Navistar cannot meet heavy-duty emission standards and is surviving in the Class 8 business because the Environmental Protection Agency is permitting it to pay nonconformance penalties, according to court documents filed by the company and the agency. Competing engine manufacturers have petitioned for review of EPA's action, arguing that the agency should not allow Navistar to pay the penalties without going through a formal comment process.

The case, which was argued on Monday in the federal appeals court in Washington, D.C., turns on Navistar's decision to rely on exhaust gas recirculation technology to meet 2010 Clean Air Act emission standards, while the other manufacturers rely on selective catalytic reduction and lesser amounts of EGR.

While the competing manufacturers have been able to meet the standards, Navistar's approach has come up short. Navistar has been relying on emission credits to keep selling its engines.

Last October, Navistar told EPA that it was likely to run out of credits in the first quarter of this year. If it was not permitted to pay a nonconformance penalty for each engine, it would be forced to stop production of its domestic Class 8 engines and trucks, Navistar told the agency.

EPA granted permission to use the penalties in an interim rule while it considers a final rule, due by early June. The penalties could go up to $1,900 per engine, the agency said in the interim rule.

Navistar said in its submission to the court that if it were to lose the engine certifications it gets by paying the penalty, it would quickly expend its remaining credits and be driven from the heavy-duty engine and truck market. This would threaten the company and its shareholders, employees, dealers, suppliers, retirees and customers, Navistar said.

"Laggard does not equal slacker"

The manufacturer continues to defend its non-SCR choice for an emissions solution, telling the court it is an environmentally superior but technologically harder path.

"Laggard does not equal slacker," the company said. "The path Navistar has chosen is longer but leads to superior technology."

The company said it has spent about $700 million since 2001 to develop an EGR solution that does not require SCR aftertreatment.

It also said it has additional heavy-duty diesel engine families that will need nonconformance penalties in order to stay in the market until its EGR solution is ready.

No formal comment period

The competing companies - Mack Trucks, Volvo Group North America, Daimler Trucks North America, Detroit Diesel Corp. and Cummins Inc. - told the court that EPA erred when it allowed Navistar to pay the penalties without having a public comment process.

Normally a decision to allow the penalties requires a formal notice and public comment, but EPA said that time was too short for that. It takes up to nine months to complete that process, and Navistar didn't have the credits to go that long.

So the agency invoked a "good cause" exception that allowed it to grant the penalties without going through the comment period.

The competing companies want the agency to take away the fine option until it has completed the public process.

A decision from the court is expected in six to eight weeks.