Paice founder Alex Severinsky, who had claimed that Toyota infringed on his 1994 patent, was pleased with the result.

“Finally people understand the merits of what I invented and give it the proper value,” Severinsky said. “Toyota is the leading technology company and finally appreciates the value of the invention.”

Toyota had insisted that, while its technology was similar to Paice patent, its hyrib vehicles were the result of its own independent research. Evidently, both parties were in agreement.

“The parties agree that, although certain Toyota vehicles have been found to be equivalent to a Paice patent, Toyota invented, designed and developed the Prius and Toyota’s hybrid technology independent of any inventions of Dr. Severinsky and Paice as part of Toyota’s long history of innovation,” both companies said in separate statements.

With this issue out of the way, Toyota can now concentrate on its latest round of subpeonas. This time, a federal grand jury in New York is investigating whether or not Toyota notified the NHTSA in a timely fashion about faulty steering rods.

For Toyota, a bad year just keeps getting worse.

This patent fight originally began in 2004, when Paice LLC, a Florida-based hybrid technology company, sued Toyota for using its patented technology in second-generation Prius vehicles. The court ruled that Toyota had infringed on Paice’s patent and Toyota filed multiple appeals, losing each time. According to Forbes, Toyota has paid $5 million in damages and a small fraction of the court-ordered license fee of $98 a car while it challenges future royalties. In the latest case, Paice is claiming that Toyota’s third-generation hybrids are also infringing on its patents and that Toyota is not paying enough in royalties. Paice is ultimately hoping to get the International Trade Commission to ban Toyota hybrids altogether. Toyota has fought to get the case dismissed but to no avail.

According to one expert, who commented on the case last year, a ban is unlikely. But if it does happen, Toyota would be looking at production delays, the inability to sell hybrid vehicles in the United States and millions of dollars in lost revenue while it inevitably tries to work out a licensing agreement.

When taken with the ongoing recall fiasco, this patent infringement mess is further evidence of the difference a year can make in business. This time last year, Toyota was seen as the industry gold standard. But their ongoing troubles paint a picture of a car company that seems to have gotten caught up in believing its own press and lost sight of key details, like safety and technology, that helped make it great. A company that once was the model for quality is quickly becoming a textbook example of the dangers of complacency.

There is no insurance that can fix the problem and even where coverage is available to fund a “PR swat team” to come to the rescue, the short-term damage is already done, and the brand will always be tied to the negative press. In the long term, the reputation smear may prove survivable, but it sure never seems that way in the initial hours, days, weeks and sometimes even months and years following the calamity.

In recent years, the most oft-repeated mantra for avoiding irreparable harm to the brand is to “get out in front of the story.” Basically, after a mishap occurs, be honest, transparent and don’t let your CEO wake up to be blind-sided with an unwanted Wall Street Journal headline. Tell the public that something went wrong and that you’re now doing everything in your power to fix the situation.

That certainly makes sense, and recent examples of companies who were criticized for their delayed response include Toyota, Massey Energy and BP. The fact that all three companies seemed to bury their heads in the sand — for years — when it came to safety issues still would have come out, but the instant backlash perhaps could have been different if the companies took charge of the situation sooner — at least with Toyota anyway. I’m not sure there is anything BP could have done differently in the first week or two that would have made people feel much differently about the oil giant than they do today.

But, in trying to be honest and transparent, should the company’s executives go so far as to say “I was wrong” and “I’m sorry”?

Logic says yes.

As journalist and author Kathryn Shultz pointed out today in a guest post on the New York Times‘ Freakonomics blog, however, those who have admitted the error of their ways have not always been greeted with forgiveness.

Quite the opposite, in fact.

Earlier this year, former Assistant Education Secretary Diane Ravitch published The Death and Life of the Great American School System, which denounced a series of school reforms (including educational testing, school choice, charter schools, and No Child Left Behind) that she herself had advocated for years.  When I interviewed Ravitch for Slate, the comments section lit up with the familiar charges: “Why is Diane Ravitch Making a Bundle Saying She Was Wrong All Along?” “Wow! Thanks Diane! It’s only taken you ten years to see the blindingly obvious.” “We’re supposed to be impressed by her contrition?”

And that is the central question: what are we supposed to do about the sincere contrition of those who err?

Schultz, who just wrote a whole book on the topic that looks interesting but I have yet to read called Being Wrong, says that the answer is a lot easier in our personal lives than it is in the public sphere. In our private lives — with relatives, friends or colleagues — the answer is usually forgiveness. People make mistakes and, often, when they are willing to admit and own up to their errors, they should be granted at least some level of reprieve.

But that courtesy is rarely extended to public officials (which is who she is really speaking about here) or corporate representatives (which is who I believe this concept may also apply to)/

When our public officials make mistakes, the costs (which are often not borne directly by them) can be horrifying. It seems reasonable to demand not just an acknowledgment of error but some effort at ameliorating the consequences.  Sometimes, though, this is simply impossible.  No one can bring back the war dead; no one can unspill the oil; no one can compensate a child for twelve years of bad schooling. All that truly contrite leaders can do in such a situation is work off their public debt the best way they know how – and live with the torments of their own conscience.

But are those torments real?  Many people doubt it, and therefore find the idea of forgiveness galling.  As one commenter observed after listening to a conversation about wrongness over at The Takeaway, “A lot of people’s admitting to being wrong is little more than a PR ploy.  Public apologies do not impress me.”  In the acid bath of cynicism that is contemporary American politics, it is all but impossible for public figures to convincingly establish their sincerity.  And fair enough: sometimes, political changes of mind really are craven or self-interested or simply for show.  But sometimes, presumably, they are not.

Ultimately, her short post doesn’t offer any concrete solutions. It certainly does present a good amount of evidence that, publicly, forgiveness — especially when the act leads to death or major destruction — is tough to come by. Former Secretary of Defense Robert McNamara is cited as a prime example.

Regardless, I have to believe that, in this day and age, corporate honesty and admission of guilt will better resonate with the public than anything else. But the alternative perspectives raised here sure do lead us to one indisputable conclusion: executives are right to be concerned with reputation risk.

When executives admit “I was wrong,” does it help the company’s reputation? Or does the public just see it as yet another insincere public relations memo?

“Someone has to go through each and every auto claim, and then try to make a determination if it involved unwarranted acceleration,” Bunim says. “It could take months.”

This is not the first time State Farm has been at the forefront of action regarding Toyota. Back in 2007, State Farm warned the automaker and the NHTSA about an increase in unintended acceleration reports involving Toyota vehicles. While this warning adds further fuel to the argument that both Toyota and regulators were asleep at the switch, Department of Transportation Secretary Ray LaHood pointed out on his blog that the NHTSA was looking into the problem as early as 2003.

The point is that our safety officials have been looking at this issue from all angles for quite some time.

So the idea that NHTSA is in the business of ignoring information–valuable or otherwise–from automobile insurers, safety organizations, or consumers is just plain wrong.

Of course, this still doesn’t answer why it took them six years to act. Perhaps they were just being diligent.

For risk managers and others looking at the Toyota recalls as an ongoing lesson in corporate crisis response, seeing the daily headlines about the automaker’s woes is — both figuratively and literally — like watching a car crash.

Sure, in some ways, Toyota has handled the situation adequately, and its rebounding stock price and recent sales suggest that the immediate damage could have been worse. Then again, the company dragged its feet in addressing safety concerns publicly, and all the fines, recalls, class-action lawsuits, Congressional hearings and public scorn suggest that the long-term reputational damage could very well be lasting. This isn’t something that consumers will ever forget.

Especially not now.

Because on Monday, the National Highway Traffic Safety Administration hit Toyota with a record $16.4 million fine, which is more than an order of magnitude larger than the watchdog’s previous highest penalty, a $1 million slap on the wrist to GM for faulty windshield wipers. The $16.4 million figure is also the largest allowed under civil law, according to NHTSA.

Said Transportation Secretary Ray LaHood:

“We now have proof that Toyota failed to live up to its legal obligations,” said Secretary LaHood. “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. For those reasons, we are seeking the maximum penalty possible under current laws.”

On Forbes.com, Ned Douthat advises Toyota to just pay the fine rather than try to fight the regulator’s decision.

Now, Toyota is faced with the choice of contesting the fine in court or simply paying the fine in order to get the episode behind in.  In comparison to the potentially lengthy and expensive legal battle, the nominal $16.4 million fine may be an attractive option.  However, in paying the fine the prestige of the Toyota brand may be forever damaged, as they would be admitting fault in hiding a very serious safety issue in their vehicles and thus endangering millions of drivers.  The number of incidences of stuck accelerators is still relatively small, but the recalls have affected some 8.5 million vehicles.  Furthermore, if Toyota admits fault and accepts this fine, it may open the litigation flood gates to hundreds of class action and personal injury lawsuits related to the stuck accelerator issue.

Amanda Bronstod of Law.com delves deeper into the idea that accepting the fine as handed down will be troublesome for Toyota, as it factually “validates the legitimacy of our allegations that Toyota has been misleading the federal government and consumers.”

With that damned-if-you-do, damned-if-you-don’t decision looming, Toyota also announced on Tuesday that it would extend its sales discount program. The program was successful in March and finally gave the company some positive headlines, but at least one industry expert seems skeptical that even this price-cutting measure will continue to push vehicles under the once-impeccable-but-now-tainted Toyota banner.

Last month’s incentive program helped Toyota “scoop up bargain hunters and loyalists” to achieve a 41% gain in sales over March 2009, said James Bell, an analyst with auto information company Kelley Blue Book.

But the increase was not as robust as it might seem, as results were tempered by the low sales in the same month a year earlier, he said.

“The question now is how many of those bargain hunters and loyalists are left. You have a finite number of people in the auto market at any one time,” Bell said.

Historically, Toyota has been among the stingiest automakers when offering incentives, helped by its historically high resale values and a reputation for building reliable cars, he said.

Last week at the International Auto Show, a Toyota rep spoke on the situation, specifically noting his thoughts that “people don’t buy a car they don’t trust just because you give them a good price.”

We’ll see, I guess.

For more on the risk management angle of the Toyota troubles, check out our past coverage. Morgan also covered “Toyota’s Total Recall” in the April issue of Risk Management.

In Minnesota, a man imprisoned for vehicular homicide in a fatal Toyota crash sought a new trial, claiming that, in light of the unintended acceleration recalls, he was wrongly convicted for a mechanical malfunction that wasn’t his fault. A prisoner in Portland, Oregon has made similar claims in what is sure to be new trend in courts around the country.

Meanwhile, lawyers have begun to jockey for position in what is assumed to be a lucrative, and perhaps historic, class action lawsuit for all involved (J.P. Morgan recently put the total recall price tag for Toyota at $5.5 billion), internal company documents revealed that Toyota was aware of the unintended acceleration problem in 2002, when Camry owners began to complain about the issue.

The technical service bulletin went to every U.S. Toyota dealership in late August 2002 after some customers reported their vehicles were speeding up unexpectedly.

“Some 2002 model year Camry vehicles may exhibit a surging during light throttle input at speeds between 38-42 mph,” the bulletin states. “The Engine Control Module (ECM) calibration has been revised to correct this condition.”

Since the National Highway Traffic Safety Administration (NHTSA) was apparently aware of the issue as well, some critics, including Clarence Ditlow, the head of the nonprofit Center for Auto Safety, have suggested that both Toyota and the NHTSA are guilty of a coverup.

“The government is really hiding this information from the consumer,” Ditlow told CNN. “They’re in a conspiracy with the auto industry to keep these out of the public’s sight.”

Some analysts have questioned the seriousness of this document, however. Matt Hardigree of the automotive blog Jalopnik wrote that the CNN article may be misleading.

[The document] just shows there was a problem with electronics on one year of the Camry, which Toyota identified and repaired. The engine affected, the 1MZ-FE, isn’t even offered in the Camry anymore. The change to a new platform and new engine lineup would have drastically changed the ECM between the sixth-gen Camry and the current seventh-generation 2007-2010 Camry. Claiming the 2002 TSB [technical service bulletin] is related to Toyota’s current sudden unintended acceleration problems is sort of like claiming a screen recall on an iPhone is related to a recall on a first-generation iPod click-wheel.

While lawyers to try to figure what what Toyota knew and when, the recall problems continue to plague the automaker’s business and have been blamed for plant shutdowns in France and the UK. In February, Toyota’s sales in the European Union fell 20% as compared to the same time last year, despite the fact that overall auto sales in the EU were up 3%.

Finally (for now), Toyota was also forced to respond to owner complaints that recalled cars were still experiencing acceleration problems after they had been repaired by dealers. The company pledged to replace the pedals free of charge at the owner’s request. The operative phrase being “at the owner’s request”  as an internal memo cautioned dealers “not to solicit pedal replacement.”

As the crisis at Toyota rages on, stay tuned to the Monitor for the latest news and updates.

And remember, you can also subscribe to the RiskCast through iTunes by clicking here or searching for “RiskCast” within the iTunes store. Please let us know what you think by ranking us or giving us a review on iTunes. (Past episodes are also available for you listening pleasure.)

Enjoy!

At first glance, the incident seemed like yet another symptom of Toyota’s unintended acceleration woes that have led to the recall of millions of vehicles since late last year (and will be covered in more depth in our upcoming April issue). But when a subsequent examination of the vehicle by Toyota and federal government investigators failed to duplicate the problem, it called the accuracy of Sikes’ account into question. Toyota found the car’s gas, brake, and safety override to be in working order and that Sikes had rapidly pressed the gas and brake pedals back and forth 250 times (the maximum amount of data that the diagnostic system could collect). This may have caused the brakes to overheat and since Sikes did not press the brakes hard enough, the brake override system did not engage.

Fox News reported that Sikes has had a history of financial problems, which has led some to suggest that his report may have been a hoax. Toyota spokesperson Mike Michels would not say outright that Sikes had fabricated his story, however.

“We have no opinion on his account, what he’s been saying, other than the scenario is not consistent with the technical findings.”

Toyota’s investigation of the Sikes incident seems to indicate a shift in their response to the acceleration issue from one of contrition to a more aggressive defense of the safety of the vehicles. As they continue to investigate the source of the problem (could it be cosmic rays?), it is apparent that they are now willing to fight for their brand. Hopefully for their business and, more importantly, for Toyota drivers, their rediscovered focus is not a case of too little, too late.

These were the topics of the discussion when us editors of Risk Managment got together to record this fifth installment of the RiskCast for your listening pleasure. Also included is an interesting discussion on the top 10 product recalls ever issued.

Enjoy.

And remember, you can also subscribe to the RiskCast through iTunes by clicking here or searching for “RiskCast” within the iTunes store. Please let us know what you think by ranking us or giving us a review on iTunes.

The “Toyota Way” is the company’s long-standing philosophy that, among other things, places an extreme emphasis on maximizing efficiency by minimizing waste. Some have even said it acts almost like a religion amongst Toyota’s 316,000 employees. There is even a Toyota-approved way of turning corners when walking around the company’s numerous hallways (you must do say at a 90 degree angle). Think that’s bad? Toyota also demands that their employees never walk around the office with their hands in their pockets. A recent NPR news article quoted Tadao Wakatsuki, who worked at the auto giant for 45 years:

“If you walk around with your hands in your pockets, you’ll be told to take them out. If you drive to work, you file a report describing the route you take and the risks. If you drive to your hometown, you report exactly where you’re going to stop for a break. I would say there’s no freedom at Toyota. It’s totalitarian.”

Totalitarian to say the least. But was Toyota’s strictly-enforced mission to cut waste and drive efficiency taken too far, ultimately sacrificing quality and safety? In the wake of the recall of more than eight million cars, some think it was. The world’s number one car maker has taken a hit — not only in terms of revenue, but also in terms of reputation. Historically, car recalls have tainted the manufacturer’s image for years, sometimes forever, steering once-loyal car buyers towards other manufacturers. MSNBC lists the top 10 biggest vehicle recalls in history. The following are the top five:

1. Ford -- Number of vehicles recalled: 7.9 million. Year of recall: 1996. The company warned that the ignition switch on the recalled vehicles could overheat and smoke or catch fire. Ford recalled most of its models built between 1988 and ’93, including the Aerostar, Bronco, Crown Victoria, Escort, F-150 pickup, Mustang, Tempo and Thunderbird.
2. General Motors — Number of vehicles recalled: 6.7 million. Year of recall: 1971. The engine mounts on these vehicles were found to potentially break, letting the engine move around, which could cause the mechanical linkage to jam the throttle. This affected a variety of Chevrolet models from 1965-’69, including the Chevrolet Bel Air, C-10 pickup, Camaro, Caprice, Chevy II, Impala and Nova. At the time GM used unique engines for each of its brands, so only the Chevrolets had the engine that used the affected mounts.
3. General Motors — Number of vehicles recalled: 5.8 million. Year of recall: 1981. A key bolt attaching the front suspension to the car could break, which would cause the suspension to collapse suddenly. This has obvious potential for negative outcomes, especially if the vehicle was being driven at the time it failed. The company recalled its mid-size cars built between 1978 and ’81 to replace the defective bolts. It included the Buick Century and Regal, Chevrolet Malibu and Monte Carlo, Oldsmobile Cutlass, and Pontiac Grand Prix and LeMans.
4. Toyota — Number of vehicles recalled: 5.4 million. Year of recall: 2009. Toyota estimated it recalled about 5.4 million vehicles in the U.S. over problems with vehicle floor mats, which they found could entrap the pedal causing unintended acceleration. The recall was initiated in 2009 and expanded in 2010. In 2010, Toyota recalled 2.3 million vehicles over problems with the gas pedal after the company found that an accelerator mechanism may not spring back up with enough pressure. About 2.1 million vehicles overlap in these two recalls, leading to a total recall so far of about 5.6 million vehicles for unintended acceleration. The final tallies won’t be known for a long while. The vehicles involved include Lexus-brand vehicles and the Toyota Camry, Tacoma and Tundra.
5. Ford — Number of vehicles recalled: 4.5 million. Year of recall: 2005. The automaker said the cruise-control mechanism on these vehicles could overheat and smoke or catch fire. The company recalled most of its full-size trucks, including the 1994-’96 Bronco, ’97-’02 Expedition, ’94-’02 F-150 and F-250, ’98-’02 Navigator and the short-lived 2002 Lincoln Blackwood pickup truck.

The Toyota recall may continue to climb in the ranks as the company continues to issue new recalls. As was the case with the other automakers on this list, it will take a lot of time to repair, not only their bottom line, but their image as well. For Toyota, time may or may not heal the financial and reputational wounds the company has suffered.