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In re Volkswagen "Clean Diesel" Marketing, Sales Practices, and Products Liability Litigation

United States District Court, N.D. California

September 20, 2019




         Volkswagen salespersons, in a proposed class action, contend that they were harmed by the company’s diesel scandal. Volkswagen and other defendants (who are alleged to have conspired with the company) have moved to dismiss the complaint. Because each claim in the complaint contains one or more pleading deficiencies, the Court GRANTS the motions.

         I. BACKGROUND[1]

         Plaintiffs are three car salespersons who, at various times from 2010 to the present, have worked at Volkswagen dealerships in California. Their pay is almost entirely commission based: when they sell a car, they get a percentage of the dealer’s profits on the sale. An additional commission on each sale comes directly from Volkswagen. The remainder of their pay is bonus based. If they sell a target number of cars in a given month, for example, the dealer pays them a bonus. If their customer service ratings meet a certain threshold, Volkswagen will award them a separate bonus.

         After the public learned in 2015 that Volkswagen, for the better half of a decade, had installed defeat devices in its “clean diesel” line of cars to mask unlawfully high emissions, there was a measurable drop in the sale of new Volkswagen cars. Consumers were shocked by the blatancy and scale of the fraud and became less interested in the brand. The decline in demand for Volkswagen cars in turn meant that Plaintiffs made less money.

         Seeking to recover that lost income, Plaintiffs filed this action. Styled as a proposed class action, they seek to represent Volkswagen salespersons nationwide. They have named as defendants Volkswagen AG (VWAG), Volkswagen Group of America, Inc. (VWGoA), Audi AG, Martin Winterkorn and Matthias Müller (former CEOs of VWAG), Rupert Stadler (former CEO of Audi AG), Bosch GmbH and Bosch LLC (electronics companies that partnered with Volkswagen), and Volkmar Denner (Bosch GmbH’s CEO). They also named Porsche AG as a defendant but later agreed to dismiss all claims against Porsche AG. (See Dkt. No. 6549.)

         The causes of action are for breach of contract, negligent interference with prospective economic advantage, fraud, and violation of RICO. Four motions to dismiss have been filed: one by VWAG, VWGoA and Audi AG (together “VW”), one by Bosch GmbH and Bosch LLC (together “Bosch”), one by Martin Winterkorn, and one by Rupert Stadler. (Defendants Müller and Denner have not appeared in the case.) The arguments raised in the motions are considered below.


         VW first argues that the claims against it should be dismissed because those claims were released as part of the class settlement that the company reached with its authorized franchise dealers. (See Dkt. No. 2807 (settlement approval order).) VW contends that under the plain terms of that agreement, Plaintiffs are among the “Releasing Parties” and their claims fall within the scope of the “Released Claims.”

         The settlement defined the Releasing Parties as “Dealer Settlement Class Members, for and on behalf of themselves and their agents, heirs, executors, and administrators, successors, assigns, insurers, attorneys, representatives, shareholders, owners, owner associations, and any other legal or natural persons who may claim by, through or under them . . . .” (Dkt. No. 2802 ¶ 9.3.) The Releasing Parties agreed in the settlement to release VWAG, VWGoA, and other “Released Parties” from all “Released Claims.” (Id.; Dkt. No. 1970 ¶ 9.2.) “Released Claims” included “all claims related in any way to the TDI Matter, ” i.e., to the diesel scandal. (Dkt. No. 2802 ¶ 9.3; Dkt. No. 1970 ¶ 2.27.)

         VW maintains that Plaintiffs were among the “Releasing Parties” because they were “agents” and “representatives” of Dealer Settlement Class Members. Plaintiffs object, arguing that as rank-and-file salespersons, they lacked the level of authority that would have given rise to an agency relationship with the dealerships at which they worked.

         Putting aside the question of whether Plaintiffs were the dealers’ agents or representatives, the Court concludes that Plaintiffs are not Releasing Parties because they are not pursing claims “by, through or under” Dealer Settlement Class Members. As the Court previously explained in resolving a motion to enforce the settlement, the “by, through, or under” phrase modifies not just the catch-all phrase that precedes it (“any other legal or natural persons who may claim by, through or under” Dealer Settlement Class Members), but also each category of persons listed in the release (e.g., the dealers’ agents, heirs, representatives, owners, and shareholders). See In re Volkswagen “Clean Diesel” Mktg., Sales Practices, & Prod. Liab. Litig. (VW Altomare), No. MDL 2672 CRB, 2018 WL 1588012, at *6 (N.D. Cal. Mar. 30, 2018). Given this prior interpretation, the release only applies to the claims of a VW franchise dealer’s agents and representatives if those claims are made “by, through or under” a Dealer Settlement Class Member. Plaintiffs’ claims are not of this kind.

         Plaintiffs are not attempting to step into the shoes of franchise dealers and assert claims on their behalf. Instead they are alleging (i) that VW breached contracts that it had with its salespersons, (ii) that VW negligently interfered with its salespersons’ business relations, (iii) that VW committed fraud by making misrepresentations to (and concealing material facts from) its salespersons, and (iv) that VW committed wire fraud (and violated RICO) by participating in an enterprise whose purpose was to deceive regulators, VW salespersons, and the public. (See Compl. ¶¶ 80, 87, 99–100, 103–04, 118.) These claims are not based on VW’s dealings with its franchise dealers; they are based on VW’s dealings with its salespersons, regulators, and consumers. The claims, then, are not brought “by, through or under” Dealer Settlement Class Members.

         This conclusion is consistent with VW Altomare, where the Court held that the fraud claims of the sole owner of a VW dealership were brought “by, through, or under” a Dealer Settlement Class Member and were thus released. See 2018 WL 1588012, at *6–7. In VW Altomare, there was no real distinction between the claims of the dealership and the claims of the dealer’s owner, the latter of which were asserted in a separate, post-settlement complaint. The claims were all based on a single person’s interactions with VW, and that person received compensation in the dealer class settlement. Here, there is a distinction between Plaintiffs and the dealerships at which they worked. Plaintiffs’ claims are based in part on the relationships that they had with VW as VW salespersons. Those relationships are separate and apart from the relationships that VW had with its franchise dealers. Unlike the claims in VW Altomare, then, Plaintiffs are not bringing their claims “by, through, or under” Dealer Settlement Class Members. This means Plaintiffs are not Releasing Parties and that the settlement does not foreclose their claims.


         Turning to the claims themselves, the first cause of action is for breach of contract and is against VWAG and VWGoA. A breach of contract claim has four elements: (1) the existence of a contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach; and (4) damages to plaintiff as a result of the breach. See CDF Firefighters v. Maldonado, 158 Cal.App.4th 1226, 1239 (2008). The contract claim against VWAG does not satisfy the first of these elements, and the contract claim against VWGoA does not satisfy the third of these elements.

         With respect to VWAG, the complaint makes no mention of any agreements between Plaintiffs and VWAG. With no allegations supporting the existence of a contract, a necessary element of the claim is missing. Plaintiffs have thus failed to state a breach of contract claim against VWAG.

         As for the contract claim against VWGoA, Plaintiffs have identified agreements that they entered into with VWGoA, but they have not adequately alleged that VWGoA breached those agreements. As alleged, VWGoA agreed to do two things: (i) to pay Plaintiffs a commission for each Volkswagen car that they sold, and (ii) to compensate Plaintiffs based on their customer service scores. (See Compl. ¶¶ 80–82.) At no point in the complaint is there a suggestion that VWGoA did not honor these obligations. Plaintiffs do argue that VWGoA’s diesel scandal interfered with their ability to sell more VW cars and to obtain more compensation from VWGoA; but there is no contention that VWGoA promised Plaintiffs that they would sell a specific number of cars. Even if the diesel scandal caused Plaintiffs to sell fewer cars, that result did not breach the express terms of the agreements that are identified.

         In their opposition brief, Plaintiffs cite to six paragraphs from their complaint which they maintain include allegations that VWGoA also agreed to provide them with “marketable, legally-compliant vehicles, ” which they assert VWGoA did not do. (Opp’n to VW, Dkt. No. 6441 at 31.) The cited paragraphs do not include any allegations supporting that VWGoA made such a promise to Plaintiffs, and Plaintiffs cannot use their opposition brief to amend their complaint. See Broam v. Bogan, 320 F.3d 1023, 1026 n.2 (9th Cir. 2003) (district court cannot consider facts in opposition brief in considering Rule 12(b)(6) motion to dismiss).

         Even if VWGoA did not breach an express contractual term, Plaintiffs alternatively assert that VWGoA, through its diesel scandal, breached the covenant of good faith and fair dealing. (See Compl. ¶¶ 88–92.) Under California law, a covenant of good faith and fair dealing is an “implied term in every contract.” Chodos v. W. Publ’g Co., 292 F.3d 992, 996 (9th Cir. 2002). In general, the covenant “imposes upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, [and] also the duty to do everything that the contract presupposes that he will do to accomplish its propose.” Pasadena Live v. City of Pasadena, 114 Cal.App.4th 1089, 1093 (2004) (citation omitted).

         As an example of its application, in construction contracts the covenant of good faith and fair dealing obligates the property owner to “furnish the selected site of operations to the contractor in order to enable him to adequately carry on the construction and complete the work agreed upon.” Hensler v. City of L.A., 124 Cal.App. 2d 71, 82–83 (1954) (internal quotation marks omitted). If the property owner does not make the property available, performance of the contract would be impossible. As another example, when benefits are due under an insurance policy, “delayed payment based on inadequate or tardy investigations . . . may breach the implied covenant [by] . . . frustrat[ing] the insured’s right to receive the benefits of the contract in ‘prompt compensation for losses.’” Waller v. Truck Ins. Exchange, Inc., 900 P.2d 619, 639 (Cal. 1995) (citation omitted).

         While the covenant will “prevent a contracting party from engaging in conduct that frustrates the other party’s rights to the benefit of the agreement, ” id., it “cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement, ” Agosta v. Astor, 120 Cal.App.4th 596, 607 (2004) (citation omitted). So, for example, if an individual and a company enter into an at-will employment agreement, the covenant cannot be used by the individual to impose a requirement that termination only be for good cause. See Foley v. Interactive Data Corp., 765 P.2d 373, 400 n.39 (Cal. 1988).

         Plaintiffs’ implied covenant claim falls into this latter category, as one that attempts to impose substantive duties beyond those incorporated in the specific terms of the agreement. The injury asserted by Plaintiffs is that they were not able to sell more cars (and earn more commissions) because of VWGoA’s diesel scandal. But as noted above, there is no suggestion that the agreements in question contained sales volume terms (e.g., that Plaintiffs could expect to sell 100 cars per year). VWGoA did what the agreements presupposed it would do to accomplish their purpose: it provided Plaintiffs with cars to sell and compensated Plaintiffs when they sold those cars. VWGoA did not “render performance of the contract impossible” or fail to take steps “to accomplish [the agreements’] purpose.” Pasadena Live, 114 Cal.App.4th at 1093.

         It was in VWGoA’s best interests that Plaintiffs would sell more Volkswagen cars; and from the allegations there is no reason to believe that VWGoA sought to (or did) interfere with Plaintiffs ability to sell those cars. That consumer demand for Volkswagen cars dropped after the diesel scandal does not mean that VWGoA breached the implied covenant of good faith and fair dealing in the commission agreements that it had with Plaintiffs.

         The allegations do not support Plaintiffs’ breach of contract claims against VWAG and VWGoA. VW’s motion to dismiss these claims is GRANTED ...

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