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Will franchising help alleviate Tesla's legal woes?

Did you know that in the United States, direct to consumer sales of motor vehicles are prohibited by franchise law? If you said no, you're not alone. As complicated as business law may seem, franchise law adds a whole other level that can blindside a growing company or business if they're not careful. Our Pasadena readers can see this happening with Tesla Motors at this very moment.

If you've been paying attention to the news over the last few months then you may already be familiar with the legal dispute that has pit the quickly growing Tesla Motors against several states who claim that Tesla's direct to consumer sales model is in violation of several state franchise laws. While some cases have led to litigation others have resulted in state orders that ban the sale of the company's electric vehicles.

If the hold up on sales involves perceived violations of franchise law, then would franchising help alleviate Tesla's legal woes? The answer is both yes and no. Though it may prevent further states from banning sales, the process of franchising will not be an easy one, especially because not every state has the same governing laws.

Take for example our own state. California's Automobile Franchise Act "requires an automobile manufacturer to obtain approval of the California New Motor Vehicle Board (Board) before opening or relocating a retail dealership within the market area of an existing franchisee if the latter protests." This means that Tesla will need to be careful about which dealerships it allows to sell its vehicles so that it does not violate the law.

Tesla will also have to check laws to determine how its manufacturing plant, located in Fremont, will be affected as well.

Although Tesla announced recently that it is considering a hybrid franchise model, it's unknown how soon this new model would take to implement. Establishing a franchise and working out specific agreements can and will take a lot of time. Agreements will need to be tailored to state-specific laws, requiring extensive legal knowledge to smooth out the kinks.

In the end, resolving this legal dispute will give Tesla the opportunity to continue expanding and growing as a company.  That will only happen through carefully understanding the requirements and limits of franchise law.

Sources: Entrepreneur, "Will Tesla Have to Franchise?" Kate Taylor, Nov. 19, 2014

The American Bar Association, "Has the Traditional Automobile Franchise System Run Out of Gas?" Roger M. Quinland, Accessed Nov. 20, 2014

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