Among the many differences between Tesla and traditional automakers, Tesla does not sell or service its electric cars through franchised dealers; it sells direct to consumers. Recent legal challenges to Tesla's direct-to-consumer sales model highlight an auto maker's hurdles in selling through its own subsidiaries.

The Utah Supreme Court upheld an agency ruling that Utah's Motor Vehicle Business Regulation Act (the "Licensing Act") and New Automobile Franchise Act (the "Franchise Act") combined to prohibit a Tesla subsidiary from selling new Teslas in Utah showrooms. The relationship between Tesla and its subsidiary was found to be a "franchise" under both statutes, and was barred by the Franchise Act's prohibition against subsidiary relationships.

At first, the subsidiary applied for a required new car dealer license to sell Tesla vehicles at a Salt Lake City showroom. Its application was denied for not having a "franchise" to sell the vehicles, as required by the Licensing Act. The subsidiary responded by entering into a "dealer agreement" with Tesla and reapplying for the dealer license.

The dealer agreement sought to create the required "franchise" relationship needed to satisfy the Licensing Act. Unfortunately for Tesla, the Franchise Act prohibits a franchisor from owning an interest in a new car dealer. Therefore, to avoid creating a "franchise" relationship of the kind that would be subject to the Franchise Act, the agreement prohibited the subsidiary from using the Tesla name.

The court noted the subsidiary was caught "between the rock of the Licensing Act and the hard place of the Franchise Act." Either it lacked the franchise with Tesla required by the Licensing Act, or it was a franchise in conflict with the Franchise Act's prohibition against owning an interest in a new car dealer.

A "franchise" under the Licensing Act is simply "a contract or agreement between a dealer and a manufacturer . . . by which the dealer is authorized to sell any specified make or makes of new motor vehicles." The court ruled that the subsidiary had such a contract.

The Franchise Act was more complex. The first element of a "franchise" is a "license to use a trade name, trademark, service mark, or related characteristic." This requirement was satisfied by the subsidiary's use of Tesla's trademarks. The dealer agreement's disclaimer of a franchise relationship could not be reconciled with the "reality of the relationship" between Tesla and its subsidiary. The second element of a franchise -- a "community of interest" in marketing new cars, was also present because Tesla and its subsidiary had a unity of interest in selling Teslas.

The court said it issued a "narrow, legal decision" that did not rule on "broad policy questions" about how cars should be sold. The Court stopped short of deciding whether Tesla itself was barred from obtaining its own dealer license. A car maker could presumably do so, but the practical and legal effects of Tesla selling direct to customers without the protection of using a subsidiary are likely to leave Tesla between the proverbial rock and hard place.

Read: Tesla Motors UT, Inc. v. Utah Tax Commission