85 Years - Clearing the Air About Discovery
BY THE EDITORS
In Fiat Chrysler, Pomerantz increased the discovery tools available to investors litigating against highly regulated companies
In September 2015, Pomerantz filed a complaint against Fiat Chrysler Automobiles N.V., one of the world’s largest car manufacturers, on behalf of a retail investor. After years of hard-fought litigation, in late 2019, the Firm achieved a $110 million settlement for defrauded investors, representing between 13.75% and 19% of maximum recoverable damages – an exceptionally high percentage for this type of action. In addition to the substantial financial recovery, Pomerantz set important precedent that expanded shareholder rights, while significantly advancing the ability of investors to obtain critically important discovery from regulators that are often at the center of securities actions.
The complaint alleged that defendants misled investors by asserting that the company was complying with regulations for conducting safety recalls set by the National Highway Traffic Safety Administration (“NHTSA”), and with regulations for controlling emissions of Nitrogen Oxide (“NOx”) set by the Environmental Protection Agency (“EPA”) and the European Union. Fiat Chrysler, in fact, had been violating those regulations since 2013 – it purposefully delayed notifying vehicle owners of defects and failed to repair the defects for months or years. More nefariously, the company also installed “defeat device” software in its diesel vehicles, designed to detect when the vehicle was being tested by a regulator such as the EPA. When testing conditions were detected, the vehicle would perform in a compliant manner, limiting emissions of NOx. When testing conditions were not detected, such as during real-world driving conditions, the emissions controls were disabled, and the vehicles would spew illegal and dangerous levels of NOx.
On July 26, 2015, the NHTSA fined Fiat Chrysler a record-high $105 million and required a substantial number of recalls and repairs. On October 28, 2015, the company announced a $900 million charge to earnings for an increase in estimated future recalls. The market responded to this news with a nearly 5% drop in the company’s share price, resulting in a $950 million decline in its market capitalization. In 2016 and 2017, when the EPA and other U.S. and European regulators publicly accused Fiat Chrysler of using defeat devices to cheat NOx emissions regulations, the company’s stock price declined further by 5% and 12% respectively.
Discovery in the case was particularly challenging, given the complexity of the emissions software technology, the international nature of the claims, and that the key defendant, Fiat Chrysler CEO and Chairman Sergio Marchionne, was hospitalized (and later died) three days before his scheduled deposition. Additionally, it involved analyzing millions of pages of documents and resulted in the exchange of reports by eleven experts on issues implicating U.S. as well as European regulations.
Pomerantz sought the deposition of a former employee of NHTSA. The United States Department of Transportation (“USDOT”), like most federal agencies, has enacted a set of regulations — known as “Touhy regulations” — governing when its employees may be called by private parties to testify in court. On their face, USDOT’s regulations apply to both current and former employees. Citing these regulations, NHTSA denied Pomerantz’s request to depose a former NHTSA employee who had interacted with Fiat Chrysler. Despite the widespread application of these regulations to former employees, Pomerantz filed an action against USDOT and NHTSA, arguing that Touhy regulations speak only of “employees,” which should be interpreted to apply only to current employees. The court granted summary judgment in favor of Pomerantz’s clients, holding that “USDOT’s Touhy regulations are unlawful to the extent that they apply to former employees.” This victory has greatly shifted the discovery tools available, so that investor plaintiffs in securities class actions against highly regulated entities (for example, companies subject to FDA regulations) may now depose former employees of the regulators to get critical testimony concerning the company’s violations and misdeeds.
The claims ultimately survived multiple rounds of motions to dismiss. Initially, the emissions allegations were dismissed because the court determined that the complaint did not plead facts sufficient to demonstrate that the defendants knew that their statements of compliance were misleading. Given leave to replead, Pomerantz filed Freedom of Information Act (“FOIA”) requests with the EPA, which led to critical new information. Pomerantz successfully argued, in opposition to the defendants’ second motion to dismiss, that emails received by the company’s head of regulatory affairs from the EPA stating that the company may be violating the law were sufficient to plead that the defendants’ subsequent statements of compliance were actionable. Significantly, Pomerantz established that a company professing compliance with regulations must also disclose if their regulators have taken a different position, even if it is not a final determination by the regulator. The additional allegations in Pomerantz’s amended complaint revived the emissions claims. Ultimately, Pomerantz secured class certification on behalf of investors.
At the summary judgment stage, Pomerantz did not merely defend against defendants’ motions, but also affirmatively moved to exclude certain expert testimony proffered by defendants, and for sanctions for spoliation of evidence. As the prospect of trial loomed, defendants finally agreed to settle.
The litigation was led by Pomerantz Partner Michael J. Wernke with Managing Partner Jeremy A. Lieberman. In approving the settlement, the court stated that Pomerantz should view the award of attorneys’ fees “as a substantial compliment for you[r] work … [I]t is most clearly evidenced by the results which were quite impressive on behalf of the class. And needless to say, given my own familiarity with the extensive litigation of the class including the collateral litigation that you had to engage in, I think you’ve done substantially a really terrific job on behalf of the class and really are to be commended.”