USA v. Volvo Powertrain Corporation , 854 F. Supp. 2d 60 ( 2012 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
v.
Civil Action 98-2547 (RCL)
VOLVO POWERTRAIN
CORPORATION,
Defendant.
MEMORANDUM OPINION
This dispute concerns a consent decree to which the United States and Volvo Powertrain
Corporation are parties. Volvo Powertrain has assumed the obligations of Volvo Truck
Corporation, the original signatory to the decree. The California Air Resources Board, which
signed a substantially identical settlement agreement with Volvo Truck, has intervened. Before
the Court is Volvo Powertrain’s motion for judicial review of the demand by the United States
for stipulated penalties pursuant to the decree. Powertrain asks the Court to find either that it has
not violated the decree or else that the stipulated penalties established therein do not apply.
Upon consideration of the motion, the oppositions thereto, and the record of this case, the Court
concludes that Volvo Powertrain’s motion must be denied in part, because the company violated
the consent decree. Because the stipulated penalties do not clearly apply to this violation, the
Court goes on to exercise its equitable authority and discretion to fashion a remedy. Finally, the
Court turns to the essentially identical dispute between Volvo Powertrain and the California Air
Resources Board regarding the effect of their settlement agreement.
I. FACTUAL BACKGROUND
In 1998, the United States brought enforcement actions against many manufacturers of
truck engines, alleging that a feature of their fuel injection systems violated the Clean Air Act.
Those fuel injection systems were operated by computer software, which the government alleged
had been programmed to operate differently at highway speeds than under the standardized
conditions of federal emissions testing, thereby improving the fuel economy of the engines but
causing them to emit nitrogen oxide at levels well above the legal limit. The government argued
that the “principal effect” of such a fuel injection timing system was “to bypass, defeat, or render
inoperative” the engines’ emissions control system, in violation of 42 U.S.C. § 7522(a)(3)(B),
and that the timing system was therefore a prohibited “defeat device,” 40 C.F.R. § 86.000-16(a).
The manufacturers denied that their systems were prohibited.
After a year of negotiations, including a session at which counsel for the engine
manufacturers collectively negotiated settlement terms with the United States, the parties agreed
to be bound by a series of similar consent decrees. (The decrees’ similarity ensured that no
manufacturer would gain a competitive advantage by negotiating superior settlement terms.)
Under these decrees, the engine manufacturers were required to meet new emissions standards
for heavy-duty diesel engines, which are used in trucks and other on-road vehicles, before those
standards took general effect. The manufacturers also agreed to accelerate the implementation of
heightened emissions standards for non-road compression-ignition engines with a horsepower of
at least 300 but less than 750. (The parties refer to this term as the “non-road pull-ahead,” and
the Court will call the engines to which it applies “non-road engines.”) Non-road engines had
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not been a part of the alleged violation, but were included in the consent decrees in an attempt to
further reduce the levels of ambient air pollutants.
After a period of public comment, the Honorable Henry H. Kennedy, Jr. found that the
decrees would serve the public interest. He entered them on July 1, 1999. This case concerns
one such decree.
The consent decree in question was initially signed by Volvo Truck Corporation, which
did not sell non-road engines. Volvo Construction Equipment, which did, intervened shortly
before the decree was entered so as to be bound by the non-road pull-ahead. In 2001, as part of a
corporate reorganization, Volvo Powertrain acquired certain production facilities from Volvo
Truck and assumed Volvo Truck’s responsibilities under the consent decree. Thereafter, Volvo
Powertrain used its manufacturing facility in Skövde, Sweden to produce non-road engines for
Volvo Penta, a corporate sibling, as Volvo Truck had done when it owned the Skövde plant. In
late 2004, Volvo Penta asked the US EPA to certify that eleven families of engines produced by
Volvo Powertrain at the Skövde facility conformed with the emissions standards for non-road
engines produced in Model Year 2005. The EPA issued the certificates of conformity. After a
competing engine manufacturer suggested to the United States that, under the consent decree,
those engines might have been required to conform to the more stringent standards for Model
Year 2006, the United States submitted a series of information requests to Volvo Powertrain. In
July 2008, the government issued a letter alleging that the company had violated the decree and
demanding penalties of approximately $72 million under its stipulated penalty provisions.
Volvo Powertrain denied the allegations and, after the parties attempted to resolve the dispute as
required by the consent decree, petitioned this Court for review.
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II. JURISDICTION AND LEGAL STANDARD
“[D]istrict courts enjoy no free-ranging . . . jurisdiction to enforce consent decrees, but
are instead constrained by the terms of the decree and related order.” Pigford v. Veneman, 292
F.3d 918, 924 (D.C. Cir. 2002) (citing Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375,
380–81 (1994)). When the District Court entered the consent decree at issue here, it retained
jurisdiction “for the purpose of enabling any of the Parties to apply to the Court at any time for
such further order, direction, and relief as may be necessary . . . to effectuate or enforce
compliance with its terms, or to resolve disputes in accordance with the dispute resolution
procedures” described by the decree. Consent Decree ¶ 151. The parties have followed those
procedures, see id. ¶¶ 129–36, and this Court has jurisdiction over Volvo Powertrain’s motion
for judicial review of their dispute.
“[C]onstruction of a consent decree is essentially a matter of contract law.” Segar v.
Mukasey, 508 F.3d 16, 21 (D.C. Cir. 2007) (quoting Citizens for a Better Environment v.
Gorsuch, 718 F.2d 1117, 1125 (D.C. Cir. 1983)).1 “The court’s task, then, is to discern the
bargain that the parties struck.” United States v. Microsoft Corp., 147 F.3d 935, 946 (D.C. Cir
1998). “Our inquiry begins, of course, with the text of the Decree.” United States v. Western
1
A federal court interpreting its own consent decree applies the federal common law of
contracts. See In re Harvey, 213 F.3d 318, 321 (7th Cir. 2000); United States v. Witco Corp., 76
F. Supp. 2d 519, 530 (D. Del. 1999); cf. KenAmerican Resources, Inc. v. International Union,
United Mine Workers of America, 99 F.3d 1161, 1164 n.2 (D.C. Cir. 1996) (“A federal court
interpreting a collective bargaining agreement applies [the] federal common law of contracts.”).
The Restatement (Second) of Contracts is an appropriate source from which to fashion such
federal common law rules, Bowden v. United States, 106 F.3d 433, 439 (D.C. Cir. 1997), but
where the principles of contract law in question are “unexceptional” and “urged in the briefs of
both parties,” the Court may look to other sources. Segar v. Mukasey, 508 F.3d 16, 21 n.3 (D.C.
Cir. 2007).
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Elec. Co., 12 F.3d 225, 230 (D.C. Cir. 1993). If the text is unambiguous, the inquiry ends there,
because “a court may not look to extrinsic evidence of the parties’ subjective intent unless the
document itself is ambiguous.” Segar, 508 F.3d at 22. In determining whether the document is,
in fact, ambiguous, “reliance upon certain aids to construction is proper, as with any other
contract. Such aids include the circumstances surrounding the formation of the consent order,
any technical meaning words used may have had to the parties, and any other documents
expressly incorporated in the decree.” United States v. I.T.T. Continental Baking Co., 420 U.S.
223, 238 (1975). However, “a contract provision ‘is not ambiguous merely because the parties
later disagree on its meaning.’ It is ambiguous only ‘if it is reasonably susceptible of different
constructions.’” Segar, 508 F.3d at 22 (quoting Bennett Enterprises, Inc. v. Domino’s Pizza, Inc.,
45 F.3d 493, 497 (D.C. Cir. 1995)).
III. THE CONSENT DECREE
To resolve this dispute, the Court must answer three questions. The first is whether the
consent decree covers engines produced by Volvo Powertrain but submitted for certification by
Volvo Penta, which is not a party to the decree. It does. All non-road engines built at a
Powertrain facility and submitted for certification by the EPA are covered by Paragraph 110 of
the consent decree and required to conform to the non-road pull-ahead. The second question is
whether, under the consent decree, a non-road engine is defined by its certification or by its
actual use. Because a definition grounded in actual use would make the consent decree
practically impossible to enforce, the Court concludes that any engine labeled for use as a non-
road engine is a non-road engine within the meaning of the decree. Third, the court must
determine whether the stipulated penalties established in the decree apply to the violations at
5
issue here. Because the engines in question were submitted for certification by Volvo Penta
rather than Volvo Powertrain, the stipulated penalties do not clearly apply and the Court must
fashion an equitable remedy instead.
A. Volvo Powertrain violated Paragraph 110 of the consent decree.
Although the Court is mindful that a consent decree, like a contract, should be read as a
whole and each part interpreted with reference to the whole, three provisions of the decree are
especially relevant here. Paragraph 60 requires that all non-road engines “manufactured by”
Volvo Powertrain2 on or after January 1, 2005 must meet certain emissions standards as well as
“all other requirements that would apply as if the engines were Model Year 2006 engines.”
Paragraphs 109 and 110 appear below the header “Non-Circumvention Provisions.” Paragraph
109 says that Volvo Powertrain “shall not . . . circumvent the requirements of this Consent
Decree through leasing, licensing, sales, or other arrangements, or through stockpiling.”
Paragraph 110 requires that all non-road engines “manufactured at any facility owned or
operated by [Volvo Powertrain] on or after January 1, 1998, for which a Certificate of
Conformity is sought, must meet all applicable requirements of this Decree, regardless of
whether [Volvo Powertrain] still owned, owns, operated, or operates that facility at the time the
engine is manufactured.”
The United States argues that, under each of these provisions, non-road engines built by
Volvo Powertrain after January 1, 2005 were required to meet the emissions standards for Model
Year 2006. Volvo Powertrain maintains that they were not. The company contends that under
2
Volvo Powertrain has assumed these obligations as the successor to Volvo Truck
Corporation. Consent Decree ¶ 4.
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Paragraph 60 engines are “manufactured by” the entity that orders them and submits them for
certification, and that in any event the United States has waived its argument as to the direct
applicability of that provision to this case. Volvo Powertrain denies that it has circumvented the
requirements of the consent decree, as Paragraph 109 forbids, and urges the Court to limit the
scope of Paragraph 110 to engines that would have been required to meet the non-road pull-
ahead set out by Paragraph 60 but for the transfer of manufacturing facilities from Volvo
Powertrain to another owner. The Court concludes, however, that Paragraph 110 means what it
says: all non-road engines manufactured at Volvo Powertrain facilities and submitted for
certification by the EPA must meet the requirements of the consent decree. The Court need not
address the government’s arguments that Paragraphs 60 and 109 also compel that result.
Volvo Powertrain begins its interpretation of Paragraph 110 with the header that appears
above it: “Non-Circumvention Provisions.” The company argues that such provisions are
administrative in nature and should not be interpreted to expand the scope of decree’s
substantive provisions. Powertrain reasons that one can only violate a non-circumvention
provision by evading otherwise-applicable requirements, which brings the company to the text of
Paragraph 110:
All . . . Nonroad CI Engines manufactured at any facility owned or operated by
[Volvo Powertrain] on or after January 1, 1998, for which a Certificate of
Conformity is sought, must meet all applicable requirements of this Decree,
regardless of whether [Volvo Powertrain] still owned, owns, operated, or operates
that facility at the time the engine is manufactured.
Powertrain contends that the phrase “all applicable requirements of this Decree” must mean “the
requirements that are made applicable by a provision other than Paragraph 110.” It also places a
great deal of emphasis on the final clause, “regardless of whether [Volvo Powertrain] still
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owned, owns, operated, or operates that facility at the time the engine is manufactured,”
suggesting that this language identifies the purpose and the function of the provision: to prevent
the evasion of substantive obligations through the transfer of manufacturing operations or
facilities. On Volvo Powertrain’s reading, Paragraph 110 prohibits only such acts of evasion.
The company further points to the stipulated penalties provision, which on its face applies only
when Volvo Powertrain—and not any other entity—seeks certificates of conformity. The
company argues that to read Paragraph 110 to allow the possibility that the decree could be
violated when some other company sought a certificate of conformity would render that
paragraph inconsistent with the penalty provision. Finally, Powertrain argues that the
government’s reading of Paragraph 110 would have made the intervention of Volvo
Construction Equipment in this case superfluous, since all of that company’s engines were
produced at Volvo Truck facilities when the consent decree was negotiated.
i. The plain language of Paragraph 110 covers all non-road engines
manufactured at Volvo Powertrain facilities.
The plain text of Paragraph 110 clearly supports the government’s argument. The
provision applies to all non-road engines “manufactured at” a facility owned or operated by
Volvo Powertrain at any time since the beginning of 1998 “for which a Certificate of Conformity
is sought,” “regardless of” who controls that facility at the time of manufacture. Powertrain
argues that giving an ordinary reading to the “regardless of” phrase would deprive the clause of
independent meaning, because the reference to all non-road engines “manufactured at any
facility owned or operated by [Volvo Powertrain] on or after January 1, 1998” necessarily
implies a lack of regard for the ownership of the facility at the time of manufacture. Although
the Court must interpret the consent decree so as to avoid surplusage, it should not strain normal
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syntax in its effort to do so—and contracts, like normal speech, often employ a certain
redundancy in the interest of clarity. The court therefore rejects the argument that it must
interpret “regardless of whether [Volvo Powertrain] still owned, owns, operated, or operates that
facility at the time the engine is manufactured” to limit the scope of Paragraph 110. The
“regardless of” clause is plainly meant to emphasize the breadth of the “all non-road engines”
clause, not to limit it—and the Court construes the provision accordingly.
Paragraph 110 requires that the engines to which it pertains “must meet all applicable
requirements of this Decree.” Volvo Powertrain contends that the “applicable requirements”
must be those that are rendered applicable by some other provision of the decree, rather than by
Paragraph 110 itself. This argument has some force if one considers the language in isolation,
but loses that force when the language is considered in the context of the provision and the
decree as a whole. Both parties agree that if Volvo Powertrain had sold its factories and its
engine business, Paragraph 110 would ensure that the purchaser was subject to the requirements
of the consent decree for the non-road engines that it produced in facilities acquired from
Powertrain. In that hypothetical case, it is obvious that the requirements applicable to those non-
road engines would include the ones set out by Paragraph 60—and it would be Paragraph 110
that made those requirements “applicable,” since Paragraph 60 only covers engines
“manufactured by” Volvo Powertrain or Volvo Construction Equipment. And so it cannot be the
case that the “applicable requirements of this Decree” are only those that another provision
makes applicable. At least in some cases—and, a sensible reading would suggest, in this
case—that language refers to substantive requirements that are set out in another provision but
rendered applicable to certain engines by Paragraph 110.
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ii. The plain language of Paragraph 110 does not conflict with the header
identifying it as a non-circumvention provision.
Of course, the plain language of Paragraph 110 cannot be considered alone. Volvo
Powertrain rightly urges the Court to interpret that paragraph in light of the header that identifies
it as a “non-circumvention provision.” It would, Powertrain argues, render the header
meaningless to find that Paragraph 110 covered circumstances in which the company did not
attempt to circumvent the consent decree. If the header conflicted with the text of Paragraph 110
an ambiguity might result, as it did in International Multifoods Corporation v. Commercial
Union Insurance Company, 309 F.3d 76 (2d Cir. 2002). That case involved an insurance
contract whose “War Exclusion Clause” included a provision the plain language of which
appeared to exclude coverage for peacetime seizures. Id. at 80–81. The covered company lost a
shipment of frozen meat when the Russian government seized the goods as part of a criminal
investigation, and its insurer argued that such a seizure was excluded from coverage by the
second provision of the “War Exclusion Clause.” Id. at 80. The food company responded that,
properly understood, the contract only excluded wartime seizures. Considering the caption “in
tandem with” the contractual provisions that it describes, id. at 86, the Second Circuit concluded
that “competing inferences . . . can be drawn” and that the scope of the provision was therefore
ambiguous, id. at 87.
But the header “Non-Circumvention Provisions” does not conflict with the text of
Paragraph 110, even if it does identify that provision’s purpose. To hold otherwise would ignore
the fact that there are many ways to achieve a particular purpose when drafting an agreement.
To use an old dichotomy, one can create a rule or a standard. Whereas a standard “refers directly
to [its] substantive objectives,” Duncan Kennedy, Form and Substance in Private Law
10
Adjudication, 89 HARV. L. REV. 1685, 1688 (1976)—for instance, to prevent the circumvention
of other contractual provisions—a rule simply instructs the person to whom it is addressed to
respond to particular facts in a particular way. “[T]he two great . . . virtues of . . . rules, as
opposed to standards . . . are the restraint of official arbitrariness and certainty,” id., but those
benefits also have a cost because “[t]he choice of rules [over standards] involves the sacrifice of
precision in the achievement of the objectives lying behind the rules.” Id. at 1689.
When Paragraph 109 says that Volvo Powertrain “shall not . . . circumvent the
requirements of this Consent Decree” it is employing the language of standards. The question of
whether any particular action circumvents the agreement can only be answered by “discover[ing]
the facts of [the] particular situation and . . . assess[ing] them in terms of the purposes . . .
embodied in the” agreement. Id. at 1688. One cannot know whether the decree is being
circumvented without asking what the decree was meant to accomplish. So Paragraph 109
prohibits those actions that would truly “circumvent” the decree, and no more, but does so at the
cost of binding the parties to a judge’s interpretation of the agreements’ aims and what it would
mean to evade them.
Paragraph 110, by contrast, is cast as a rule. Its language does not ask the judge to
discern and directly apply the provision’s purpose, but rather provides “a list of easily
distinguishable factual aspects of a situation,” id. at 1687, which trigger a determinate
consequence. Volvo Powertrain urges that to read Paragraph 110 as a rule would render it
overinclusive and unbound by the purpose that it was meant to achieve—and that such a reading
might reach instances in which the substantive requirements of the decree were not
circumvented. Even if this is so—and the government disputes the notion, arguing that it
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bargained for that added emission reduction—a certain disjunction between purpose and effect is
the inevitable cost of employing a rule. The benefit of a rule—the benefit for which the parties
bargained in this instance—is the ease and certainty of application. To substitute the Court’s
own judgment for theirs would deprive the parties of that benefit. Paragraph 110 functions as a
non-circumvention provision even if it reaches cases in which no circumvention has been
proven.
iii. The stipulated penalty provisions do not render Paragraph 110
ambiguous.
Volvo Powertrain goes on to argue that the phrasing of the stipulated penalty provisions
supports its reading of Paragraph 110. Indeed, the stipulated penalty provisions, which on their
face apply whenever Volvo Powertrain—but not any other corporation—“seeks certificates of
conformity for any affected [heavy-duty diesel engine], but cannot certify compliance with” the
requirements of the consent decree, Consent Decree ¶ 116, do fit imperfectly with the language
and purpose of Paragraph 110. As discussed at greater length below, this imperfect fit is at least
partly due to inartful drafting: the penalty provisions contain several grammatical and structural
ambiguities that render them difficult to apply directly to clearly foreseeable violations of the
consent decree. To name only the most obvious examples, the language cited above would
appear not to apply to violations that occurred when Volvo Construction Equipment sought
certificates of conformity, nor when any company sought certificates of conformity for non-road
engines, nor when a company that had purchased Volvo Powertrain facilities (and therefore, the
parties agree, had become bound by the decree) sought such certificates.
The proper interpretation of the stipulated penalty provisions involves difficulties that
will be taken up in short order. But those difficulties, which are numerous, internal to the
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penalty provisions themselves, and largely independent of Paragraph 110, cast no doubt on the
plain meaning of that non-circumvention provision.
iv. To interpret Paragraph 110 by its plain language would not render
the intervention of Volvo Construction Equipment superfluous.
Finally, Volvo Powertrain argues that if Paragraph 110 meant what the government now
urges, the intervention of Volvo Construction Equipment would have been superfluous. The
Court considers this argument because it invokes “the circumstances surrounding the formation
of the” consent decree. United States v. ITT Continental Baking Co., 420 U.S. 223, 238 (1975).
The Court, however, rejects it: although the engines that Volvo Construction Equipment
manufactured at Volvo Powertrain facilities would have been covered under the plain language
of Paragraph 110 whether or not Volvo Construction Equipment had intervened, that
intervention brought Volvo Construction Equipment engines manufactured at other facilities
within the terms of Paragraph 60. The governments’ construction therefore would not render the
intervention superfluous.
This case is not International Multifoods. Nor is it Segar v. Mukasey, 508 F.3d 16 (D.C.
Cir. 2007), which stands for the proposition that a general disclaimer cannot be read to vitiate the
specifically negotiated terms of an agreement. The consent decree unambiguously reaches all
non-road engines produced at Volvo Powertrain facilities, and subjects them to the substantive
requirements set out in Paragraph 60. The Court therefore proceeds to determine what
constitutes a non-road engine under the consent decree.
B. Because any engine labeled for use as a non-road engine is one for the
purposes of the consent decree, all of the engines in question violated the
decree.
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To know how many non-road engines Volvo Powertrain has produced in violation of the
consent decree, the Court must determine how a non-road engine is properly defined. Under the
consent decree, “‘Nonroad CI Engine’ means a compression-ignition engine subject to the
regulations in 40 C.F.R. Part 89.” Consent Decree ¶ 3. Under those regulations,
Nonroad engine means
(1) Except as discussed in paragraph (2) of this definition, a nonroad engine is
any internal combustion engine:
...
(iii) that, by itself or in or on a piece of equipment, is portable or transportable,
meaning designed to be and capable of being carried or moved from one location
to another. Indicia of transportability include, but are not limited to, wheels, skids,
carrying handles, dolly, trailer, or platform.
(2) An internal combustion engine is not a nonroad engine if:
...
(iii) the engine otherwise included in paragraph (1)(iii) of this definition remains
or will remain at a location for more than 12 consecutive months or a shorter
period of time for an engine located at a seasonal source. . . .
40 C.F.R. § 89.2All non-road engines must be labeled as such at the time of manufacture. 40 C.F.R. § 89.110(a)
(“The manufacturer must affix at the time of manufacture a permanent and legible label
identifying each nonroad engine.”).
The regulatory definition of non-road engine focuses on the design—and, more
problematically, on the use—of a particular engine. See 59 Fed. Reg. 31306, 31311 (June 17,
1994) (noting that the regulation “distinguishes between nonroad engines and stationary internal
combustion engines on the basis of engine mobility and residence time . . . . thus ensuring that
engines that are actually used in a stationary manner are considered stationary engines”). So the
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same engine may be non-road or stationary depending on whether it is moved from one site to
another or instead stays put. Of course, there is no way for a manufacturer to know when it
builds an engine whether or not that engine will be frequently moved when it is put to use. The
government therefore argues that, for the purposes of the consent decree, any engine certified
and labeled for use as a non-road engine is a non-road engine. Volvo Powertrain contends that
only those engines that fall within the Part 89 definition—that is, those engines that do not
“remain[] . . . at a location for more than 12 consecutive months or a shorter period of time for an
engine located at a seasonal source,” 40 C.F.R. § 89.2, notwithstanding their labeling—can be
considered non-road engines.
The government’s interpretation is correct because it alone produces a workable
enforcement scheme. An interpretation “which gives a reasonable, lawful, and effective
meaning to all the terms is preferred to an interpretation which leaves a part unreasonable,”
RESTATEMENT (SECOND) OF CONTRACTS § 203(a) (1981), and Volvo Powertrain’s interpretation
of what constitutes a non-road engine would render the consent decree unreasonably difficult to
enforce. On the company’s reading, the United States would have to collect (or, perhaps, force
Powertrain to collect) information on the use to which each individual engine was put. Even if
Powertrain certified an engine to conform with the non-road emissions standards and labeled it
for importation as a non-road engine in conformity with 40 C.F.R. § 89.110(a), it would not
become a non-road engine for purposes of the consent decree until it was actually used in the
manner described above. There is no reason to think that either the government or Powertrain
could accomplish this data collection, as the affidavits attempting to demonstrate that certain
15
engines have been put to stationary uses show. It is therefore reasonable to interpret the
agreement as applying to engines that are certified and labeled for use as non-road engines.3
Powertrain’s fallback argument, that the consent decree applies only to non-road engines
that are introduced into domestic commerce, fares no better. “As the settlement of a litigation,
the decree may require less than the statute under which the suit was brought, or more . . . .”
United States v. Microsoft Corp., 147 F.3d 935, 944 (D.C. Cir. 1998). Regardless of whether the
EPA could have regulated engines produced for sale abroad, the requirements of Paragraph 110
plainly apply to all non-road engines “for which a Certificate of Conformity is sought.” That
provision does not require actual importation, nor does any other provision of the decree.
Paragraphs 60 through 62, which make reference to the “requirements that would apply . . . if the
engines were Model Year 2006 engines,” Consent Decree ¶ 60, to the “requirements of 40
C.F.R. Part 89 and of the [Clear Air] Act,” id. ¶ 61, and to the EPA’s “authority under its
regulations found at 40 C.F.R. Part 89 or under the Act,” id. ¶ 62, refer to the substantive
requirements and substantive authority described in those provisions. They do not limit the
agreement’s clear application to non-road engines manufactured at Powertrain facilities and “for
which a Certificate of Conformity is sought.” Id. ¶ 110.
3
The largest trouble with the government’s account is comparatively minor. Because
Volvo Penta submitted these engine families for certification, and thereby brought them within
the scope of the consent decree, it could have imposed liability upon Volvo Powertrain without
that company’s knowledge or consent. Powertrain might have built the engines expecting that
they would be used as stationary engines. But Powertrain could have solved that problem
through contract, informing Penta ahead of time that Powertrain would have to build mobile
engines to the standards of the consent decree and extracting a promise from Penta to pay any
penalties associated with engines that Penta later certified for non-road use.
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The parties agree that 8,354 Model Year 2005 engines were produced at a Powertrain
factory and labeled for importation as non-road engines. They agree that those engines did not
comply with the Model Year 2006 emissions standards. Those 8,354 engines were therefore
manufactured and submitted for certification in violation of the consent decree. The Court
proceeds to consider the consequences of that violation.
C. Because the stipulated penalties do not apply to this violation, the Court must
exercise its equitable discretion to determine a penalty.
The third question in the case is what penalties should apply to the violation at issue here.
In answering that question, the Court begins from the proposition that a district court has the
inherent “authority to exercise its discretion as a court of equity in fashioning a remedy to . . .
enforce a consent decree.” Cobell v. Norton, 391 F.3d 251, 257 (D.C. Cir. 2004); Holland v.
N.J. Dept’ of Corrections, 246 F.3d 267, 270 (3d Cir. 2001) (“[A] court does have inherent
power to enforce a consent decree in response to a party’s non-compliance. . . .”). “[A] consent
decree is an order of the court and thus, by its very nature, vests the court with equitable
discretion to enforce the obligations imposed on the parties.” United States v. Local 359, United
Seafood Workers, 55 F.3d 64, 69 (2d Cir. 1995); see also Bergmann v. Michigan State
Transportation Commission, 665 F.3d 681, 683 (6th Cir. 2011); Cook v. City of Chicago, 192
F.3d 693, 695 (7th Cir. 1999) (Posner, J.) (“From the standpoint of interpretation a consent
decree is a contract, but from the standpoint of remedy it is an equitable decree.”); Berger v.
Heckler, 771 F.2d 1556, 1566–67 (2d Cir. 1985) (“Consent decrees are a hybrid in the sense that
they are at once both contracts and orders; they are construed largely as contracts, but are
enforced as orders.”) (citation omitted). “Until parties to such an instrument have fulfilled their
17
express obligations, the court has continuing authority and discretion—pursuant to its
independent, juridical interests—to ensure compliance.” EEOC v. Local 580, International
Association of Bridge, Structural & Ornamental Ironworkers, 925 F.2d 588, 593 (2d Cir. 1991).
Of course, “parties to a consent decree [may] cabin the district court’s equitable
discretion by stipulating the remedies for breach.” Cook, 192 F.3d at 698. The parties to this
decree have stipulated that Volvo Truck Corporation, which has been succeeded by Volvo
Powertrain, “shall pay stipulated penalties and other payments to the United States” if it “seeks
certificates of conformity for any affected [heavy-duty diesel engines], but cannot certify
compliance with . . . the [non-road] pull-ahead requirements. . . .” Consent Decree ¶ 116.
Volvo Powertrain argues that this provision does not constrain the Court’s discretion, because
Volvo Penta rather than Volvo Powertrain sought certificates of conformity for these engines.
The United States responds that such a reading would eviscerate the stipulated penalty provision,
since it would imply that the penalties similarly did not apply when Volvo Construction
Equipment—which, unlike Penta, is a party to the decree—sought certificates of conformity.
There is a genuine difficulty here, which begins with the fact that the provision is poorly
drafted. Read literally, it applies whenever Volvo Powertrain cannot certify that heavy-duty
diesel engines comply with the non-road pull-ahead. But that literal reading is nonsense: the
non-road pull-ahead does not apply to heavy-duty diesel engines, which are by definition on-
road engines. See 40 C.F.R. § 86.082-2 (“Heavy-duty engine means any engine which the
engine manufacturer could reasonably expect to be used for motive power in a heavy-duty
vehicle.”) (incorporated into the Consent Decree at ¶ 3). As discussed above, the provision has
other problems, too: it does not prescribe a penalty for violations committed by Volvo
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Construction Equipment, nor by any manufacturers that may purchase Powertrain factories, nor
by Powertrain itself when the engines are submitted for certification by another company.
If this were an ordinary contract, the Court would conclude that the provision was
ambiguous because its plain language indicated one reading while its context indicated another.
In such a case, the Court would proceed to examine extrinsic evidence of the parties’ intent. But
the Court is mindful that where a “[consent] decree does not specify the consequences of a
breach” that question is “[i]mplicitly . . . referred to the district court’s equitable discretion.”
Cook, 192 F.3d at 698. “[T]hough a court cannot randomly expand or contract the terms agreed
upon in a consent decree, judicial discretion in flexing its supervisory and enforcement muscles
is broad.” EEOC v. Local 580, International Association of Bridge, Structural & Ornamental
Ironworkers, 925 F.2d 588, 593 (2d Cir. 1991). If the parties wish to limit that broad discretion,
they must do so clearly—and gain the Court’s approval for their proposal. See Cook, 192 F.3d at698 (citing Blankenship & Assocs. v. NLRB, 54 F.3d 447, 449–50 (7th Cir. 1995)). In the
absence of an unambiguous constraint on its inherent power to enforce its own decrees, the Court
will proceed to fashion an equitable remedy for the violation that it has found.
The Court has few markers to guide it in the exercise of its equitable authority, and so it
places particular emphasis on the consent decree’s instruction that, in reviewing any dispute,
“the Court . . . should consider the effect of the resolution on other Settling HDDE
Manufacturers.” Consent Decree ¶ 129. Those manufacturers were subject to identical
stipulated penalty provisions, see, e.g., Consent Decree at ¶ 116, United States v. Mack Trucks,
Inc., et al., Civil Action No. 98-2543 (D.D.C. July 1, 1999); Consent Decree at ¶ 116, United
States v. Cummins Engine Co, Inc., Civil Action No. 98-2546 (D.D.C. July 1, 1999), and one has
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paid $193 million in non-conformance penalties. Pl.’s Opp. to Def.’s Mot. for Judicial Review,
Ex. S (Declaration of Anne K. Wick (Apr. 30, 2009)) (“Wick Decl.”), at ¶ 9 (describing penalties
paid by Caterpillar, Inc., the defendant in Civil Action No. 98-2544). Although this penalty is
substantial, when it submitted the decrees for approval the government explained that “[t]he
nonconformance payments are valued at more than the estimated cost of compliance . . . to take
away any economic incentive not to meet the more stringent emission levels.” Pl.’s Mot. to
Enter Consent Decree at 31. To allow Volvo Powertrain to pay a lesser penalty here might place
it at a competitive advantage relative to the settling manufacturers who either complied with the
emissions standards in their consent decrees or else paid the stipulated penalties.
The stipulated penalty provision does not bind the Court in its exercise of equitable
discretion, but that provision does offer guidance. The Court therefore notes that Volvo
Powertrain does not dispute that the stipulated penalties, if they applied to this violation, would
require it to make a payment of $65,759,212, but does contest the government’s demand for
$6,247,125 in interest accruing from the time that the violations occurred until the government
issued its demand letter. The government responds that such an interest payment is appropriate
because the penalties accrued on the date of non-compliance, Pl.’s Opp. at 51 (citing Consent
Decree ¶ 119), and at least one other manufacturer paid interest on delayed payments in a similar
circumstance. Id. at 52 (citing Wick Decl. at ¶ 6).
The requirements at issue here bound all of the engine manufacturers subject to these
decrees. Manufacturers that violated their decrees have been penalized in accordance with the
stipulated penalty provisions. Although those provisions are drafted so poorly that they do not
clearly apply to this violation, the Court finds that they provide useful guidance and exercises its
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equitable authority to order Volvo Powertrain to forfeit to the government $72,006,337, an
amount equal to the penalty that would have been assessed under the stipulated provision plus
interest accrued from the date of the violation.
IV. THE SETTLEMENT AGREEMENT
The Court now turns to a settlement agreement between Volvo Powertrain and the
California Air Resources Board, which was signed to resolve accusations that the same alleged
“defeat devices” violated state law. The Air Resources Board intervened in this case to claim
that Volvo Powertrain had violated that settlement agreement, which contains provisions
essentially identical to Paragraphs 60 and 110 of the consent decree. See Def.’s Mot. for Judicial
Review, Ex. A (Settlement Agreement Between the California Air Resources Board and Volvo
Truck Corporation (Oct. 21, 1998)) (“Settlement Agreement”), at ¶¶ 60, 110.
The Court has supplemental jurisdiction over this dispute under 28 U.S.C. § 1367(a)
because the claim of the Air Resources Board is so related to the United States’ claim that it
forms part of the same Article III case or controversy. A settlement agreement is essentially a
contract, Makins v. District of Columbia, 277 F.3d 544, 546 (D.C. Cir. 2002), and a contract
dispute is a state law claim. Bender v. Jordan, 623 F.3d 1128, 1130 (D.C. Cir. 2010). “A
federal claim and a state law claim form part of the same Article III case or controversy if the
two claims ‘derive from a common nucleus of operative fact’ such that ‘the relationship between
[the federal] claim and the state claim permits the conclusion that the entire action before the
court comprises but one constitutional “case.”’” Lindsay v. Gov’t Emps. Ins. Co., 448 F.3d 416,
423–24 (D.C. Cir. 2006) (quoting Chicago v. Int’l Coll. of Surgeons, 522 U.S. 156, 164–65
(1997) (quoting United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966))) (alteration in Int’l
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Coll.). This is so even if the state law claim “involve[s] the joinder or intervention of additional
parties.” 28 U.S.C. § 1367(a). Here, the two disputes involve the production of the same
engines and the interpretation of essentially the same contractual language. Moreover, the
recovery provisions of the Consent Decree and Settlement Agreement are intertwined: each
provides for stipulated penalties, but provides that Volvo Powertrain shall only be liable to pay
those penalties once, whether they are “paid to the United States, [the Air Resources Board], or
both.” Consent Decree ¶ 118; Settlement Agreement ¶ 118. Given the close connection between
the claim advanced by the Air Resources Board and that put forward by the United States, the
Court concludes that the claims derive from a common nucleus of operative fact, and goes on to
consider the merits of the Air Resources Board’s claim.
The Air Resources Board argues that Volvo Powertrain violated the Settlement
Agreement for the same reasons and in the same way that it violated the Consent Decree. The
Board’s argument is persuasive, and the analysis of the Consent Decree set out at III.A and III.B
above is entirely applicable to the Settlement Agreement. Briefly, Paragraphs 60 and 110 of the
Settlement Agreement are indistinguishable from the Paragraphs 60 and 110 of the Consent
Decree. The engines in question here were “manufactured at [a] facility owned or operated by
[Volvo Powertrain] on or after January 1, 1998,” and “an Executive Order [the California
equivalent of a federal Certificate of Conformity] [was] sought” for them. Settlement Agreement
¶ 110. The engines were therefore required to “ meet all applicable requirements of [the]
Settlement Agreement, regardless of whether [Volvo Powertrain] still owned, owns, operated, or
operates that facility at the time the engine[s] [were] manufactured.” Id. Those “applicable
requirements” are set out in Paragraph 60, which requires that “Nonroad CI Engines”
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manufactured on or after January 1, 2005 meet the standards “that would apply if the engines
were Model Year 2006 engines.” Id. ¶ 60. A “Nonroad CI Engine” is, for purposes of the
Settlement Agreement, an “off-road compression-ignition engine” within the meaning of the
California Code of Regulations, Title 13, § 2421(a)(38). See Pl.’s Mot at 41 n.12. This
definition employs the same language found in 40 C.F.R. § 89.2 and discussed above, compare
Cal. Code Regs. tit. 13, § 2421(a)(38)(A)(3), (B)(3) with 40 C.F.R. § 89.2, which focuses on the
use to which engines are put. An apparently mobile (and therefore apparently covered) engine is
excluded from the definition if it “remains or will remain at a location for more than 12
consecutive months or a shorter time for an engine located at a seasonal source.” Cal. Code
Regs. tit. 13, § 2421(a)(38)(B)(3). A settlement agreement, like a consent decree, must be read
to give its terms a reasonable and effective meaning, and the Air Resources Board is no more
capable than the United States of collecting information on the use to which each individual
engine is put. An engine is therefore a Nonroad CI Engine for purposes of the Settlement
Agreement if it is labeled for use as such. All 8,534 engines at issue here were so labeled, and
all were therefore required to meet the standards applicable to Model Year 2006 engines. None
did. Volvo Powertrain has therefore breached the Settlement Agreement, and the Court turns to
analyze the Agreement’s stipulated penalty provision.
Like the Consent Decree, the Settlement Agreement provides that Volvo Powertrain, as
successor to Volvo Truck, “shall pay stipulated penalties,” Settlement Agreement ¶ 116, if it
“seeks Executive Orders for any affected [heavy-duty diesel engines], but cannot certify
compliance with . . . the Nonroad CI Engine standard pull-ahead requirements,” id. ¶ 116(a).
Again, an interpretive problem arises from the difficulty of this language and the fact that Volvo
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Penta rather than Volvo Powertrain sought the Executive Orders. But the easy analogy to the
Consent Decree ends here, because the Settlement Agreement is not an order of the court. The
Court has no “independent, juridical interests” in seeing the Settlement Agreement enforced,
Local 580, 925 F.2d at 593, nor any “equitable discretion to enforce the obligations imposed on
the parties” by that agreement. Local 359, 55 F.3d at 69. The Court can only enforce the
bargain that the parties have struck. The Court must therefore conclude that the stipulated
penalty provision is ambiguous, because its plain language indicates that it is limited to engines
for which Volvo Powertrain sought Executive Orders, while its context suggests that it should at
least apply to violations committed by Volvo Construction Equipment or by any manufacturers
that may purchase Powertrain factories—and therefore that it cannot be limited to the scope of
the plain text. To resolve this ambiguity, the Court must examine the circumstances surrounding
the formation of the Settlement Agreement, but the present motions and their attached exhibits
do not offer the Court a sufficient evidentiary basis from which to conduct that examination.
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V. CONCLUSION
For the reasons stated above, Volvo Powertrain’s motion for judicial review will be
DENIED this 13th day of April 2012 insofar as it asks the Court to find that it has not violated
the consent decree. The Court will exercise its equitable authority and enter a separate judgment
of $72,006,337 against Volvo Powertrain and in favor of the United States.
Volvo Powertrain’s motion for judicial review is further DENIED insofar as it asks the
Court to find that it has not violated its settlement agreement with the Air Resources Board. But
because the scope of that agreement’s stipulated penalty provision is ambiguous, the Court will
consider parol evidence as to the parties’ intent. The parties will be directed to meet and confer
and submit within twenty days a proposed order to schedule further proceedings.
Royce C. Lamberth
Chief Judge
United States District Court
for the District of Columbia
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