastest Car Ever, the 261 mph Bugatti Chiron Makes Its US Debut

Dealers have been hit not only by the loss of sales, but may have been paying floor plan costs to keep those diesels sitting on their lots. Retailers who might have wanted to sell their franchises have also seen the value of their showrooms sharply diminished by the scandal.

"Our clients recognized the best solution would be one that not only allows them to recoup lost franchise value and continue to employ thousands of American workers, but one that also charts a strong course for the recovery of the Volkswagen brand in the United States," said Steve Berman, Managing Partner at Hagens Berman, the Seattle law firm that had taken a lead in the dealer lawsuit.

The proposed settlement still must go before the court for final approval - as was the case for VW's agreement with the EPA, the U.S. Department of Justice, the Federal Trade Commission and the California Air Resources Board. U.S. District Judge Charles Breyer has since given that agreement the go, and payments are expected to be made shortly to owners of as many as 475,000 vehicles equipped with the 2.0-liter diesel.

Read More: Forget Sedans, Sports Cars; SUVs Increasingly Dominate Super-Premium Luxury Market

About $10 billion of that fund will be used for a vehicle buyback program - though VW continues searching for a fix that could allow at least some models to remain on the road. Another $2.7 billion will be used for an emissions remediation program, with the final $2 billion going to fund programs aimed at boosting sales of battery-cars and other zero-emissions vehicles.

VW still has to reach an agreement with government officials over the 3.0-liter diesel. And it has been negotiating what is expected to be a $1.2 billion fine to settle the Department of Justice criminal probe. Also on the docket: shareholders are suing to recover the sharp decline in their VW stock portfolios since the scandal began.

The dealer settlement is expected to be reviewed by the courts on September 30th.

Read More: Whether it's Clinton or Trump, Change is Coming to the Auto Industry