California Dealers Say Scout’s Direct Sales Model Is Illegal

The powerful California New Car Dealers Association (CNCDA) has asked Scout to stop taking refundable deposits for the two electrified off-roaders it unveiled in October 2024. The group claims that Scout’s plan to sell the Traveler SUV and the Terra pickup directly to buyers is both illegal in California and wrong.

CNCDA, whose stated goal is to “protect both the franchise system and California consumers while promoting legal and ethical business practices,” claims that Scout’s direct sales model is a violation of California Vehicle Code section 11713.3(o), a recently adopted law that prohibits manufacturers from competing with their franchisees. The accusation hinges on the company’s ties to Volkswagen.

Volkswagen stresses that Scout Motors operates as an independent entity, according to industry trade journal Automotive News (subscription required). If that’s the case, it’s exempt from the law highlighted by the CNCDA. However, a cease-and-desist letter written by Los Angeles-based law firm Glaser Weil on behalf of the dealer body argues that Scout is considered an affiliate of Volkswagen under California law.

“Since as early as 2022, Volkswagen has been directly and substantively involved in Scout’s development and revitalization of its vehicles, including Volkswagen’s investment of billions of dollars into a Scout production plant in South Carolina,” the letter states. It adds that Scout’s ties to Volkswagen make the direct sales model illegal because the law clearly bans carmakers from competing with their own dealers.

What about Tesla? The brand remains allowed to sell cars directly to buyers because it doesn’t have a dealer network and never did. It’s not competing against franchise owners. The letter says that Scout, on the other hand, either needs to sell cars through its own dealer network or through Volkswagen stores to avoid breaking the law. The letter adds that selling Scout models through another Volkswagen-owned brand’s dealer network, like Lamborghini, would be acceptable, though we don’t see that happening.

Reading between the lines suggests that dealers are worried about missing out on an additional product to sell. “[The] current plan to sell Scout vehicles directly to consumers in California wrongfully cuts new and existing Volkswagen dealers out of an opportunity to sell Scout vehicles,” the letter points out.

Scout started taking $100 refundable deposits for the Traveler and the Terra on October 24, 2024. Both models are tentatively scheduled to enter production in a new facility located in South Carolina in 2027.

This could ultimately snowball into a big deal. The CNCDA threatened to take immediate legal action if Scout doesn’t stop collecting deposits from California residents. If the matter lands in court, Scout could end up fighting an expensive legal battle before it can sell vehicles in the nation’s largest EV market. Numerous other states ban the direct sales model, including Alabama, Kansas, South Carolina, and Texas. Several others, such as Maryland and New York, place a cap on the number of direct sales outlets.

Scout told Automotive News that it has “sole oversight for engineering, design, and manufacturing” of its vehicles, and it refused to comment on the cease-and-desist letter. It directed all inquiries to Volkswagen of America, which gave Automotive News the “no comment” line. We’re guessing the war is far from over.