Tesla’s Connecticut legal battle continues

December 15, 2018 GMT

GREENWICH — The white-walled Greenwich Avenue showroom sports three gleaming Tesla electric vehicles on its floor.

Visitors can take a close look at the Model S and Model 3 sedans and Model X SUV. They can check out manufacturing specs and charging locations, design their own car, schedule a test drive and purchase company-branded clothing.

But there is one caveat to the company’s only Connecticut establishment: No one can buy any of the cars there on display or any other Tesla models.

Tesla said it devised that system to comply with Connecticut’s automobile-dealerships law — but others in the industry say it is not following the rules. A Superior Court judge recently ruled the gallery was operating illegally by generating sales, a year-and-a-half after the company sued the state’s Department Motor of Vehicles for reaching the same decision. Debate about Tesla’s operations has spilled over into the state Legislature, and scrutiny would likely grow as more electric vehicles hit the road.


“The controversy is that Tesla’s entry into the automobile market threatens to upend established relationships between manufacturers and dealers,” said Robert Bird, a professor of business law at the University of Connecticut. “Tesla has the potential to create industry-changing products, and the automobile industry may not look the same if those vehicles reach a larger consumer base.”

Long-running dispute

Palo Alto, Calif.-based Tesla said it already accounts for half of Connecticut’s electric-vehicle sales, but it is keen to increase its reach. EVs still account for less than 1 percent of cars on the road in the state, according to company data.

To boost sales, the firm has implemented an unconventional strategy. None of its showrooms are franchised dealers, a framework that it has eschewed from its founding.

“Tesla has always sought to sell its vehicles directly to consumers,” Jonathan Chang, Tesla’s vice president of legal affairs, said in testimony last March to the state Legislature. “This is to ensure the best possible customer experience.”

Brick-and-mortar Tesla establishments operate in 27 states, including New York, Massachusetts, New Jersey, California, Florida, Illinois and Texas. Laws in those states dictate which stores can make on-site sales.

The Greenwich showroom debuted in September 2016. At that point, the company counted about 1,200 Connecticut-based Tesla owners.

Executives were quick to assert, however, that their business would not be selling cars from the new storefront. Visitors interested in buying could be directed to the Tesla website or one of the New York galleries permitted to make on-site sales.


Still, the Greenwich center attracted opposition — even before it opened.

In July 2016, the Connecticut Automotive Retailers Association filed a petition that sought a ruling from the DMV on the new establishment’s legality. CARA argues the establishment violates the state’s ban on direct sales to consumers from manufacturers that do not have a new-car dealer’s license.

CARA officials view Tesla as a company that frequently flouts state and federal laws. Tesla CEO Elon Musk settled for $20 million earlier this year with the U.S. Securities and Exchange Commission and resigned as chairman, after the SEC sued him for allegedly lying to investors when he announced on Twitter in August that he had “funding secured” to take Tesla private.

“Legality is probably the most important issue facing us with Tesla, given their reputation for not giving due respect to regulatory agencies,” CARA President Jim Fleming said last week. “Their management would be located outside our state, which makes regulation even more difficult.”

In April 2017, the DMV ruled that Tesla was making sales at the Greenwich showroom and would need to procure a dealer’s license to continue.

Two months later, Tesla sued the DMV and CARA. It maintained that no vehicles were sold in the gallery. The company said it had gone as far as preventing customers from placing online orders, with their own devices, while they were in the store.

Superior Court Judge Joseph Shortall disagreed. Showroom services such as test-driving scheduling and assistance with computer configurations of models that would be available to buy later exceeded constitutionally protected “commercial speech,” he wrote in his Dec. 6 decision. He also concluded that Tesla had tasked employees with building leads to be converted into customers and rewarded them for doing so.

“If Tesla was not engaged in the business of selling motor vehicles at the gallery, it’s difficult to see what it was engaged in at that location,” Shortall wrote. “The record evidence is that gallery employees educated visitors to the gallery, with the goal of selling them Teslas. So, the argument that the gallery was simply a locus for public education about the virtues of electric vehicles borders on the fanciful.”

Tesla disputed Shortall’s ruling, although it did not confirm whether it would appeal.

“We stand by our mission to educate the public and raise awareness about the benefits of EVs because getting more EVs on the road is the right thing to do for the environment and for the battle against climate change,” the company said in a statement.

The firm has overcome similar legal challenges. In 2014, a state court rejected the Massachusetts State Automobile Dealers Association’s request to shut down Tesla’s showroom in the Boston suburb of Natick.

Legislative breakthrough?

Despite Shortall’s decision, the Greenwich showroom will stay in business — for the time being, at least.

“Discussions with Tesla regarding their next steps are ongoing,” DMV spokesman Jim Carson said. “There are no plans to take any action at this time.”

Larger questions about the company’s regulation in the state, extending beyond the Superior Court case, would likely linger as the company continues to roll out new vehicles. It has accumulated more than 400,000 paid reservations for the Model 3, according to company data.

In the past few years, the state General Assembly has considered several bills to allow electric-vehicle manufacturers to sell directly to consumers. Doing so would enable the Greenwich showroom to make on-site sales. But all of those proposals have foundered.

Senate Majority Leader Bob Duff, D-Norwalk, who has sponsored such legislation, said he would support direct EV sales again “under the right circumstances” and with “an agreement negotiated.” But he does not plan on introducing a related bill in next year’s legislative session.

Tesla officials have sought to allay concerns about their sales model. It would provide buyers with the same warranty, liability and consumer protections outlined in state law, according to Chang.

The company also points to a number of economic benefits, including some $2 million in parts bought annually from Connecticut businesses, a service center in Milford and the installation of “supercharger stations” around the the state, including sites in Darien, Greenwich, Milford and West Hartford.

“There simply is no justifiable reason to exclude manufacturer-owned and operated stores, except to protect the monopolistic business interests of existing dealers from legitimate inter-brand competition,” Chang said in his March testimony.

CARA officials are unconvinced. They said allowing direct sales could cost the state thousands of dealership jobs — largely by allowing manufacturers to outsource administrative positions — and cut dealership tax revenues by millions of dollars.

There are 270 new-car dealers in Connecticut, according to CARA data. They accounted last year, directly and indirectly, for nearly 29,000 jobs and generated $310 million in state and federal income taxes.

Last year, those dealers sold more than 90 percent of the state’s electric vehicles, Fleming said.

“Our concern is that if Tesla were to come in, along with other (manufacturers) that would qualify for an exemption, they, too, would follow that direct-sale model,” he said. “Many jobs would be located outside the state. That is not economic development.”

pschott@scni.com; 203-964-2236; twitter: @paulschott