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Tesla Discloses Risks of Lawsuits to Investors

November 13, 2012

PALO ALTO, Calif. — In the past month, Tesla has been slapped with lawsuits in two states for operating a showroom under its franchise. And as it awaits a ruling for preliminary injunction in Massachusetts, Tesla is trying to appease investors and the industry’s national dealer group.

In its Nov. 7 filing with the Securities Exchange Commission (SEC), Tesla warned investors that its operations in New York and Massachusetts are being threatened by state dealer associations. In New York, the dealer association there is attempting to get Tesla's dealer license revoked, while the dealer association in Massachusetts is attempting to limit its business activity in that state.

“Although we believe that Massachusetts and New York laws were not designed to prevent our distribution model, such challenges in these states, and possible similar challenges in other states, if successful, could restrict or prohibit our ability to sell our vehicles to residents in such states,” the filing read.

In an Oct. 22 blog post, Tesla Chairman and CEO Elon Musk wrote that his stores and gallery locations take advantage of educating the customer and then direct the shopper to go online, making the lawsuits “starkly contrary to the spirit and the letter of the law.”

He wrote, “Automotive franchise laws were put in place decades ago to prevent a manufacturer from unfairly opening stores in direct competition with an existing franchised dealer that had already invested time, money and effort to open and promote their business. That would, of course, be wrong, but Tesla does not have this issue. We have granted no franchises anywhere in the world that will be harmed by us opening stores.”

The National Automobile Dealers Association, however, said the laws do, in fact, suggest that the manufacturer itself should not operate a showroom. The association’s chairman Bill Underriner wrote in an e-mail that the NADA has serious concerns about Tesla’s intentions and it is seeking a meeting with Tesla executives, including Musk.

“Tesla may not yet recognize the value of the independent, franchised dealer system, but as its sales increase, the NADA is confident it will re-examine its business model,” wrote Underriner, who cited Daewoo as an example of a company who changed course to comply with existing laws.

“Over the years, other manufacturers have tried operating their own retail networks, but have concluded that the franchised new-car dealer system is the best method of serving the public for its vehicle transportation needs,” Underriner noted.

The NADA’s stance is that this is a state-by-state issue depending on specific franchise laws. "Individual state dealer associations will decide whether to proceed with legal action against Tesla Motors,” Underriner wrote. “NADA supports the franchised new-car dealer system, and will provide legal support to state dealer associations if necessary.”

Tesla also disclosed concerns in its SEC filing about its global operations, as it is registered as both a motor vehicle manufacturer and dealer in Canada, Australia, and Japan, and has obtained licenses to sell vehicles in other places such as Hong Kong and Singapore.

“While we have performed an analysis of the principal laws in the European Union relating to our distribution model and believe we comply with such laws, we have not performed a complete analysis in all foreign jurisdictions in which we may sell vehicles,” Tesla said in the SEC filing, going on to note that the company could suffer from ongoing and potential lawsuits.

“Accordingly, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that may restrict our vehicle reservation practices or other business practices. Even for those jurisdictions we have analyzed, the laws in this area can be complex, difficult to interpret and may change over time.”

Aside from the dealer operations claims, Tesla stated that its use of lithium-ion battery cells in the Tesla Roadster and the Model S was another area of concern for lawsuits since the batteries have been found to catch fire or vent smoke in Chevy Volt vehicles.

“There can be no assurance that a field or testing failure of our Model S or other battery packs that we produce will not occur, which could damage the vehicle or lead to personal injury or death…” Tesla wrote.

“We may have to recall our vehicles or participate in a recall of a vehicle that contains our battery packs and redesign our battery packs, which would be time consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle fire, even if such incident does not involve us, could seriously harm our business.”

 

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