Tesla faces California sales halt over marketing of autopilot

(Bloomberg/Madlin Mekelburg, Dana Hull and Kara Carlson) — Tesla Inc.’s car sales in California are poised to be suspended for 30 days over marketing practices that allegedly mislead consumers about the automated-driving capabilities of its vehicles.

The California Department of Motor Vehicles said Tuesday the suspension won’t take effect for 90 days to give Tesla time to appeal or come into compliance. The agency accused the company of exaggerating the abilities of features marketed as Autopilot and Full Self-Driving, and had asked an administrative judge to weigh whether a suspension is warranted.

“We’re really asking Tesla to do their job, as they’ve done in other markets, to properly brand these vehicles,” Steve Gordon, director of the California DMV, told reporters. He said in a statement the company can take “simple steps” to resolve the issue permanently.

A suspension of Tesla’s sales license would be a major blow to the Austin-based company. California is the biggest market for car sales in the US and the leading state for electric vehicle adoption, making even a temporary disruption potentially costly. Tesla registered more than 135,00 new cars in California through the first nine months of this year, equivalent to about 11% of the number of vehicles it delivered worldwide during that span.

Lawyers for Tesla sought to fend off the DMV’s disciplinary action by arguing that its advertising is protected free speech under the First Amendment of the US Constitution. The attorneys also accused the regulator of taking the marketing statements out of context and failing to account for Tesla’s warnings and disclosures about its driver-assistance systems.

“This was a ‘consumer protection’ order about the use of the term ‘Autopilot’ in a case where not one single customer came forward to say there’s a problem. Sales in California will continue uninterrupted,” Tesla said in a statement that didn’t provide more details.

In her written decision, the judge also recommended suspending Tesla’s manufacturing license for 30 days, but the regulator stayed that order. The company’s massive car plant in the San Francisco Bay area has the capacity to produce more than 650,00 vehicles a year, second only to its factory in Shanghai.

Tesla shares declined as much as 2.2% on the news in post-market trading Tuesday. The stock traded down as much as 0.6% before the open Wednesday.

Years of Scrutiny

Tesla has faced years of scrutiny from federal prosecutors, securities regulators and the National Highway Traffic Safety Administration, plus lawsuits by consumers and investors, over how its driver-assistance features are marketed, used and perform. Both Autopilot and the system Tesla calls Full Self-Driving, or FSD, require active human supervision and thus don’t make its vehicles autonomous.

Tesla recalled 2 million vehicles in 2023 after NHTSA, the top US auto-safety regulator, determined Autopilot didn’t do enough to guard against driver misuse. The agency still has an open investigation into the effectiveness of the software update Tesla deployed to address safety concerns, and it’s probing FSD over traffic violations and multiple crashes, one of which resulted in a fatality.

Tesla sustained its first significant Autopilot-related loss in court in August, when a Miami jury said it should pay $243 million in damages after finding the system partially responsible for a fatal crash.

Chief Executive Officer Elon Musk has nevertheless billed Teslas as the safest cars ever made. He’s increasingly staked the company’s future on developing autonomous-driving technology and confirmed this week the company was starting to test the ability of its vehicles to navigate Austin roads without any occupants.

California Proceedings

California alleged that Tesla violated state law by making untrue or misleading statements in 2021 and 2022, including advertising that its cars would be “able to conduct short and long-distance trips with no action required in the driver’s seat.”

An amended complaint by the DMV filed in November 2023 said Tesla vehicles equipped with driver-assist technology “could not at the time of those advertisements, and cannot now, operate as autonomous vehicles.”

The agency argued that these actions justified the suspension or revocation of Tesla’s dealer and manufacturer license in the state, initiating a lengthy regulatory proceeding within the California Office of Administrative Hearings. A five-day hearing was held in July.

When a regulator like the DMV wants to discipline a license holder, they often need approval from an administrative law judge. While the cases are not the equivalent of full-fledged civil or criminal proceedings in a state or federal court, the judges still hear evidence and review filings from both parties before making a decision.

It’s rare for the DMV to take drastic action against manufacturers, but not unprecedented. In 2023, the agency pulled the license for General Motors Co.’s driverless-car business Cruise in the wake of an incident in San Francisco where a vehicle ran over and dragged a pedestrian initially hit by a separate vehicle.

Economic Ramifications

Tesla had warned that any decision limiting its ability to manufacture or sell vehicles would have major consequences for the state’s economy, given the company employs more than 33,000 people at its production plant and its 60 retail stores and galleries.

The move by California could have nationwide implications for Tesla’s efforts to expand its businesses selling advanced technology in its vehicles, said Haris Khurshid, chief investment officer at Karobaar Capital.

“If regulators slow Tesla’s autonomy claims there, it directly affects how fast the AI story turns into real revenue,” Khurshid said. “Tesla can still win long term, but rulings like this widen the gap between hype and deployment.”

Musk, the world’s richest person, has long had a strained relationship with California. He feuded with the state’s Democratic leaders over governance decisions, tax rates and other matters before moving Tesla’s corporate headquarters from California to Texas in 2021.

The California DMV case is In the Matter of the First Amended Accusation Against: TESLA, INC, 21-02188, Department of Motor Vehicles, State of California.

–With assistance from Jordan Fitzgerald.

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