October 12, 2017 2:30 pm JST

Kobe Steel scandal: Five legal dangers facing company

Experts say data falsification could lead to huge damages, even criminal penalties

A man walks past the signboard of Kobe Steel at the group's Tokyo headquarters in Tokyo, Japan October 10, 2017. © Reuters

TOKYO -- Kobe Steel's falsification of data regarding client specifications for aluminum and copper products impacts a wide range of companies from automakers to defense contractors. Given the deep implications of the scandal, The Nikkei has consulted experts to determine five legal dangers the Japanese steelmaker may face.

1. Liabilities 

The first issue may involve legal damages sought by companies that received the products in question. Supplying components whose quality data has been falsified may well violate contracts.

The affected corporations will have to screen their end products for safety, which could result in recalls.

"Kobe Steel will likely face demands from client companies to pay all costs associated with testing and other measures," said Tadashi Kunihiro, a lawyer versed in corporate scandals. "If those lead to actual recalls and such, those costs will be subject to compensation as well."

2. Damages

The sum depends on the number of companies seeking damages and the content of those petitions. However, multiple experts say the aggregate amount could be sizable.

Affected companies "face pressure to obtain a certain amount of compensation due to the threat of shareholder lawsuits," attorney Hideaki Kubori said. That factor could fuel a string of substantial claims.

3. Lawsuits outside Japan

Claimants in the U.S. and elsewhere can sue for punitive damages, in which case Kobe Steel's liability could balloon. Because Takata's defective air bags were blamed for accidents, automakers were slapped with class-action lawsuits, resulting in massive settlements.

4. Shareholder lawsuit 

Shareholders can level a suit against Kobe Steel's executive officers. Any damages the company sustains as a result of the scandal would open the executives to liability.

In Japan, shareholders have sought hefty sums from company executives in recent years. In April, a Tokyo court ordered a former president of Olympus and five others, including one now deceased, to pay roughly 59 billion yen ($525 million) in total damages for overstating earnings.

5. Criminal liability of management

Executives and the corporate entity itself may have run afoul of the Unfair Competition Prevention Act. The law forbids the misrepresentation of product quality and content. Offenders face up to five years' imprisonment and fines of no more than 5 million yen. Corporations also could be hit with fines.

Toyo Tire & Rubber was discovered in 2015 to have falsified data on quake absorbers. Though no executives were indicted, a subsidiary was prosecuted under the law and is fighting the charge in court.

(Nikkei)

Kobe Steel, Ltd.

Japan

Market(Ticker): TKS(5406)
Sector:
Industry:
Non-Energy Minerals
Steel
Market cap(USD): 2,694.89M
Shares: 364.36M

Olympus Corp.

Japan

Market(Ticker): TKS(7733)
Sector:
Industry:
Health Technology
Medical Specialties
Market cap(USD): 12,213.24M
Shares: 342.69M

Toyo Tire & Rubber Co., Ltd.

Japan

Market(Ticker): TKS(5105)
Sector:
Industry:
Producer Manufacturing
Auto Parts: OEM
Market cap(USD): 2,967.49M
Shares: 127.17M

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