GM files racketeering lawsuit against FCA, saying it corrupted labor talks

Jamie L. LaReau | Detroit Free Press

Open warfare broke out between two Detroit automakers Wednesday, with General Motors suing Fiat Chrysler Automobiles, alleging that it cost GM billions of dollars by corrupting labor talks over the past decade. FCA called the effort "a meritless attempt to divert attention" from GM's own challenges.

GM also alleged that former FCA boss Sergio Marchionne authorized bribes and conspired with the UAW to "effectively take over GM through a merger."

GM's lawsuit, filed under federal racketeering laws, said FCA was "the clear sponsor of pervasive wrongdoing, paying millions of dollars in bribes to obtain benefits, concessions and advantages in the negotiation, implementation and administration of labor agreements over time." That gave FCA an unfair edge in labor expenses, it said.

Those claims are tied to an ongoing federal corruption investigation that has led to 13 criminal charges and 11 guilty pleas among former FCA executives and UAW leaders, one of whom held a GM board seat. The probe has spread from misspending of money from a UAW-FCA training center to the highest reaches of the union, with both current President Gary Jones and his predecessor Dennis Williams implicated. Jones resigned Wednesday from the union amid contract negotiations with Detroit automakers, as UAW leaders were moving to remove him.

The shocking lawsuit comes as FCA this week began final negotiations with the UAW on a new contract. The union this month settled quickly with Ford after a bitter 40-day strike against GM in September and October. At the same time, FCA is pushing toward a merger with French-based PSA Groupe, the maker of Peugeot and other brands, that would create the world's fourth-largest auto company.

FCA responded angrily.

"We are astonished by this filing, both its content and its timing," it said in a statement Wednesday afternoon. "We can only assume this was intended to disrupt our proposed merger with PSA as well as our negotiations with the UAW. We intend to vigorously defend against this meritless lawsuit and pursue all legal remedies in response to it."

Marchionne takeover bid

In a riveting passage of the lawsuit, GM alleges that FCA conspired with UAW leaders to try to take over GM by merger. It said that after Marchionne's attempt to merge with GM failed in 2005, he saw another chance after Fiat acquired Chrysler out of bankruptcy in 2009 and merged into FCA in 2014.

“After taking full control of Chrysler, and having secured control of the FCA-Control Enterprise and the UAW’s full cooperation, Marchionne set his sights on forcing a merger with GM,” the lawsuit reads.

The suit alleges that former UAW President Williams, a “longtime friend” of Marchionne, was key to the effort.

“With Marchionne as the lead, FCA schemed that it could effectively take over GM through a merger (code-named 'Operation Cylinder'), have Marchionne remain CEO of the combined companies, and oversee the largest auto company in the world. In part for this very reason, Marchionne, on FCA Group’s behalf, had authorized the bribery of UAW leaders, whose support was essential to the success of Operation Cylinder given that, among other reasons, the UAW could effectively block a merger under certain terms in the collective bargaining agreement.”

The lawsuit said Marchionne's failure to "consummate Operation Cylinder was a regret" cited in Marchionne's biography, which said an FCA-GM merger was "one uncompleted project that Marchionne probably regretted to the end of his life." Marchionne died unexpectedly in July 2018 at age 66.

GM's lawsuit, filed in U.S. District Court in Detroit, names FCA and former FCA executives Al Iacobelli, Jerome Durden and Michael Brown as defendants.

“We have alleged in the complaint that Mr. Marchionne is responsible for conceiving, executing and sponsoring the alleged wrongdoing," said Craig Glidden, GM's executive vice president and general counsel. “We have no present intent to pursue the UAW. Our focus is on FCA. We believe the responsibility firmly rests on the orchestrater of the wrongdoing … and we plan to hold FCA responsible.”

GM said current FCA CEO Mike Manley is not individually part of the lawsuit.

Iacobelli had been vice president of employee relations at FCA, responsible for negotiating and implementing labor relations with the UAW. Durden was a financial analyst at FCA and Brown was director of employee relations at FCA, also involved in UAW negotiations. All three have pleaded guilty to criminal charges.

The FBI alleged that Iacobelli and the late UAW Vice President General Holiefield plotted to keep senior union members “fat, dumb and happy.” While contracts were being negotiated, prosecutors alleged, FCA officials were secretly siphoning money from the company and giving it to senior union officials as an investment in "relationship building."

The top negotiators did this, prosecutors said, by secretly funneling FCA money through a UAW training center and a fake children's charity, ultimately spending it on themselves.

FCA lowered its labor costs

GM's lawsuit alleges that during contract negotiations in 2011 and 2015, FCA corruption undermined the integrity of collective bargaining with the UAW. It alleges that FCA interfered with implementation of contracts as soon as 2009.

GM said the corruption cost it "substantial" damages. Specifically, FCA was able to achieve favorable labor costs and operate "differently than their competitors," which lowered FCA's costs, said Glidden.

Glidden said FCA hired more temporary workers and "in-progression" workers, both at lower entry level wages, than GM did and "it did so with the knowledge that guidelines we believed would be in place were not in place."

GM said FCA has an $8 per hour total labor cost advantage because of the corruption. The average total hourly labor cost GM pays is $63 an hour compared with FCA’s $55, Glidden said, citing Center for Automotive Research data.

GM is not indicating a specific dollar amount yet that it seeks from FCA, Glidden said.

In the lawsuit, it said that under the 2015 UAW contract, GM spent $1.9 billion in incremental labor costs over four years, more than $1 billion more than the deal GM believed it had reached with the UAW before the UAW chose FCA as the lead company to negotiate with that year.

"We are seeking substantial damages. We cannot comment further on the amount or measure the amount of damages until discovery," said Glidden. "We will not put a number on it today. We do believe that the damages we will be able to establish will be substantial due to the length of time.”

GM said it would invest any damages it collects in the lawsuit in the United States and use it to create jobs here.

Such a lawsuit is unprecedented, said Harley Shaiken, a professor at the University of California, Berkeley who specializes in labor issues.

“The timing of the suit while the UAW is in negotiations with Chrysler is neither helpful to the talks or coincidental,” said Shaiken. “I don’t see the suit, however, derailing the negotiations or necessarily even having a major impact, but we should see what happens quickly. New leadership teams on both sides of the table and a real desire to clean up the damage done with the original corruption scandal means the focus will be on the issues and the ratification.”

FCA, in a follow-up statement from its London headquarters on Thursday (late Wednesday Detroit time), pushed back hard against the suit, suggesting motives for GM's actions other than what was included in the filing. FCA noted that the Opel and Vauxhall brands, formerly owned by GM, have been transformed from money losers to money makers since they became part of PSA Groupe.

"This astonishing ploy comes at a time when FCA is proving itself to be an ever more formidable competitor that continues to create significant value for all its stakeholders through the successful implementation of its long-term strategy. This includes the proposed merger with PSA, which itself completed the successful turnaround of the European businesses it acquired not long ago from General Motors," FCA said in its statement.

"FCA will deal with this extraordinary attempt at distraction through the appropriate channels and will stay focused on continuing to deliver record results while realizing an exciting vision for the future of the industry. FCA is confident that it will prevail in defending itself against these claims in court and will also pursue all available remedies in response to this groundless lawsuit."

Not focused on UAW

The lawsuit is based on RICO and the Taft-Hartley Act. RICO stands for racketeering influenced and corrupt organizations. It's a federal law designed to fight organized crime by granting private plaintiffs an ability to sue for damages suffered as a result of a criminal enterprise.

Taft-Hartley Act prohibits employers from engaging in bribery, graft, conflict of interest payments, and other prohibited transactions with union officials. The act is to ensure union officials are working on behalf of the members.

"This lawsuit is intended to hold FCA accountable for the harm its actions have caused our company and to ensure a level playing field going forward," said Glidden.

Glidden said GM's focus in the lawsuit is on FCA and the former executives.

"We are supportive of the reform efforts the UAW has announced," said Glidden. "Second, nothing about this lawsuit has anything to do with the recent work stoppage at GM and it will not change" the 2019 contract agreement GM's 46,000 UAW workers ratified on Oct. 25.

The UAW said it didn't believe the corruption influenced contracts with FCA.

"Mr. Iacobelli worked for both FCA and General Motors, and he is currently in prison for his crimes, which include the misuse of Joint Program funds," UAW spokesman Brian Rothenberg said in a statement. "As to the collective bargaining agreements negotiated with FCA while Iacobelli was an FCA manager, we are confident that the terms of those contracts were not affected by Iacobelli’s misconduct, nor that of any UAW officials involved in the misuse of Joint Program funds at FCA. Those contracts, which were ultimately ratified by our membership, were negotiated with the involvement of both local and international representatives, and the process had multiple layers of checks and balances to ensure their integrity.

"That said, the fact that these issues can cause doubt about the contracts is regrettable. The UAW leadership is absolutely committed to making whatever changes are necessary to ensure on our end the misconduct that has been uncovered will never happen again.”

A labor expert said the lawsuit "raises a real specter of doubt about the integrity of FCA and the UAW and takes it to a higher level."

"It basically is alleging that the parties colluded to affect collective bargaining to the advantage of the company and to the disadvantage of the workers," said Marick Masters, professor of business at Wayne State University.

GM has been caught up in the widespread corruption scandal. A former UAW vice president and onetime GM board member appears set to plead guilty to charges connected to the federal corruption probe.

Joseph Ashton, who faces two conspiracy charges related to wire fraud and money laundering is scheduled for a plea hearing Dec. 4 before U.S. District Court Judge Bernard Friedman.

In addition, Iacobelli went to work for GM to negotiate with Canada's autoworker union after he retired suddenly from FCA on the eve of 2015 negotiations. A person well-placed in Detroit labor circles told the Free Press on Wednesday that the UAW had warned GM about Iacobelli before he was hired there.

GM suspended him in the summer of 2017 when he was charged and fired him late that year. Ashton left the GM board at about the same time Iacobelli was dismissed.

More: Ex-UAW VP, former GM board member Ashton expected to plead guilty in probe next month

More: UAW to sell ex-president's lavish Up North cabin as part of ethics cleanup

More: UAW President Gary Jones to take leave of absence as corruption investigation escalates

“The events surrounding Mr. Ashton have nothing to do with what’s alleged in this complaint," said Glidden. "As for Mr. Ashton's conduct, GM did not have knowledge of his conduct and GM will address the allegation in time.”

GM wants future negotiation free of corruption, added Glidden.

GM said the timing of the lawsuit is not related to the UAW entering the final phase of its contract talks with FCA, which started this week. Also, it is not intended to derail FCA’s planned merger with French-based Groupe PSA. GM relied on the federal government’s investigation in bringing the RICO lawsuit. Glidden said he has not discussed the matter with Ford Motor Co.

“The acts that the federal government has brought out through guilty pleas reveal that there were covert acts,” said Glidden. “We followed that and we’ve done our own due diligence and we think now is the time to bring it forward and recover damages.”

Contact Jamie L. LaReau: 313-222-2149 or jlareau@freepress.com. Follow her on Twitter @jlareauan. Read more on General Motors and sign up for our autos newsletter. Eric D. Lawrence contributed to this report.