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Car Dealers Sue Tesla, Citing State Franchise Laws

Nov 9, 2012
Originally published on November 9, 2012 12:46 pm

Tesla Motors usually makes headlines for its technology. Its new Model S is the first entirely electric vehicle to be named car of the year by Automobile Magazine.

Friday's news is less flattering: A judge in New York will take up a lawsuit against the company about how Tesla sells its cars.

When Mark Seeger bought a Tesla in Seattle, he was actually just looking for a pair of shoes.

"I was looking for a Banana Republic 50 percent-off sale," he says. "I had no intention of going into Tesla or buying a car that day."

Then he walked past Tesla Motors' Bellevue, Wash., showroom. It's one of a handful of Tesla's company-owned stores. Within five minutes, he'd put down a deposit for an electric car that costs more than $50,000.

"This is the most expensive impulse buy I've ever done," he says.

This isn't a typical sale for Tesla Motors, but according to car dealers in Massachusetts, if it had happened there, it would have been illegal.

The issue is that Tesla sold the car through its own store, instead of through a local dealership.

Robert O'Koniewski, the executive vice president of the Massachusetts State Automobile Dealers Association, is suing Tesla for opening a store in a local mall.

In Massachusetts, franchise law 93B prohibits a manufacturer from owning a dealership, O'Koniewski says. An auto dealer association in New York is also suing Tesla.

Typically, car manufacturers build the cars, then ship them out to local car dealers, which have to meet the various manufacturers' standards.

Manny Quinones is a sales manager at one of those dealers, Manhattan Motorcars in New York.

"We're multibrand, so we have brand-specific showrooms," he says.

Each brand represents another manufacturer that can require expensive equipment and training. Not having to meet those various needs, O'Koniewski says, gives Tesla an unfair advantage.

"Those dealers are investing millions of dollars in their franchises to make sure they comply with their franchise agreements with the manufacturers," he says. "Tesla is choosing to ignore the law and then is choosing to play outside that system."

Tesla insists it isn't breaking the law, in Massachusetts, New York or anywhere else. But it is clearly trying to play outside the franchise system.

Jeremy Anwyl, vice chairman of Edmunds.com, thinks that's the real issue.

"Let's say consumers really liked buying from a factory store. That would put dealers in a tough spot because they've been saying for years that the franchise system is actually good for customers," he says.

And if customers like the Tesla model, then the franchise system — and the laws that prop it up — could be in trouble.

"If you step back, why do we have these laws? Well, the dealers would argue, 'Well, we made a big investment, so we deserve to be protected,' " Anwyl says. "But travel agents made a big investment, and they didn't get any protection."

Right now, there are only a few thousand Teslas on the road. But if they become more mainstream — as Tesla plans — they could be a model for other manufacturers. Much of that will depend on how Tesla is able to handle the things dealers do now, like service. New Tesla owner Seeger, for one, isn't worried — because the Tesla is a simpler kind of car.

"An engine is very complex — lots of hoses and belts and pulleys and God knows what, wires," he says. "The Tesla has a motor and a single-speed transmission and four wheels. That's kind of it."

Then again, he's still waiting in line to receive his first Tesla.

"I'm number 11,100 and I believe 97 for the Model S," Seeger says.

His second Tesla, the Model X, won't be out until 2014. Maybe by then the legal battles over Tesla's showrooms will be resolved.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

Tesla Motors often makes headlines for its technology: its new Model S, for instance, is the first entirely electric vehicle to be named "Car of the Year" by Automobile Magazine. But today a judge in New York will take up a lawsuit against the company that has nothing to do with engineering; it's about how they sell the cars.

Stan Alcorn has the story.

STAN ALCORN, BYLINE: Mark Seeger was in the Seattle area for work, land he was looking for a pair of shoes.

MARK SEEGER: I was looking for a Banana Republic 50 percent off sale. You know, I had no intention of going into Tesla or buying a car that day.

ALCORN: But then he walked past Tesla Motors' Bellevue, Washington showroom. It's one of a handful of Tesla's company-owned stores. Within five minutes he'd put down a deposit for an electric car that costs more than $50,000.

SEEGER: This is the most expensive impulse buy I've ever done.

ALCORN: Now this isn't a typical sale for Tesla Motors. But according to car dealers in Massachusetts, if it had happened there, it would have been illegal. The issue is that Tesla sold the car through its own store, instead of through a local dealership.

Robert O'Koniewski is the executive vice president of the Massachusetts State Automobile Dealers Association, which is suing Tesla for opening a store in a local mall.

ROBERT O'KONIEWSKI: 93B is the franchise law, is the auto dealer franchise law, which prohibits a manufacturer from owning a dealership in Massachusetts.

ALCORN: To understand that law, you have to know how car sales typically work. A car manufacturer - Porsche, for example - builds a car. Then they ship it out to the local dealer - Manhattan Motorcars, for example.

Manny Quinones is a sale manager there.

MANNY QUINONES: Right. Well, we're multibrand, so we have brand-specific showrooms. Yeah, this showroom meets the Porsche standard.

ALCORN: Not having to do that, gives Tesla an advantage that, according to O'Koniewski of the Dealers Association, is more than unfair.

O'KONIEWSKI: Those dealers are investing millions of dollars in their franchises to make sure that they comply with their franchise agreements with the manufacturers. Tesla is choosing to ignore the law and is choosing to then try to play outside that system.

ALCORN: Tesla insists it isn't breaking the law, in Massachusetts, New York or anywhere else. But it is clearly trying to play outside the franchise dealer system.

Jeremy Anwyl is vice chairman of auto website Edmunds.com, and he thinks that's the real issue.

JEREMY ANWYL: Let's say that consumers really liked buying from a factory store. That would put dealers in a tough spot because they've been arguing for years that the franchise system is actually good for customers.

ALCORN: If customers prefer the Tesla model, the franchise system - and the laws that prop it up - could be in trouble.

ANWYL: So if you step back, why do we have these laws? Well, you know, the dealers would argue well, we made a big investment so we deserve to be protected, but, you know, travel agents made big investments in their travel agency and they didn't get any kind of protection.

ALCORN: Now, there are only a few thousand Teslas on the road. But if they become more mainstream - as they plan to - they could become a model for other manufacturers. And a lot will depend on how they're able to handle the things that dealers do now. Like service. Mark Seeger, for one, isn't worried - because the Tesla is a simpler kind of car.

SEEGER: You know, an engine is very complex; lots of hoses and belts and pulleys and god knows what, wires. The Tesla has a motor, a single speed transmission and four wheels. That's kind of it.

ALCORN: Then again, he's still waiting in line to receive his first Tesla.

SEEGER: I'm number 11,100 and I believe 97 for the Model S.

ALCORN: And his second Tesla, the Model X, won't be out until 2014. Maybe by then the legal battles over Tesla's showrooms will be resolved.

For NPR News, I'm Stan Alcorn in New York. Transcript provided by NPR, Copyright NPR.