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Prosecutor, Judge And Jury

There is something disconcerting about the U.S. Transportation Department — acting as prosecutor, judge and jury — slapping the maximum allowable fine on Toyota for allegedly covering up a problem with sticky accelerator pedals.

The department wants to fine Toyota $16.4 million in what would be the largest civil penalty assessed by the government against an auto manufacturer. The $16.4 million relates only to the sticky-pedal problem. As investigations continue, there may be further fines down the road for other aspects of Toyota’s well-publicized problems with unintended acceleration of its vehicles.

While Toyota could choose to challenge the fine, a protracted lawsuit might hurt the company more than simply paying up. On the other hand, lawyers who have filed more than 100 would-be class-action lawsuits are hoping that the government’s action will make it easier for them to perform the American legal system’s specialty, a corporate cashectomy, on the Japanese carmaker. Those lawsuits are where the real money is at stake.

Toyota, of course, brought these problems on itself to a considerable degree. The company’s failures have tarnished its reputation and led some previously loyal customers, including me, to reconsider their allegiance to the brand.

But the whopping fine does not strike me as a fair and evenhanded response, and a lot of people are likely to see the record fine through a prism of cynicism. The Transportation Department is, after all, part of the same administration that holds majority control of General Motors (also known in some circles as Government Motors) and Chrysler. There is a clear conflict of interest, and I’m not at all sure that, under similar circumstances, the government would hold to its hard-line policies with GM or Chrysler.

Until now, no automaker has paid a fine of more than $1 million. In 2004 General Motors negotiated a $3 million payment down to $1 million in relation to a windshield wiper issue which the Transportation Department said the company dealt with improperly. Ford paid only $425,000 in 1999 to settle a dispute with the National Highway Traffic Safety Administration (NHTSA) over claims that it had failed to provide timely and accurate information about a problem with ignition switches that presented a risk of steering column and underdash fires. Approximately 7.8 million vehicles were recalled because of the ignition switch problem. Toyota has recalled eight million vehicles worldwide in connection with the acceleration problem, but only about six million of those have been in the U.S.

Transportation Secretary Ray LaHood justified the hefty fine on Toyota by emphasizing the Transportation Department’s case that Toyota acted deceitfully, attempting to hide problems from customers and regulators. “We now have proof that Toyota failed to live up to its legal obligations,” LaHood said in a statement. “Worse yet, they knowingly hid a dangerous defect for months from U.S. officials and did not take action to protect millions of drivers and their families.”

But during these months, Toyota did send repair procedure guidelines to distributors in 31 European countries and Canada. The Transportation Department counts this as evidence against the company, saying it proves that executives were aware of the problem. But, in reality, the fact that Toyota sent information to distributors about how to respond to complaints of unexpected acceleration shows that the company wasn’t engaged in a cover up. If you want to hide a problem you refuse to acknowledge it. You don't try to fix it. The fact that one branch of the automaker was working on the problem in Europe and Canada while the departments dealing with U.S. regulators were slow to address it looks more clumsy than deceptive.

The case could have far-reaching implications on the global political stage. Toyota is the crown jewel of industrial Japan. The Obama administration is already having trouble maintaining smooth relations with Japan, thanks in part to a dispute over the U.S. military presence in Okinawa. The fine against Toyota deals a blow to Japan’s star company, and its record size creates the impression that the U.S. government is unfairly using its might to injure a rival to its own auto manufacturers. The Japanese are unlikely to be pleased. Neither are Americans who would like their government to be fair. Some of those Americans, by the way, build Toyota vehicles, and a lot of other Americans sell and service them.

I would like to see Toyota force the Transportation Department to justify its ham-handed punishment in court, but I am not holding my breath. My guess is that the Japanese automaker will just keep trying to drive on through the storm.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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