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Tesla Operating Illegal Stores, Really?

Tesla Accused Of Operating Illegal Showrooms In 4 States
October 10, 2012 | 3 commentsby: TheCarConnection | about: TSLA By Richard Read

Given today's high gas prices, many car shoppers are turning their attention to hybrids and other fuel-efficient vehicles. Electric cars like those built by Tesla (TSLA) could be attractive to better-off buyers, but Tesla is facing some legal problems that may slow the selling process.

Automotive News reports that dealer networks and government regulators across the U.S. have begun to question Tesla's sales techniques. And in several cases, they've threatened legal action to stop the startup.

A New Paradigm for Auto Sales

According to the National Automobile Dealers Association, 48 states have franchise laws that forbid or restrict the ability of automakers to sell vehicles directly to the public. That's why dealerships tend to be independently owned and operated. Tesla showrooms, on the other hand, are owned by Tesla itself.

However, Tesla says that the majority of its showrooms -- designed by George Blankenship, the man behind Apple's outrageously successful chain of retail shops -- don't actually conduct sales; they simply share information about Tesla vehicles. When it's time to seal the deal, Tesla staff point prospective shoppers to the automaker's website, where they can customize and reserve their vehicle.

Other dealers aren't buying it. They insist that even though Tesla's showroom staff don't technically sell vehicles on site, they do everything else that a traditional dealership would do. In short, they argue that by facilitating the sales process, Tesla showrooms are essentially conducting sales.

To date, questions about the legality of Tesla showrooms have arisen in four states: Illinois, Massachusetts, New York, and Oregon. Because franchise laws vary from state to state, each case is a bit different. Some complaints have been brought by dealer associations, and in Illinois the challenge was lodged by the Secretary of State. Tesla says that it is doing everything it can to comply with each state's regulations.

Tesla currently maintains 17 showrooms in 10 states and the District of Columbia, but it's set to open another six this fall. As Tesla expands operations and its reputation grows, we'd expect to see many more challenges to its business model down the line.

Will Tesla eventually shift to a conventional model of independently owned dealerships? Or will it bring about a change in the way that state laws are written, laws generally written decades ago when there was far less competition in the marketplace and states wanted to put big automakers on more equal footing with smaller ones?

And more importantly, will Tesla's unusual sales paradigm -- which has recently been copied, in part, by Audi -- change the way that automakers interact with customers?

If I were the attorney for Tesla, my answer to the dealership association would be...

"Tell you what, we will remove our showrooms in these states, as long as the company you represent, no longer shows your products outside of YOUR dealerships...i.e. No more car shows, special events, shopping malls, etc."

@ DouglasR

They bring the "display" Model S up a freight elevator, then drive it (after hours) through the mall to the Tesla store.

Their "demo" is parked in the parking garage where it can be charged and be ready to drive.

electricblue0303. Every state wants its' sales tax. Sales tax is charged where you live. Sorry, ya gotta pay the man! It is not about Tesla.

@petero

FYI, Many States do not have sales tax.

Michael S. You are right there may be a few states that don't charge sales tax on cars - but the vast majority of states do. In CA are rates vary from county to county. I live in Ventura County (7.75%), Los Angeles is 8.75%, some counties are more. If I buy a car in Los Angeles they charge me the 7.75%.

I bought a used car in AZ theycharged me 9.1% and both AZ and CA shared.

Mark K. “Why shouldn't you be able to buy a Ford too at a better price under a more efficient distribution model?” Not to be argumentative, but what better price did we get from TM? MSRP + list price for all the options + fees. No haggling, no offer/counter offer – take it or leave it. Granted there was no “market value added markup” by TM that an independent dealer would charge.

What we can agree on is, live and let live. Let TM pursue its’ retailing model and the auto industry pursue their traditional model. When TM grows and prospers and retails S, X, GIII, etc. their annual production will be under 200K. That is great for TM but peanuts to Toyota, Ford, GM… and all their franchised dealers.

Regarding the state of list for MVPA, mine says California (the Palo Alto HQ). I live in Minnesota, and the Oak Brook, IL demo room is the closest to me. I made the deposit for my purchase, sight unseen. It was later that I was able to get more experience with Tesla and the Model S. I'm in the 10% of reservation holders who will not be reached by the Supercharger network in two years (Des Moines is out of range), and it may be a very long time before there is a demo room at the Mall of America. The argument made by these filings is flaccid and soggy.

It is my opinion that Tesla Motors was expecting this fight and they are ready for it. To me, it is a sign of progress, like when the internet took a huge bite out of print newspapers. When SpaceX and Scaled Composites get hit with lawsuits from their big competitors, I will be equally bold.

It makes me wonder if early airlines were sued by passenger rail.

This is already generating publicity for Tesla. I suspect that unless the lawsuits cost truly vast amounts, that TM will reap more publicity and sympathy from being prosecuted than it cost them to fight the suits. We'll see.

TikiMan do not let your politics cloud your view of reality. The 4 states that have made an issue of this are actually extremely blue states

Flex, you beat me to the punch. IL is as blue as it gets. I talked to my lobbyist friend who represents the blue side and he even laughed at this one. Tough to do business in IL when everyone wants a piece of the pie being made.

Flex, In that case, all the more reason to stop all of this BS monopoly control crap in our nation! Here in California, it's bad enough having to deal with our monopoly refinaries, health care, and power utilities (that want to drive us all out of business).

If diansour car makers can't play fair, then they should "build a better mousetrap' (or in this case, a REAL EV car!) Otherwise, be prepared for a slow death!

Sorry, however, as this car becomes more of a reality for me (my delivery is in the next few weeks now), I am hardcore defending it from the naysayers, haters, and morons!

Long live the future, down with traditionalist!

No party is immune to lobbying by special interests, and no partisan should tolerate it.

The idea that lawmakers elected by the people at large would favor the few is unacceptable to any citizen.

Peter - The syllogism does not work.

TM has not asked for any law barring dealers from reselling their cars. But the reverse is true. Dealers want to bar TM from offering retail choice to extract more from consumers by limiting competition.

The most enterprising dealers will seek bulk purchase deals from TM and try to offer time and place utility. Some will succeed because they find an innovative way to please customers.

Existence proof. We can buy Apple products at an Apple company store, or at at a reseller like MacMall. The reseller often provides a discount to compete.

By contrast, under the old franchise model, I vividly recall paying 10K over list to get the latest MB SL500, because of demand.

Despite the same oversubscribed conditions today, TM company stores very clearly have never done is.

Change ruffles feathers, but it will yield benefits when people are free to choose.

Check out Milton Friedman for fun.

Last "Is" = "this"

The dealer's concern is not that they will lose sales to Tesla. They fear their customers will ask for same.

I have the image of a guy in trench coat outside the dealership, "Pssst you wanna buy a Tesla?"

Does that mean the car dealers will get their cars out of Costco, the malls and art fairs?

Tiki;
48 states have dealer-only laws, with differing provisions etc. The dealer lobby has been active for a long time.

I know I would have jumped at the idea of ordering my car online with the options and features I wanted when I bought my Prius. Instead I got in line and the dealer would call me up when they got cars in, but they never matched my requirements. As it was, the car I got was my third color choice since I did not want white. I had to wait 6 months to get the car as it was.

@DouglasR

They bring the car in through large doors down by JCP, use a crane to lift it onto the upper deck, then drive it to the store.

@douglasR

No, no, no. Each of the employees at the Tesla store smuggles in what they can carry in their pockets. Then they reassemble the car in the dead of night with flashlights to avoid the all-seeing eyes of the Dealer Association.

aaronw2 - I would never have accepted that. I went through a similar process with acquiring my Golf TDI back in 2000. The dealer tried to sell me other cars. One had a sunroof and better wheels. I told them I would happily take it at the price we agreed to previously, but they wanted $1600 more from me.

Then they tried to get me into a couple of cars in different colours. I told them that was fine as long as they repainted them as part of the delivery (and without adding to the price).

Eventually they agreed to order the car from Germany and I got it about 5 months later. The only problem at that point was that they wanted to renegotiate the trade-in price for my old car. After one rather frosty conversation they reluctantly agreed to accept my trade-in at the originally agreed upon price.

Now my only ongoing problem with the dealer is that they rarely respect my parts discount. They are supposed to give me a 10% discount on parts because I bought the car from them 12 years ago. They frequently neglect to include it on their invoices and I have to ask them to reprint the invoice with the discount (they never specified a time limit on how many years the discount applied).

All that being said - I really hope Tesla's model delivers a better experience. So far things have been great with Tesla's approach. If the service after I complete my purchase is as good as the sales experience I will never want to deal with a regular dealer again. Hopefully protectionist type laws like these don't kill the model. As a Canadian who sees so much in the US press about people not wanting the government to pick winners and losers it is ironic that there are so many laws that seem designed to do that.

So BIG OIL is shaking in there boots and I wouldn't have to deal with a pushy,stinky, non-English speaking sales man that generally know less about the vehicle then you do by researching on the web pages anyhow ? I think I might add this to my favorites along with shopping online with Amazon . Good Lord why would anybody , in there right mind , be afraid of innovation especially when we need to all get away from oil all together . I cant wait for a car in the 30k range I can order on the net . Good job Tesla keep up the pressure and the innovative ideas . I advertise for you all almost daily by word of mouth.Nikola and you rule.

I am just waiting for the BS propaganda machine to come back with the numbers of car salesman jobs lost due to this change?

The big 3 were getting destroyed by foreign cars, so they used protectionist laws and the emotions of patriotic people to fight back. It's really sad that they are quietly filing suit against an American car maker, since their same old tactics won't work....

@BrianMRolfe, I don't think Tesla should ever go the route of a dealership. They are keeping their costs low and their branding on target by owning their showrooms and allowing people to buy only / get deliveries at home.
No real need to get to a point where they are stocking inventory at stores. Same applies to those arguing Tesla will at some point move to a independent franchise dealership structure. The only real reason to do so is that car companies basically move their inventory costs to a 3rd party. Once Tesla manufacturing catches up to demand, they will be in a unique position to actually do successful "just In Time" manufacturing with a 1-2 week delivery window.

@sxt173

I'd think they'd be successful with even a 3 month time frame from order to delivery.

Yes, they want that much lead time, and JIT manufacturing is exquisitely sensitive to hiccups or failures on any of its feed lines.

United States v. General Motors Corp., 384 U.S. 127 (1966) the litigation pertaining to civil action to enjoin General Motors Corporation (GM) and three associations of Chevrolet dealers in the Los Angeles area from participating in an alleged conspiracy to restrain in violation of § 1 of the Sherman Act by eliminating sales of new Chevrolets through "discount houses" and "referral services."

Held: this is a classic conspiracy in restraint of trade: joint, collaborative action by dealers, associations, and GM to eliminate a class of competitors by terminating dealings between them and a minority of Chevrolet dealers and to deprive franchised dealers of their freedom to deal through discounters if they so choose. Pp. 384 U. S. 138-148.

Retrieved on November 2, 2012 via the Internet at URL:

http://supreme.justia.com/cases/federal/us/384/127/case.html

@andrew,

I don't think that case applies. A conspiracy implies at least two parties (the dealers' association and the manufacturer), whereas in the case of Tesla, the dealers' association is acting alone. Moreover, actions to influence government (such as enforcing statutes in court or lobbying the legislature) are protected activities under the antitrust laws.

For Release: November 2, 2006
FTC Issues Staff Report on Enforcement Perspectives on
Noerr-Pennington Doctrine

The Federal Trade Commission today released a staff report by its Office of Policy Planning and Bureau of Competition that provides enforcement perspectives on the Noerr-Pennington doctrine, which precludes enforcement of the antitrust laws against certain private acts that urge government action.

“When properly applied, the Noerr doctrine serves important purposes in our representative democracy,” said Maureen Ohlhausen, Director of the FTC’s Office of Policy Planning. “Unnecessarily broad interpretations of the doctrine, however, can protect abuses of government processes and impose significant costs on consumers.”

The report provides the staff’s views on how best to apply the Noerr doctrine to conduct that imposes great risk to competition but does not further the First Amendment and government decision-making principles that underlie the doctrine. The views presented are based on recent FTC enforcement experience and the staff’s assessment of the type of issues that the Commission is likely to encounter in the future.

http://www.ftc.gov/opa/2006/11/noerr.shtm


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