CHICAGO--(BUSINESS WIRE)--In a first-of-its-kind lawsuit brought by a franchise dealer, three family-owned Volkswagen dealers filed a class action against VW stating that it intentionally defrauded dealers by installing so-called “defeat devices” in its diesel cars, and separately carried out a systematic, illegal pricing and allocation scheme that favored some dealers over others and illegally channeled financing business to VW affiliate, Volkswagen Credit, Inc., according to consumer-rights law firm, Hagens Berman.
The lawsuit, filed Apr. 6, 2016 in the U.S. District Court for the Northern District of Illinois states that in the midst of VW’s Dieselgate scandal, in which it admitted to installing an illegal “defeat device” emissions-cheating software in more than 550,000 U.S. diesel vehicles, VW’s U.S. affiliate in charge of its dealer network withheld all information about the scandal from current and prospective dealers, even though it was aware of the issue since at least as early as 2014.
The suit goes on to say that VW’s deception, coupled with the drop in value of diesel vehicles, the inability of franchise dealers to sell diesel vehicles and the loss in value of the VW brand post-Dieselgate delivered a devastating blow to dealers’ profits and the value of their franchises.
During this time period, the automaker also allegedly forced franchise dealers into a floorplan-financing discount system conducted by Volkswagen Credit, Inc. – a company wholly owned by VW – in what the suit calls an “incestuous relationship” that put dealers that declined to use Volkswagen Credit at a competitive disadvantage.
“For VW dealers – many of which are small, family-owned franchises – Dieselgate amounts to a classic ‘pump and dump’ operation, in which VW exploited the CleanDiesel eco-friendly market that it helped create, boosting the price of entry and continuation in the market for VW franchises,” said Steve Berman, managing partner of Hagens Berman. “All the while, VW withheld information about the impending Dieselgate fiasco, and left dealers to fend for themselves as the scandal unfolded.”
The suit explains that just as consumers readily purchased what they thought were reliable environmentally friendly vehicles, franchise dealers built new showrooms and purchased new facilities, while heavily stocking lots with CleanDiesel vehicles, based on VW’s false marketing. In VW’s push of its CleanDiesel vehicles, the complaint states that it also “purposely and fraudulently induced its dealers to continue to invest in their dealership facilities and to otherwise benefit VW.”
“Franchise owners are now left with lots full of CleanDiesel vehicles they are unable to sell, and these cars have suffered tremendous loss of value and take up inventory space and carrying costs,” Berman added. “VW dealerships large and small have been at the mercy of an unethical corporation, much like the hundreds of thousands of owners across the country, and we believe it’s time to take a stand for their rights.”
“What is really discouraging and led me to file this lawsuit,” said Ed Napleton, “is that Volkswagen has wholly failed to respond to dealer concerns in a substantive manner. It has talked for months about multiple plans, but done nothing and left us dealers in the red, and in limbo.”
The suit accuses VW of engaging in a criminal racketeering enterprise with respect to the Dieselgate scandal and violating federal law designed to protect car dealers from unfair practices by vehicle manufacturers. It also accuses VW of breaching state franchisee protection laws, breaching its franchise dealer agreements and defrauding its franchise dealers.
“Plaintiffs and the Franchise Dealer Class have invested millions, collectively hundreds of millions of dollars in the Volkswagen brand,” the suit states. “But now the brand value has plummeted, sales of VW diesels have completely halted, and sales of all VW cars have plummeted.”
The suit’s named plaintiffs are three Volkswagen dealerships owned by Ed Napleton. Napleton and his family have been involved in the automobile dealership business in the Chicago area for three generations. Ed Napleton’s father's and grandfather's business grew from a single Buick service station to several franchises in and around Chicago. Five of Francis Napleton’s eight children have worked their entire lives in the automobile industry, and today the Napleton family operates more than 50 dealerships in five states.
“In a sickening display of VW’s disregard for its dealer franchisees, Napleton Automotive of Urbana was purchased after VW admitted its fraud to regulators, just three days before the Dieselgate scandal made headlines. Yet Volkswagen withheld the truth and pushed the sale through, knowing well that Ed Napleton was purchasing a dealership that would almost immediately plummet in value,” Berman said.
In addition, the suit accuses Volkswagen of abandoning its long standing “stair-step” programs to provide financial assistance to its dealers. While the automaker touted to dealers that it would replace them with new programs with equal or greater benefit, the suit states that VW’s abandonment of these programs, “was calculated to quell poor publicity as well as dealer outrage at VGoA’s (Volkswagen Group of America) conduct and was otherwise calculated to fraudulently induce its dealers and prospective dealers to continue to invest in the Volkswagen brand.”
Hagens Berman Sobol Shapiro LLP is a consumer-rights class-action law firm with offices in 10 cities. The firm has been named to the National Law Journal’s Plaintiffs’ Hot List eight times. More about the law firm and its successes can be found at www.hbsslaw.com. Follow the firm for updates and news at @ClassActionLaw.