Jul 14, 2016: NHTSA, Confidentiality Agreements, and the Current Regulatory Environment

The National Highway Traffic Safety Administration (NHTSA) is charged by Congress with promoting safety on U.S. roads. While mandating minimum vehicle safety performance levels through federal standards was the original focus of congressional intent, monitoring vehicle-use trends for signs of potential safety defects has become a major, if not the principal, function of the agency.

NHTSA relies extensively on consumer reporting to identify patterns in vehicle behavior and repairs that may signal a safety concern. For this reason, the agency (backed by Congress) takes a hard line on any manufacturer or dealer behavior that might impede this flow of information. Recent congressional hearings on NHTSA's response to GM ignition-switch and Takata airbag defects along with a June 2015 report by the agency's own Inspector General on weaknesses in its Office of Defects Investigations has made the agency especially sensitive in this regard. For that reason, among others, automotive businesses should remain vigilant in regard to any language in consumer agreements that may imply any intent to hinder consumer contacts with NHTSA.

A. Tesla Motors Goodwill (Non-Disclosure) Agreements (May - June 2016)

During May 2016, NHTSA became aware of what it called a “troublesome” non-disclosure agreement involving repairs that could be considered related to vehicle safety. On at least three occasions, Tesla Motors (Tesla) repaired vehicles for customers after the warranty period had expired at a reduced charge in exchange for a signed “Goodwill Agreement”.

The underlying incident involved alleged excessive wear on a vehicle component. Tesla ultimately offered to assume 50% of the $3100 repair bill provided the customer signed an agreement “to keep confidential our provision of the Goodwill, the terms of this agreement and the incidents or claims leading or related to our provision of the Goodwill.” The agreement further prohibited the customer from engaging in any legal proceeding involving the repair claim or goodwill gesture.

When the operative terms of the Goodwill Agreement came to NHTSA's attention, its response was swift and unequivocal. According to NHTSA spokesman Bryan Thomas, “The agency immediately informed Tesla that any language implying that consumers should not contact the agency regarding safety concerns is unacceptable, and NHTSA expects Tesla to eliminate any such language.”

Equally swiftly and unequivocally, Tesla took issue with that inference and denied that its Goodwill Agreement barred its customers from communicating with NHTSA.

By June 10, 2016, Tesla had modified its Goodwill Agreement to NHTSA's satisfaction, stating expressly that its terms do not prohibit a customer from communicating with NHTSA. By then, at least some reputational damage may have occurred. Concerns over alleged suspension issues on Tesla models that had been quietly subject to a “pre-investigatory” NHTSA inquiry became news.

NHTSA did not penalize Tesla over the agreements. But the agency did issue a warning. As a result, Tesla’s pristine reputation as a technology leader supported by an army of satisfied customers has experienced some headwinds in the court of public opinion. All companies in the automotive industry should learn from this incident.

B. Other Recent Developments of Note

At least two other recent developments provide background on NHTSA’s views towards confidentiality agreements as well.

1) Protective Orders, Settlement Agreements, or Any Equivalent in Administrative Actions (July 24, 2015)

NHTSA initiated an administrative action against Chrysler (FCA) for numerous alleged violations of the Vehicle Safety Act, see, e.g., 49 U.S.C. § 30118; § 30119; § 30120 for, among other things, failure to submit timely safety-related reports to NHTSA, failure to timely notify consumers who owned the vehicles at issue, and failure to remedy defective vehicles. On July 24, 2015, NHTSA and FCA entered into a Consent Order that, among other things, directed FCA to pay a total fine of $105 Million, to retain an Independent Monitor to oversee FCA’s product safety efforts for a period of years, to develop Best Practices to ensure future safety compliance reporting. Of note, the Consent Order also directed FCA to

“. . .develop and implement a plan ensuring that, in safety-related litigation, FCA U.S. uses its best efforts to include in any protective order, settlement agreement, or equivalent, a provision that explicitly allows FCA U.S. to provide information and documents to NHTSA.”

(July 24, 2015 Consent Order, Attachment A, para. B 12). NHTSA has indicated that the FCA Best Practices efforts may be used as a template of sorts industry-wide. The clear intent is to create or enhance policies, processes, and practices that promote a culture of safety within organizations in the automotive industry. Confidentiality agreements that do not provide a carve-out provision for NHTSA may run contrary to this intent.

2) Protective Orders and Settlement Agreements in Civil Litigation (March 11, 2016)

NHTSA then issued the final version of its Enforcement Guidance Bulletin 2015 – 01 entitled “Recommended Best Practices for Protective Orders and Settlement Agreements in Civil Litigation.” It expressly states, in pertinent part, that to the extent that such agreements contain confidentiality provisions that prevent relevant vehicle safety information from being transmitted to NHTSA, it violates Fed. R. Civ. P. 26, its state corollaries, and public policy. It reasons that NHTSA’s ability to identify and define motor vehicle safety-related defects relies in large part on timely reporting. Entities and individuals must be allowed to disclose relevant information to the federal agency commanded by Congress to ensure highway safety. Accordingly, NHTSA published these Best Practices regarding protective orders and settlement agreements in civil actions to ensure this outcome.

Especially when read in conjunction with the FCA Consent Order, the Vehicle Safety Act, and the TREAD Act, NHTSA has consistently asserted that confidentiality should be subordinate to interests of health and public safety. It would be only a matter of time before the spirit of NHTSA’s Enforcement Guidance Bulletin was applied to a particular matter.

C. NHTSA and the Current Regulatory Environment

NHTSA has the challenging task of resolving, mitigating, and controlling risks of harm and promoting safety on U.S. highways. Congress defines NHTSA’s powers to regulate; and NHTSA’s powers are by no means exhaustive. Notwithstanding NHTSA’s commendable efforts and achievements, no fewer than 30,000 people have died on U.S. highways every year since 1946. Estimated traffic fatalities in 2015 reached 35,200, up 7.7% from 2014.

By 2050, the vast majority of vehicles on the road will likely be capable of autonomous driving thanks to a flood of emerging new technologies. Indeed, regulating this transformation will be the greatest challenge that NHTSA has yet faced. Transitioning the current fleet of roughly 260 million vehicles will be a truly daunting task, especially if NHTSA’s powers remain unchanged.

NHTSA is charged with ensuring appropriate levels of safety performance in new vehicles. One would think that it is also able to ensure that these new technologies do not pose inordinate risks to the public. However, NHTSA currently does not have that power. Its mandate is to set minimum safety performance levels for new vehicles, not to ensure the pre-launch safety of new technologies. The agency is not allowed to regulate based upon technical concerns or future probabilities. As its former Administrator, David Strickland, recently reminded, “NHTSA has no pre-market regulatory authority. The only thing that the agency can do is make a decision whether the vehicle is compliant with the existing federal motor vehicle safety standards.”

NHTSA’s current primary power, therefore, is to respond to people being killed or seriously injured. Consequently, anything that interferes with its efforts to gather evidence of vehicle safety problems or public harm attracts NHTSA’s attention. One such category of documents that can prove problematic are confidentiality agreements, even those whose focus is a topic other than safety. By their nature, these agreements expressly assure that certain information is maintained in secrecy. But it is quite clear that these agreements when used in the automotive industry need be reviewed through the eyes of NHTSA and highway safety.

D. Conclusion

Congress developed the U.S. automotive regulatory system in the 1960's to oblige automakers to install (and car buyers to pay for) safety and countermeasures in new vehicles. The overall approach responds to concerns raised by vehicle use, such as reducing deaths and injuries in certain types of accidents. By definition, this system, as currently structured, is reactionary and limited in its ability to address the deployment of new technologies regardless of whether they may pose safety or other risks.

Under the current system, U.S. regulators need evidence of public harm before they can move to establish regulatory responses. At least for the moment, this limitation obliges NHTSA to respond through recalls (preferably early in the vehicle lifecycles) and admonitory penalties. Confidentiality agreements that appear to interfere with NHTSA’s mission, even if that is not the intent, may have unintended consequences.

Clearly, protective orders, settlement agreements, nondisclosure agreements, or any “equivalent” document can be quite useful in many contexts. But such a document can also create problems if drafted too broadly. As Tesla discovered, non-disclosure agreements, however titled, or any other confidentiality agreements, can run afoul of NHTSA’s commitment to gather evidence of potential safety problems and public harm.

Butzel Long specializes in counseling automotive companies. This includes advising clients on drafting confidentiality agreements to avoid such unintended and avoidable problems. That also includes auditing documents already executed to determine if an amendment may be in order. As Benjamin Franklin reminded, “An ounce of prevention is worth a pound of cure”.

Daniel P. Malone