Legality of Tesla's Store Model Being Challenged

Tesla Motors has not just wanted to reinvent the automobile, its business model of placing trendy and customer focused zero-pressure stores in highly trafficked retail venues flies in the face of traditional automotive franchising, and now dealers and officials in a few states are pushing back.

To date, the California electric car maker has 17 stores in the U.S., six pending, and is having to work with complaints in four states while more complaints may come in time.

Objections are based on varying laws either restricting or forbidding factory owned automobile stores in 48 states, and Tesla is reportedly working with objectors as well as it can on a case-by-case basis.

Complaints have included observations that Tesla sets a dangerous precedent overturning the specialized function that dealerships have long held as purveyors of a manufacturer’s vehicle products.

As factory owned stores, Tesla’s stores are also being said to represent unfair competition, threatening the franchise system, and – given they are like Apple stores in shopping areas – they are inconvenient for repairs and service although Tesla has a mobile service intended to get around that objection.

Since Tesla has been a niche company with all but zero actual deliveries for much of the first half of this year while in limbo between the discontinued Roadster and June-launched Model S, it has flown under the radar in some cases. Even so, automobile dealer associations and others have been looking askance or in cases have attempted action.

This year attempts to protest Tesla’s store model have come from the Illinois Secretary of State, the Greater New York Automobile Dealers Association, and state dealer associations in Massachusetts, and Oregon.

In other situations, such as in California, there is no legal conflict as long as a factory store is placed at least 10 miles away from a competing franchise. Since Tesla is a newcomer, that was an easy law to comply with.

In short it is a patchwork quilt of laws Tesla must contend with, and it has been scrutinized by the National Automobile Dealers Association (NADA) and some legal authorities which would at best like to see the upstart go to a traditional dealer model if it wants to continue to do business.

Tesla narrowly missed being illegal in Colorado, but its one store opened in 2009 is grandfathered in although the state has since updated its franchise law to prevent factory further stores being opened in that state.

In 2010 a law suit that was later thrown out in New York against Tesla and the New York Department of Motor Vehicles said Tesla’s Manhattan store was illegal. It was only disallowed because the suit was filed after the expiration of a statute of limitations.

In June it was reported that a NADA legal representative thought Tesla’s store idea was “somewhat laughable.” Since Tesla sells a niche product, its actual threat was not perceived as great as say, if Toyota was to open a factory direct store down the street from an existing Toyota franchise.

But an attorney who specializes in working with auto dealers, Leonard Bellavia, was quoted by CNN Money saying dealers should take action for the precedent Tesla is setting. He also predicted Tesla will eventually be forced to conform, abandon its retail franchise stores, and adapt the traditional franchise model.

“The business model that works best is having the manufacturers focus on building quality products and the dealers focused on selling and serving the vehicles,” said the NADA in a statement.

It too predicted Tesla will in time reconsider its ways – aided to this decision no doubt by exerted pressure.

“Tesla may not yet recognize the value of the independent, franchised dealer system, but as its sales increase, NADA is confident it will re-examine its business model,” Montana dealer and NADA Chairman Bill Underriner said in a statement. “Other companies such as Daewoo did. All companies should be complying with existing laws in the same way dealers are required to.”

But Tesla says it is determined to continue adding Tesla stores to select spots on the map, having announced six news stores this fall, and is thus far working with specific complaints in various localities as they come.

Tesla has been dedicated to the maverick model for a while now, and announced its hiring of veteran Apple marketer George Blankenship, early in July 2010. He was at the time touted as enabling Tesla to carry forward successful principles that work for marketing computers.

“Tesla is revolutionizing the auto purchasing experience. Unlike traditional car dealerships, said Tesla in a statement, “Tesla stores are designed to be stylish and inviting.”

In response to objections, Automotive News quoted Blankenship as saying Tesla’s mindset is it will do what it takes to make its stores legally complaint and its high hopes fly.

“We do what we’re capable of doing, and we do whatever they let us do,” said Blankenship. “It’s unique for each location. If we can’t be a dealer in a mall, we won’t do reservations on-site. We tell people where to go on our Web site to make a reservation.”

Perhaps making a subtle distinction to its printed statements, Blankenship says the “last thing on our agenda” is to change the automotive retailing industry.

Tesla has said its locating stores in high-traffic retails areas is an attempt to put the Tesla concept in front of people who may not even be shopping at the moment for a car.

Blankenship said it is not motivated to overturn laws, or change how other brands sell their cars. It is mainly concerned with how it sells its own cars, and says its store model is how it wants to do so.

But the issues have been brewing for a while, and Tesla is now delivering cars, with big plans for the future, so we shall see where this goes.

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  • Dakotatycoon

    Just another ploy by STEALERSHIPS to pad their pockets at customers expense.

  • Max Reid

    Wonderful. Infact, they can even sell a LED bulb or Solar Panel in the store to attract more customers just like Apple started selling iMac, iPod, iPad and so on.

    Anything which has to do with Hybrid, Plugin, EV, Solar will be opposed by someone and this may probably be the hand of oil companies.

    No 1 protested the 1000,s of Apple stores, so why are they questioning the Tesla dealerships. Many dealerships may not sell Tesla product probably and that’s why the manufacturer is directly stepping in. Also the cost of product may be lesser if bought directly from dealer.

  • Todd R. Lockwood

    Regardless of the outcome, Tesla will be selling cars. The Tesla Model S is such a striking and revolutionary automobile, the car will be selling itself just by being out on the street. There’s really no need for salespeople in the traditional sense. So far, demand is way beyond supply, and with only 20,000 units being made each year I imagine that will continue.

    I happen to believe that the customer will be better served with Tesla’s direct sales model. The various state laws forbidding direct sales by a car manufacturer strike me as being on shaky legal ground, given that so many other products are sold directly to customers.

  • ojaiojai

    I was wondering if a legal issue exists with Tesla not posting MSRP window stickers on the vehicles. I thought this was required under a rule nicknamed: “Monroney Window Sticker”, named after congressman Monroney in 1958 as part of the infamous Automobile Information Disclosure Act. I think this might be a consumer protection issue as well as a DMV violation???


  • Modern Marvel Fan

    Telsa should have broken the “monoply” model by the auto dealers by selling cars directly on the internet.

    I would have preferred it selling it on Amazon…

  • Roy_H

    Notice that it is not customers who are complaining, but dealerships. If these cars were sold through a conventional dealership there would be at least a 20% mark-up. How many customers would prefer to pay $10K to $20k more?

    Almost all GM dealerships are excellent and honest. However it only takes a few bad apples to taint the whole company. These bad dealerships perform unnecessary repairs to drive up the repair bills and when the opportunity arises, will gouge the customer with price mark-up. Franchise laws prevent GM from taking disciplinary action against these bad dealers. Tesla’s factory stores avoid this possibility.

    “The business model that works best is having the manufacturers focus on building quality products and the dealers focused on selling and serving the vehicles,” said the NADA in a statement.

    If this was true, they wouldn’t have to have laws to force auto companies to use franchised dealerships.

    These laws should be repealed.


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    “Telsa should have broken the “monoply” model by the auto dealers by selling cars directly on the internet.”

    Tesla DOES sell directly on the internet.

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  • dutchinchicago

    The worst part of buying a new car by far is having to deal with a dealership. I would love to be able to bypass them. I do not want to be subjected to pressure sale tactics to get me to buy what ever car they happen to have on the lot.

    Ofc ourse dealerships need to make money so somewhere in your car’s final sale price you are paying for that dealership to exist. Not having to deal with a dealership and getting a cheaper car sounds like a good plan to me.

  • AP

    Welcome, Tesla, to the real automotive world. As a GM employee, I can tell you they are only dealing with the same issues every other manufacturer does.

    Ford tried this when Nasser was CEO, and was quickly shut down by state franchise laws.

    A lot of money changes hands in the car business, so everyone wants their say, and their piece of the pie.

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  • Jack Burgess

    These laws are antiquated, protectionist, and now only serve as an arbitrary barrier to protect a special interest group — the automobile dealers. Created prior to any Internet commerce, the laws no longer make sense in today’s modern markets. They were originally enacted to foster competition. But over time as our modes of commerce have changed, these laws have come to do just the opposite. If we allow them to stay in place, they will continue to stifle true competition, thus harming market efficiencies and the productivity of the automobile industry as a whole. Today, we consumers end up paying a little bit more for our cars due to this now unwarranted protectionism. These laws should have been changed years ago.

  • scott kessler

    Having just reserved my Tesla model S at Tesla’s Newport Beach store I can attest that it was a wonderful experience…much more like an intriguing discovery than the dreaded go to a dealership to haggle over buying a car for 3 hours. If I had to go to a “traditional” type dealership to make my purchase would have procrastinated the process for a long time… My father owned a VW dealership and I pretty much grew up there…I’ve sat in the “closing room” and seen a lot of deals go down “traditionally”…
    I believe Tesla has found a better way…Congratulations Tesla

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