Dealers call Tesla factory stores illegal
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After opening several stores without much pushback, Elon Musk's ambition to replicate the Apple experience in Tesla factory stores is now facing potential roadblocks.
Dealer associations in a handful of states, and state regulators in at least one case, say Tesla's stores violate state franchise laws that prohibit factory ownership of dealerships. Electric-vehicle maker Tesla now operates 17 stores in 10 states and the District of Columbia, most in shopping malls. Another six are scheduled to open this fall.
The protesting dealer associations say Tesla's factory-owned stores present unfair competition for rival dealerships, are inconvenient for consumers needing repairs and, if left unchallenged, ultimately threaten the franchise system.
"If a manufacturer sees that Tesla is successful with this kind of business model, who's to say they don't break out their own EV product lines and create a separate system that bypasses dealers?" said Bob O'Koniewski, executive vice president of the Massachusetts State Automobile Dealers Association. "It's extremely problematic."
The New York State Automobile Dealers Association, concerned about just such an occurrence, recently asked dealer lawyer Leonard Bellavia to write a report for an upcoming newsletter on the threat of BMW using a direct-to-consumer model to retail its upcoming i-car line of electric vehicles. BMW has said it intends to distribute its i-cars through U.S. franchised dealers.
Tesla says it is doing whatever it takes to comply with state and local laws.
"We do what we're capable of doing, and we do whatever they let us do," said George Blankenship, Tesla's vice president of sales. "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."
Blankenship, the former Apple executive who developed that company's much-coveted retail network, is trying to replicate Apple's soft-sell, product-focused atmosphere in Tesla stores. Company employees can present the Tesla story better than independent dealers, he has said. Tesla opened its first store in Los Angeles in 2008.
 | Blankenship: “We do what we’re capable of doing.” |
Hot points
Concerns have cropped up in at least four states.
• In Illinois, the Secretary of State's office told Tesla officials in a meeting on Sept. 28 that the EV manufacturer is breaking Illinois law by listing company founder and CEO Musk as the owner of its suburban Chicago store. Tesla officials said they would correct the problem and asked for 30 days to respond, said Jay Mesi, deputy director of the Secretary of State's Department of Administrative Hearings.
"We're not looking to put someone out of business," Mesi said.
• In New York, the association representing New York City metro dealers is exploring options to challenge Tesla's store in Westchester, which opened in May. That store and two others in New York violate state law, said Stuart Rosenthal, general counsel for the Greater New York Automobile Dealers Association.
The association filed a lawsuit in 2010 against Tesla and the New York Department of Motor Vehicles that challenged the legality of Tesla's first New York store in Manhattan that opened in 2009, Rosenthal said, but it was thrown out because it was filed after a statute of limitations had expired.
• In Massachusetts, the state dealers association will continue to challenge the legality of a store that opened in the Boston suburb of Natick on Sept. 28, O'Koniewski said. The association filed a protest this year with the city of Natick for approving Tesla's store license.
Tesla told city officials that the store wouldn't conduct sales, but O'Koniewski said selling activity goes beyond executing a contract and includes product presentation and directing shoppers to Tesla's Web site.
"Anything that gets you to the executed contract is part of the sale," he said.
• In Oregon, the state dealers association informally asked the Oregon Department of Transportation's Driver and Motor Vehicles Services Division to review the validity of the dealer license granted for Tesla's Portland store. Division spokesman David House says Tesla submitted everything required for a license but noted that his division doesn't determine whether a license holder complies with state franchise law.
Greg Remensperger, executive vice president of the Oregon Automobile Dealers Association, says the association is exploring options to further challenge Tesla's store. "As we feel the law is written, it should not allow them to be able to have a retail facility," he said.
48 states
In some states, such as Texas, questions remain over how Tesla may operate. In other states, Tesla clearly complies with state law.
In California, where Tesla opened its first store in 2008, manufacturers can operate dealerships as long as they're not within 10 miles of a same-brand store owned by a private-capital dealer, said Peter Welch, president of the California New Car Dealers Association. Since Tesla has no private-cap dealers, its stores comply.
In Colorado, where Tesla also opened an early store in 2009, the store is legal under a grandfathering provision, said Tim Jackson, president of the Colorado Automobile Dealers Association. The state has since updated its franchise law to prohibit factory stores, so Tesla would not be able to open a second store in the state, Jackson said.
The National Automobile Dealers Association says 48 states prohibit or restrict factory ownership of dealerships. NADA issued a statement saying that the franchised new-car dealer system is the best way to distribute vehicles.
"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 the statement. "Other companies such as Daewoo did. All companies should be complying with existing laws in the same way dealers are required to."
Tesla says it is focused on providing a great customer experience and is not trying to change the auto retailing industry.
"That's the last thing on our agenda," Blankenship said.
"We just want to locate in high-traffic locations and interact with people when they are specifically not thinking of buying a car,'' he said. "We have no motivation to change the laws or how the car industry does its business."
Mark Rechtin contributed to this report
Stores open in: Arizona, California, Colorado, District of Columbia, Florida, Illinois, Massachusetts, New York, Oregon, Texas, Washington
Challenges or concerns in: Illinois, New York, Massachusetts, Oregon
Stores scheduled to open in: New Jersey, Virginia
Source: Tesla, Automotive News
You can reach Amy Wilson at awilson@crain.com.
