Tesla’s Direct Sales Model Helps It Thwart Customer Lawsuits

Until last month, a class-action lawsuit by Tesla owners looked as if it would reveal new details about the carmaker’s self-driving technology, which has been blamed for serious accidents and deaths.

But then Tesla deployed a legal strategy that has allowed it to avoid the kind of attention-grabbing lawsuits other carmakers regularly contend with. The company asked a judge to send the case to an arbitrator, who would hear it in private.

Tesla’s gambit is likely to succeed because of a provision in the contracts that the company’s customers agree to when they buy electric cars from the company.

Disputes between buyers and Tesla “will not be decided by a judge or jury but instead by a single arbitrator,” the agreement says. In other words, buyers with grievances must give up their constitutional right to a trial in front of a judge and jury. Instead, their cases must be heard by an arbitrator paid for by Tesla.

The contract language is an example of a long-running trend that legal scholars say has denied thousands or millions of people their day in court. Arbitration clauses buried in the fine print are widely used by businesses like banks, cable companies and nursing homes.

But forced arbitration had been rare in the auto industry.

Tesla is able to use arbitration more widely than its rivals because it sells cars directly to buyers. Established carmakers like General Motors, Ford Motor and Toyota sell through dealers and are less likely to have a direct contractual relationship with buyers.

Conceived as a way to avoid costly litigation and relieve overburdened courts, arbitration has evolved into a system that favors corporations and leaves consumers little recourse, consumer groups and legal scholars say. Cynthia Estlund, a professor of law at New York University, calls arbitration a “black hole” because it helps companies make complaints effectively disappear. That’s because arbitrators, often retired judges, typically hear cases in private, unlike courts open to the public.

And arbitration clauses usually prohibit people with grievances from banding together in class-action suits to share the costs of lawyers, expert witnesses and so on.

A Tesla owner whose bumper falls off or trunk latch malfunctions must file a complaint as an individual, even if hundreds of other people have the identical problem. In most cases, the cost of pursuing claims in arbitration exceeds the potential payoff, discouraging filings.

“It’s considered a get-out-of-jail-free card” for corporations, said Shannon Liss-Riordan, a Boston labor lawyer whose clients include Tesla employees who say that the company laid them off this year without giving them adequate notice. In October, a federal judge in Texas dismissed a class-action suit by the workers, accepting Tesla’s argument that the employees had signed binding arbitration agreements. (Other automakers such as Toyota also make at least some of their employees sign contracts with binding arbitration clauses.)

In the class-action suit about Tesla’s self-driving system, filed in federal court in California, customers are asserting that the company cheated them by exaggerating the capabilities of its technology.

One of the plaintiffs in the suit, Thomas LoSavio, a resident of Hillsborough, Calif., said he paid $8,000 above the list price for optional self-driving software when he bought a new Tesla Model S in 2017, according to court documents. But he and other owners say the technology never delivered the level of autonomous driving promised by Elon Musk, the Tesla chief executive. On the contrary, it has been implicated in fatal crashes, the lawsuit claims.

Tesla argues that buyers knew that performance of the self-driving software depended on future advances in technology. “Since 2016, Tesla has made good on its promise by continuously improving the software and deploying it to customers via over-the-air software updates,” the company said in court documents in November.

Then Tesla filed a motion to force most of the owners to pursue their claims individually through arbitration.

The judge in the case, Haywood S. Gilliam Jr., has not yet ruled on the motion. But the Supreme Court has given corporations a broad mandate to enforce arbitration agreements.

Arbitration prevents the public from learning which vehicles have quality problems, said Gretchen Freeman Cappio, a partner at Keller Rohrback, a firm that has been involved in many lawsuits against automakers. “It makes you wonder what vehicle manufacturers are afraid of becoming public,” she said.

This year, inspired by the #MeToo movement, Congress banned forced arbitration for employees claiming sexual harassment or sexual assault. But for consumers and workers with other complaints, it remains ubiquitous.

Tesla buyers can opt out of arbitration, and preserve their right to a trial, by sending a letter to the company within a month of buying a car. But few are aware of or exercise that option, plaintiff’s lawyers said.

Tesla and its lawyers did not respond to requests for comment.

The American Arbitration Association, a nonprofit group that provides arbitration services to Tesla and other corporations, said in a statement that it “has implemented various procedures aimed at providing a fair and equitable forum for the resolution of consumer disputes,” including a $200 limit on filing fees. The organization says it resolves consumer cases more than three times as fast as federal district courts.

In recent years, some lawyers who represent consumers or employees have found a way to get around arbitration clauses. Lawyers recruit hundreds or thousands of clients with identical complaints and help them file individual claims in return for a cut of any judgment.

The practice is similar to a class action, but more costly in part because of filing fees and the logistics of managing so many claims. For that reason, such mass arbitrations make financial sense only when customers can expect to collect at least $1,000 or so apiece in compensation.

“Mass arbitration is not a magic bullet,” said Warren Postman, managing partner of Keller Postman, which used the approach to pursue claims by DoorDash couriers that they had been underpaid.

Consumers with smaller claims still fall through the cracks. And mass arbitrations remain largely confidential.

Ms. Liss-Riordan, the Boston labor lawyer, said she planned to use the strategy on behalf of the laid-off Tesla workers.

Arbitration does not protect Tesla from lawsuits by people who are not employees or customers. Tesla has been sued by shareholders and by victims of accidents involving Teslas owned by other people.

Still, Tesla’s relative immunity from consumer and employee litigation gives it a financial advantage over more established automakers. Since the end of 2017, the American Arbitration Association has handled 21 consumer complaints against Tesla, awarding a total of $280,000, according to the group’s data.

The association does not disclose what Tesla owners complained about, but they typically sought damages in the tens of thousands of dollars.

By comparison, Ford Motor agreed in 2019 to pay $17 million to owners who complained about defects in their cars’ entertainment systems. And Volkswagen agreed to pay $15 billion to owners of diesel vehicles with illegal emissions systems.

Ford and Volkswagen have sold many millions of cars over the years, while Tesla sold fewer than one million last year. Even taking into account the difference in the number of cars produced by Tesla and its competitors, legal experts said the company’s use of binding arbitration appeared to have saved it a lot of money.

Recently other automakers have also been trying to deploy the same legal force field.

Ford and others have begun inserting arbitration agreements into contracts for car loans from their credit divisions. In at least one case, in which owners of Ford F-150 pickup trucks claimed that defective V-8 engines consumed a lot of engine oil, a federal judge ruled that those agreements could be used to force buyers into arbitration.

Ford maintains that arbitration is a better way to resolve disputes. Resolution of claims “should be fair, fast, efficient and proportional to the dispute,” Ian Thibodeau, a Ford spokesman, said in an email. “Arbitration often achieves those goals faster and more effectively than the court system.”

In another recent case, though, a federal judge in Illinois denied a motion by Subaru to compel arbitration for an owner who had signed an arbitration agreement with a dealer. The owner claimed her privacy was violated by Subaru technology designed to tell whether drivers are being attentive. The judge ruled that an agreement between the dealer and the buyer did not apply to disputes with the manufacturer.

Because of its direct sales model, Tesla stands apart from much of the industry, lawyers said.

“Tesla appears to be unique among car companies in their use of arbitration clauses to avoid responsibility in courts of law,” said Donald Slavik, who represents Derrick Monet, whose wife, Jenna Monet, was killed when their Tesla hit a parked fire truck on I-70 in Indiana.

A lawsuit by Mr. Monet, who was seriously injured, attributed the crash to Tesla’s Autopilot system, which can steer, brake and accelerate a car on its own. Tesla, which is contesting the lawsuit, has not yet tried to force the case into arbitration. The company has maintained that Autopilot improves the safety of its cars.

Kristin Hull, chief executive of Nia Impact Capital, an investment firm, has pushed Tesla to eliminate forced arbitration for employees, arguing that it conceals problems investors should know about. In August, almost 40 percent of shareholders supported a resolution proposed by Nia that would have instructed Tesla to study whether forced arbitration affects employees’ ability to seek redress for discrimination or other complaints.

“As investors we don’t have any insight into company culture and what is happening,” Dr. Hull said. “Managers aren’t held accountable.”