NTHSA recently published a Notice of Proposed Rulemaking (NPRM) “prescribing procedures for the assessment of civil penalties and for interpreting the factors for determining the amount of a civil penalty or the amount of a compromise under the National Traffic and Motor Vehicle Safety Act (Safety Act), to implement the Moving Ahead for Progress in the 21st Century Act (MAP-21).”
Both manufacturers and suppliers should take note of the proposed procedures as they could significantly impact the ability of OEMs, suppliers and others involved in NHTSA regulation to influence NHTSA decision making with respect to fines – which, as demonstrated below, are on the rise.
How Has NHTSA Considered Fine Assessments in the Past?
Historically, NHTSA has considered a wide variety of factors when assessing fines including:
There is no specific formula or calculation that provides clarity on what the magnitude of the fine will or could be. Rather, there is a general assessment by NHTSA of all of these factors, and possibly others, in an effort to determine the magnitude of the fine.
The Recent Trend is Not Fine
Before we discuss what the new proposal is all about, let’s first take a look at the fines that have been collected by NHTSA historically, and why a formal process may be necessary in response to recent trends.
NHTSA authority, and therefore the related fines, cover more than just passenger vehicles. The chart below illustrates NHTSA collection of all fines from all manufacturers, suppliers and dealers that have violated the federal legislation that is under NHTSA’s purview.
There has obviously been a dramatic change in the assessment and collection of fines by NHTSA in recent years. But could it be that passenger vehicle manufacturers are not the target of these fines? No. Quite the contrary. The chart below demonstrates that passenger vehicle manufacturers have paid the overwhelming majority of these fines.
The fines that have been collected may also give us insight into the primary areas of NHTSA’s focus, or the compliance challenges most frequently encountered by OEMs. The chart below illustrates the total amount of fines collected from 1999 through June 2015 based on the category of violation indicated by NHTSA.
It is important to note a couple items regarding this last chart. The $70 million collected for failure to report incidents is related solely to Honda’s EWR reporting violations from earlier this year. Further, for all of these charts, the data provided by NHTSA is only current through May 2015. As such, any amounts received since then, including amounts to be paid by GM or Chrysler as a result of their recent settlement agreements and consents orders have not been included. Untimely Recall is clearly the issue of either greatest focus or for which OEMs have the greatest compliance challenge.
So What Is the New Proposal All About?
Under the current legislation, there is no procedure for the assessment of fines and penalties. This new proposal is an effort to establish a proposal, while also ensuring due process for the companies involved. The procedure being proposed includes three options for violating companies after NHTSA makes an initial demand for civil penalties:
While NHTSA does not believe it is necessary to have a formal review process for civil penalties it brings, and is not proposing such a formal review process, it does believe (and is proposing) an informal review process that will “lead to the creation of a record in each individual proceeding that can form the basis for judicial review without a new trial of all the facts and issues in the district court.” The standard of review that NHTSA proposes is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
Under the proposal, NHTSA will send the violating company correspondence containing a variety of information regarding the violations, the rights the violating company has, and the amount of the civil penalty being sought. The responding company can then select one of the options described above.
The Fork in the Road – Three Paths to Choose From
Obviously, paying the fine is relatively self-explanatory. However, the other two options being proposed provide opportunities for the responding company to engage NHTSA in ways that may not have been previously available.
The Informal Response
In the Election of an Informal Response, the responding company must provide NHTSA Chief Counsel in writing “any arguments, views or supporting documentation that dispute or mitigate that person's liability for, or the amount of, civil penalties to be imposed” within 30 days of receiving the notice from NHTSA. The Assistant Chief Counsel for Litigation and Enforcement can then provide rebuttal materials to the Chief Counsel in response. The Chief Counsel will then issue a final determination on the fine which becomes final after 20 days, unless appealed. This process is intended by NHTSA to provide respondents with a more flexible, less formal, less adversarial opportunity to engage NHTSA, discuss its concerns and present evidence in support of its position. The alternative, below, is a much more structured and formal process.
Election of a Hearing
If the responding company chooses to have a hearing in response to the demand from NHTSA, “the Chief Counsel will designate a Hearing Officer to preside over the hearing. The Hearing Officer appointed by the Chief Counsel may have no other responsibility, either direct or supervisory, for the investigation or enforcement of the violation for which the initial demand for civil penalties relates and will not have any prior connection to the case… the Hearing Officer will have the discretion to conduct an in-person hearing and allow witness testimony only if an in-person hearing is needed, in the opinion of the Hearing Officer, to resolve any factual and/or legal issues that cannot be easily resolved by written submissions.” NHTSA proposes that parties exchange documents in advance of the hearing (with NHTSA’s documents due 3 days before the hearing) and therefore proposes that there be no discovery allowed and the Hearing Officer will not be bound by the Federal Rules of Evidence. As with the informal response, the decision of the Hearing Officer will be final after 20 days unless appealed.
Both the informal response and hearing provide the possibility of administrative appeal to the Administrator after the decision of the Chief Counsel or Hearing Officer. “The Administrator will affirm the order unless the Administrator finds that the order was unsupported by the record as a whole; based on a mistake of law; or that new evidence, not available at the hearing, is available.”
As of September 26, 2015 there were still 55 days remaining in which public comment would be received for the NPRM. As of this date, no comments had been posted to the Federal Register in response to this proposal.
One area of concern for manufacturers is likely to be the fact that NHTSA determines the initial amount of the fine, and the avenues for further consideration involve either paying the fine, submitting information informally which NHTSA will then review and consider, or subjecting yourself to a formal process whereby a NHTSA-appointed Hearing Officer will make a formal binding determination. Further, the appeals process is overseen by NHTSA. While these new processes may provide a voice for manufacturers, some may express concern that the proposed process doesn’t give this voice a chance of being truly heard. It will be interesting to see if manufacturers or others in the industry take the opportunity to use the voice they have today to comment on the proposed rulemaking before it is put into practice.
Neil Steinkamp is a Managing Director at Stout. He has extensive experience providing a broad range of business and financial advice to corporate executives, risk managers, in-house counsel and trial lawyers. Steinkamp has provided consulting services and has been engaged for several years as an expert in numerous matters involving automotive warranty and recall costs. His practice also includes consulting services for automotive OEMs, suppliers and their advisors regarding valuation, transactions and disputes. Mr. Steinkamp can be reached at +1.646.807.4229 or firstname.lastname@example.org.