Hyundai, Kia agree to $350M U.S. settlement over inflated mileage claims

WASHINGTON -- Hyundai and Kia have agreed to a settlement worth more than $350 million to end the government’s two-year investigation into the inflated fuel economy ratings of some 1.2 million Hyundai and Kia vehicles. 

The EPA and Department of Justice announced the settlement deal at a press conference here today.

Under the settlement, Hyundai and Kia will pay a $100 million civil penalty, spend $50 million to establish an independent fuel economy certification group and forfeit some 4.75 million greenhouse gas emission credits the companies have banked under the EPA’s tailpipe emissions regulations -- estimated to be worth more than $200 million, according to a joint statement by the Justice Department and EPA.

"This unprecedented resolution with Hyundai and Kia underscores the Justice Department’s firm commitment to safeguarding American consumers, ensuring fairness in every marketplace, protecting the environment, and relentlessly pursuing companies that make misrepresentations and violate the law,” Attorney General Eric Holder said in a statement.

“This type of conduct quite simply will not be tolerated. And the Justice Department will never rest or waver in our determination to take action against any company that engages in such activities -- whenever and wherever they are uncovered.”

Divided penalties

Hyundai said in a statement that it will pay $56.8 million of the $100 million fine, meaning Kia will pay the remaining $43.2 million.

Hyundai said it will forfeit about 2.7 million greenhouse gas emission credits, which based on the EPA’s valuation of roughly $45 per credit, equates to about $121.5 million. Kia will forfeit about 2.05 million credits, equivalent to roughly $92.3 million, based on calculations comparing statements from DOJ and Hyundai. 

During the press conference, EPA Administrator Gina McCarthy said the size of the settlement is “a reflection of the large, unfair market advantage that Hyundai and Kia captured by overstating their fuel economy ratings.”

Because of the importance of fuel economy as a purchase consideration, overstating fuel economy figures “tilts the market in favor of those who don’t play by the rules and it disadvantages those that actually do play by the rules,” McCarthy said. “That’s simply not fair and it’s also not legal.”

Dating back 2 years

In November 2012, Hyundai and Kia admitted to overstating the fuel economy ratings on 13 nameplates from the 2011-13 model years due to testing errors. The errors were uncovered after EPA engineers found discrepancies between agency fuel economy test results and data submitted by the companies, prompting the EPA’s investigation.

The 2012 mpg revisions were a black eye for both brands, especially for Hyundai, which had touted in advertising that its formerly 40 mpg-rated models made it a fuel economy leader.

Hyundai and Kia spent millions of dollars to compensate owners of the affected vehicles, agreed to additional federal oversight and were hit with dozens of class-action lawsuits, which the companies agreed in December 2013 to pay up to $395 million to settle.

In addition to the EPA’s investigation into Hyundai and Kia, the restatement prompted an industrywide crackdown by the agency on automaker fuel economy ratings. The compliance push uncovered fuel economy testing errors that forced Mini, Ford and Mercedes-Benz to lower mpg figures on several models since 2013.

On a media call, EPA officials would neither confirm nor deny whether BMW, Ford or Mercedes-Benz were under investigation.

“Hyundai has acted transparently, reimbursed affected customers and fully cooperated with the EPA throughout the course of its investigation,” Dave Zuchowski, CEO of Hyundai Motor America, said in a statement. “We are pleased to put this behind us, and gratified that even with our adjusted fuel economy ratings, Hyundai continues to lead the automotive industry in fuel efficiency and environmental performance.”

While Hyundai was unranked in the EPA’s Fuel Economy Trends report released last month due to the pending investigation, the company would have been the No. 1 overall automaker with a 29 mpg average for the 2013 model year, the EPA said. Kia’s 27.4 mpg average would have tied it for third with Honda.

“Kia Motors is a responsible company, and the agreement with the U.S. Environmental Protection Agency is the result of good-faith efforts among the parties to resolve our issues,” Kia said in a statement.

“We are pleased to have this matter behind us, and our priority remains making things right for our customers through our fair and transparent reimbursement program which remains in effect and unchanged by this settlement.” 

'Egregious' and 'systemic'

While the EPA has forced other automakers to revise fuel economy labels, those errors paled in comparison to what was discovered at Hyundai and Kia, McCarthy said during the press conference.

“We have caught other discrepancies, but those discrepancies have not been systemic in nature, they have not resulted from the way in which the companies have done their testing systemically and they have not been anywhere near the egregiousness of what we’re talking about today,” she said.

Hyundai and Kia used “cherry-picked” data and conducted testing in ways “that did not reflect good engineering judgement” that ultimately led to artificially high fuel economy ratings for most of its lineup at the time in question, according to the DOJ’s statement.

Sam Hirsch, acting assistant attorney general for the Justice Department’s Environment and Natural Resources Division, said during the press conference that the investigation uncovered a series of flawed practices. He said Hyundai and Kia submitted the best fuel economy data to the EPA for greenhouse has compliance, rather than using average test results.

Hyundai and Kia’s testing was done at temperatures where fuel economy was at its best, he said. The companies also used the wrong-sized tires and tested vehicles that were aided by a tailwind, but failed to turn cars around and measure the effects of a headwind, Hirsch said.

Unusual engineering?

EPA officials said Hyundai and Kia engineers responsible for powertrain and product development -- including work to improve fuel economy and reduce emissions -- were the same engineers responsible for fuel economy and emissions certification testing. During a media call after the press conference, EPA officials called the setup “unusual,” noting that other automakers have separate engineering functions to develop products and ensure compliance.

“We believe the way in which they did their testing was systemically flawed,” McCarthy said. “It was done in a way that would have made it inconsistent with the way that they should be doing fuel economy, inconsistent with normal engineering practices and inconsistent with how any other company has been doing this.”

In a statement, Hyundai defended its testing procedures.

The company said the EPA’s rules and guidelines have afforded automakers “broad latitude” in terms of temperature, tires and road surfaces used in testing.

“Outside of a data processing error related to the coastdown testing method by which Hyundai calculated resistance or 'road load,' it was Hyundai’s regulatory interpretation within this broad latitude that was responsible for the ratings restatement,” Hyundai said in a statement.

“Hyundai has corrected the error, and the EPA in October 2012 approved the automaker’s new fuel economy testing program.”