Volkswagen took a big step toward trying to fix its tattered reputation Tuesday as a federal judge formally approved a $14.7-billion settlement of the automaker's emissions cheating case.
The deal is the largest auto scandal settlement in U.S. history and paves the way for the company to make amends to 475,000 U.S. owners of Volkswagens and Audis with 2-liter diesel engines. Motorists can now have their cars bought back or modified by Volkswagen and receive additional cash compensation up to $10,000 each.
Leases covering the affected cars can be terminated. Volkswagen must also provide nearly $5 billion to support environmental programs, reduce emissions and promote zero-emissions vehicles.
"This is what people had been waiting for," said Matt DeLorenzo, managing editor for news at Kelley Blue Book. "Now you have actual buybacks and compensation about to begin."
The cars affected by the agreement include Volkswagen's popular Beetles, Golfs, Jettas and Passats. Some Audi A3s also are covered.
The pact approved by U.S. District Judge Charles Breyer in San Francisco ended a year of uncertainty about whether the automaker would compensate drivers who bought cars that Volkswagen had secretly designed to underreport emissions.
The VW scandal erupted in 2015 when Volkswagen admitted that it had installed "cheat devices" on diesel-powered cars from 2009 through 2015. The devices enabled the vehicles' engines to emit substantially fewer pollutants during emissions tests than during normal road use.
The uproar involved nearly 600,000 cars in the United States, including about 71,000 in California, and 11 million Volkswagen vehicles worldwide.
Since the cheating controversy began, Volkswagen's U.S. sales have tumbled, its dealers suffered losses, the German automaker's executive ranks were shuffled, and VW's reputation was smeared as the company negotiated the settlement with U.S. and California regulators and lawyers for the affected car owners.
Volkswagen said Tuesday that it would start to implement the U.S. settlement immediately and that it was hiring 900 people to help with the buybacks, including one employee to be stationed at each of its 652 U.S. dealerships.
The settlement "is an important milestone in our journey to make things right in the United States," Hinrich Woebcken, chief executive of Volkswagen Group of America Inc., said in a statement.
Owners of certain 2-liter diesel cars made by Volkswagen in the model years 2009 through 2015 will receive $12,500 to $44,000 from the automaker to buy back their cars, depending on the model. Leases of those vehicles may be terminated without penalty, and leaseholders also may seek cash payments.
Drivers who want to keep their cars can have VW modify their vehicles to meet emissions standards — once that method is approved by the California Air Resources Board and the Environmental Protection Agency. Federal officials said such a modification does not yet exist, although the company is working on a fix.
Regardless of whether they choose the buyback or modification, owners will receive a cash payment of at least $5,100 and as much as $10,000, depending on the model.
Breyer, who has overseen the litigation against Volkswagen, said in his court order approving the settlement that the deal was "fair, reasonable and adequate."
The agreement does not cover about 90,000 cars with 3.0-liter engines equipped with the cheating software. Volkswagen, regulators and consumer lawyers are still negotiating a possible settlement for those vehicles.
"The funds won't fully compensate owners who thought they were buying a better vehicle, but it is a strong step toward ensuring Volkswagen won't try to cheat again," Kathryn Phillips, director of the Sierra Club in California, said in a statement. "Volkswagen chose to poison our families with dangerous pollution just to pad its pocketbook."
Volkswagen took immediate steps when the scandal surface. It halted diesel sales in the U.S. and its chief executive, Martin Winterkorn, resigned. But Volkswagen's reputation took an immediate hit.
Through the first nine months of this year, the company said, U.S. sales of Volkswagen models tumbled 12.5% to 231,300 vehicles, down from 264,200 in the same period last year. Combined U.S. sales of all VW brands, including Audi and Porsche, fell 6.1% to 426,000 vehicles in the January-through-September period.
Volkswagen's claims that its diesel vehicles were more fuel efficient than they actually were "really hurt the ability of customers to trust the VW brand and consequently the dealers' ability to sell those cars," said Brian Maas, president of the California New Car Dealers Assn., which represents more than 1,300 franchised new car and truck dealerships including 66 VW dealers.
Volkswagen hopes some new models will help the company's U.S. comeback, notably a midsize sport utility vehicle called Atlas that's expected next year priced at about $30,000.
Jamie Caffrey, 35, said he bought his 2014 Volkswagen Jetta Sportwagen TDI two weeks before the emissions scandal became public.
"I was really irritated," said Caffrey, who had owned a Volkswagen GTI. "I'm still not happy about it."
Caffrey, a real estate investor who lives in the Hollywood Hills, said he initially planned to take the buyback but is reconsidering.
"Obviously it would be nice to get the cash part of it, but if I have to go and buy a more expensive car … I'm not sure it makes sense," he said, adding that he would still consider buying another VW. "Next week, there could be a scandal about any other carmaker."
Steve Kalafer, chairman of New Jersey's Flemington Car & Truck Country, a chain of 17 franchise dealerships that includes a VW dealer, said the settlement is a boon for consumers.
"The consumers are absolutely being made whole," he said. "There is no question that Volkswagen has stepped up and said, 'We cheated you, we sold you a product that not only was defective, but we sold it to you under false pretenses.'"
Analysts said they'll be watching closely to see how many affected Volkswagen owners keep their cars and have them modified, and how many sell their cars back to Volkswagen and then buy another VW model.
"A lot of consumers are going to be fairly brand loyal and give Volkswagen another shot," said Patrick Min, senior analyst at TrueCar.com. "A lot of these customers love the vehicle."
The automaker reached three separate but related settlements that were approved Tuesday: the first with the U.S. Department of Justice, the California attorney general's office, the California Air Resources Board and the EPA; the second with the Federal Trade Commission; and the third with owners. The agreements were developed in parallel.
Late last month, Volkswagen agreed to pay its U.S. dealers up to $1.2 billion to compensate them for losses suffered as a result of the emissions cheating scandal.
The dealers are expected to receive about $1.85 million each, but they can choose to opt out of the deal and pursue their own lawsuits against Volkswagen. A judge still has to approve that settlement before it can go into effect.
DeLorenzo of Kelley Blue Book said the industry will monitor Volkswagen's sales over the next several months for any indication that consumers caught in the scandal stick with the automaker after they sell back their cars.
"If they replace their VW vehicle with another VW vehicle, the damage won't be as bad as initially thought," DeLorenzo said.
Even so, he said, the Volkswagen scandal has "shaken not only the trust people had in VW but in automakers in general."
That's the case with Dan McCall, 53, of Torrance, who has a 2011 Jetta TDI and plans to participate in the buyback program and "be done with the potential headache."
Would he buy a VW car again? "Absolutely not," he said. "I'm sure it wouldn't happen again, but this was pretty egregious in my opinion to go on for so long."
5:55 p.m.: This article was updated with comments from New Jersey dealer Steve Kalafer.
2:45 p.m.: This article was updated with comments from TrueCar.com's Patrick Min, vehicle owner Dan McCall, Kelley Blue Book's Matt DeLorenzo and the California New Car Dealers Assn.'s Brian Maas.
11:35 a.m.: This article was updated with comments from the Sierra Club's Kathryn Phillips and from vehicle owner Jamie Caffrey, as well as additional background information.
10:30 a.m.: This article was updated throughout with Times staff reporting.
8:45 a.m.: This article was updated with additional details about the settlement and background information about last month's settlement with dealers.