TrueCar Inc. Sued Again; Is It Playing by the Rules?

By Markets Fool.com

For every innovative product, service, or company there is always a downside: the people or businesses being disrupted lose significant business. Sometimes that means mom-and-pop stores close, sometimes it means companies are forced into bankruptcy -- basically, it's never pretty for those disrupted by innovation.

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That seems to be the case with TrueCar , which has rattled new-vehicle dealerships that aren't a part of the company's network of dealers. This has led to pushback, demonstrated by a lawsuit filed on behalf of the California New Car Dealers Association this week.

Is TrueCar playing by the rules? How will this impact TrueCar as an investment, and is there a trend to be found here? Let's dig in.

Lawsuit details
To understand how the lawsuit is attacking TrueCar, let's take a look at the company's business model first.The idea fueling TrueCar's business is simple: the company inserts itself as a middleman between millions of car buyers who visit its website and its more than 10,000 certified dealerships.

TrueCar uses its data to generate strong leads for dealerships. When a dealership seals a deal with a consumer referred by TrueCar, it writes a check to TrueCar for about $322, as of the most recent quarter.

Looking at the lawsuit itself, the California New Car Dealers Association claims TrueCar is breaking state laws regarding dealer licensing by acting as a facilitator of a vehicle sale.The dealer association represents 1,100 members and argues that under California state law, TrueCar must register as a dealer or broker -- which the state defines as a person who negotiates or attempts to negotiate a sale of a vehicle -- or stop doing business.

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So, is TrueCar playing by the rules? If history serves as any indicator, the answer is yes.

The California Legislative Counsel Bureau concluded that the operation of such a Web-based service "does not constitute autobrokering" and the company or operator of said service "is not a dealer," TrueCar said in a press release responding to the lawsuit.

"It is telling that the lawsuit was filed by a trade association and not by any actual California dealers, consumers, or governmental agency charged with the responsibility for enforcing the very laws that are at issue in the lawsuit," TrueCar added. "We believe the reason is simple: TrueCar operates in compliance with California law."

What's the impact?
Chances are this lawsuit will have zero impact on TrueCar as an investment. However, investors should keep in mind that this will be a continuing theme as an increasing number of consumers go online to shop for vehicles. There will inevitably be resistance from brick-and-mortar dealerships that are left behind.

This isn't the first lawsuit against TrueCar, either. Earlier this year, 117 new-car dealership franchises sued the company for more than $250 million in total, alleging that they are each losing three to seven vehicle sales per month because of TrueCar's advertising and sales leads for its dealership network.

The trend here is that dealerships outside of TrueCar's network are upset that their business is being disrupted by the young company. But at the end of the day, whose fault is that?

"TrueCar only exists because of our past sins," Brendan Harrington, president of Longo Toyota in El Monte, Calif, told Automotive News. "So we as an industry have to get better."

The article TrueCar Inc. Sued Again; Is It Playing by the Rules? originally appeared on Fool.com.

Daniel Miller owns shares of Apple and TrueCar. The Motley Fool recommends Apple and TrueCar. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.