You've probably heard of money laundering. There is also something called "lemon laundering." This practice consists of automakers trying to avoid lemon laws in order to resell defective cars they were obliged to buy back. Multiple automakers were busted doing this in the past. Now, lawyers and consumer protection entities suspect Tesla is doing the same. And they say they have evidence – some of them related to goodwill repairs.
Lemon laws, which vary by state, are rules that oblige carmakers to make up for chronically defective vehicles. In case these cars cannot meet quality and performance standards, their manufacturers have to compensate their affected customers. That compensation usually comes in the form of a buyback.
In order for this repurchase to happen, there usually needs to be a reasonable number of unsuccessful repair attempts for a given defect. These attempts also have to occur within the warranty period. Another requirement is that customers spent more than 30 days without their cars.
Apart from having to repurchase the defective vehicles, manufacturers also have to warn future buyers about the lemon condition of these cars, which can be almost as bad as a salvage title. With the depreciation lemons suffer, it's easy to understand the incentives carmakers have to do what NCLC – the National Consumer Law Center – defines as fraud.
Is this a private practice from Tesla? Far from it. Chrysler has two famous cases. The first happened in New York in 1988. The attorney general there managed to reach a settlement with Chrysler that got the carmaker to pay $2 million in damages to 400 clients. That's the equivalent of $4.3 million today, according to the US Inflation Calculator.
The second one happened on May 24, 1994. Two Alabama clients – James and Suzanne Carter – sued the company for selling them a lemon. Chrysler had a deal with Alabama's attorney general office not to sell lemons in that state: they were sold in states where lemon laws didn't exist. Chrysler also erased computer records that would allow people that eventually bought these cars to discover they were lemons. All that came up due to the lawsuit.
General Motors helped create the expression "lemon laundering" when it sold Gayle Pena a 1989 Suburban in 1990. She and her husband almost died when the car's brakes failed. Before buying it, they were told a GM executive used to drive the vehicle. They eventually discovered it belonged to a couple that had more than 20 work orders on the brakes alone.
Chrysler and GM are just two of the many companies involved with lemon laundering, as this 2007 article from the New York Times shows.
That doesn't mean Tesla is entitled to follow a similar path just because legacy automakers have. As a new automaker often credited with doing things differently, we would expect Tesla to end that bad lemon car tradition. So would Bernard Brown, a national expert in consumer law with more than 40 years of practice in Missouri and Kansas.
"Tesla appears likely to be living down to the practices that have long been rampant in the industry. Or perhaps it is showing the traditional manufacturers how to be even better at this slimy practice. I really don't have numbers of cars that Tesla has bought back, but it sure appears obvious that there have been a lot of these buybacks, and everything we're seeing just has a stench rising out of it."
Brown was one of the first specialists we contacted to talk about Tesla calling its warranty repairs "goodwill." He and Rosemary Shahan, president of CARS – Consumers for Auto Reliability and Safety, connected the dots between the "goodwill" repairs and lemon laundering. We also consulted with Dani K. Liblang, a Michigan attorney focused on lemon cars since she purchased one herself as a law student in the early 1980s.
Before these experts gave us the lemon laundering perspective, though, the most likely explanation for the goodwill repairs was an article written by Montana Skeptic, a famous Tesla short-seller. He claims that labeling warranty repairs as "goodwill" is a way Tesla found to cheat its financial results.
This would happen because warranty costs are included in financial results as "Cost of Revenue," a number that affects gross profit and net income, according to that article. Instead of naming them as such, Tesla would say they are goodwill repairs, so these expenses would appear as "Operating Expenses," which get diluted in the company's results for as long as the car is under warranty.
The article also points out a contradiction: although Tesla claims the repairs are not due to warranty issues, but to goodwill, they are only performed while the cars are under warranty.
We are not accounting specialists and know Montana Skeptic will make money in case Tesla fails, but his hypothesis seemed like a valid financial reason – and we know Tesla has profit goals – to change the repair classification. Which – regardless of anyone's beliefs and preferences – really happens frequently, as we have already demonstrated.
The reasons Brown and Shahan gave us for calling repairs "goodwill" are mostly financial too, but they also relate to safety. Cars without issues repaired under warranty don't need to be reported to the NHTSA – National Highway Traffic Safety Administration. After all, warranty repairs are due to manufacturing issues and are, therefore, an OEM's responsibility. Goodwill fixes are something automakers do to please their clients. Here's what Shahan said about Tesla's case:
"Tesla provides express warranties. Under state lemon laws and the federal Magnuson-Moss Act and other provisions of state and federal laws, they are required to ensure that they comply with the warranties, or provide a refund. It appears they are attempting to evade state lemon laws by claiming their so-called 'goodwill' repairs don't count toward the criteria for buying back lemons. In addition, Tesla has been requiring lemon owners to sign onerous settlement agreements that silence them and make it easier for Tesla to engage in lemon laundering: the illegal resale of defective lemon vehicles, without branding the titles or taking other steps to protect consumers."
In other words, Tesla could escape the need for a recall or a Technical Service Bulletin (TSB). The latter doesn't involve safety but also impacts the ownership experience. While recalls have to be performed for free for as long as the vehicle exists, TSBs are free only while the warranty is valid.
If a company labels a warranty repair as goodwill, it may claim in court that it was not due to a defect, but rather to the way the clients used their cars. In short, it could not be framed as something the automaker had to fix, according to lemon laws.
Another Michigan lawyer recorded a video saying Tesla couldn't evade lemon laws by doing this, but Brown does not agree with him.
"Yes, these 'goodwill' labels could be used by Tesla on safety-related defects to help it evade NHTSA reporting, and possible mandatory safety recalls. Yes, they may be used to help it avoid issuing TSBs. And yes, they may be used to help it in battles with complaining consumers to evade lemon law and other legal responsibility for the defects. But there's a huge issue that no one touched on yet, that I think is really central to Tesla's use of these phony labels: lemon laundering. Where do these vehicles go if Tesla buys them back? They get resold, surely almost always eventually to other consumers. Are the defects, or the fact that the vehicle was bought back because of defects, disclosed to the eventual purchaser? Are the defects actually fixed before the vehicles are resold?"
Liblang tends to agree with that other Michigan lawyer but reinforces lemon laundering would be a plausible reason for Tesla's behavior regarding the warranty repairs.
"Many states have title branding laws that require a manufacturer to brand the vehicle title as 'manufacturer buyback,' when the vehicle is repurchased due to a lemon law claim or a claim under the federal Magnuson-Moss Warranty Act. Some states do exempt 'goodwill' repurchases, but most do not – for precisely the reason that the legislatures know that manufacturers would just use 'goodwill' to evade the responsibility to avoid title branding. Avoiding title branding, so as to enable 'lemon laundering' would be the primary reason to use the 'goodwill' designation. That said, it is fairly common for manufacturers to just resell lemon buybacks at auction in states that do not have title branding laws."
Shahan and NCLC also say that one method legacy automakers have to get rid of their lemons is to sell them at dealer-only car auctions. The manufacturers are responsible for telling customers these cars are lemons within their dealership network, but cannot control that with vehicles sold to dealers from other brands.
Tesla does not work with dealers: it handles sales by itself. We have seen at least two cases in which lemons seem to have been sold by the company. In February, we told you "Alec's" story. He bought a Model S from Tesla, and it had an acute case of pressure buffeting. He is currently suing Tesla because his car is not repairable.
In March, a Model 3 with severe paint issues was officially for sale at the Canadian Tesla website. The damages it presented may be an indication it has been repurchased. But there's more to it than just suspicions.
Beyond Goodwill Repairs
According to the specialists InsideEVs talked to, Tesla has a standard procedure for buying back lemon cars. First of all, it does not call it a lemon buyback. It says it is "voluntarily choosing to repurchase the car," as the TMC forum user playoutside stresses in a thread he started back in December 2018.
A simple search on Google will reveal more similar "buyback" situations and even a lawsuit from 2018 in which a former employee claims Tesla was doing lemon laundering. Adam Keith Williams also accused Tesla of demoting and firing him because he reported this practice.
The last legal proceedings involving this problem was a "Notice of Removal of Action" filed by Tesla lawyers on March 23, 2018. Apparently, Tesla asked the lawsuit to be removed from the Superior Court of New Jersey due to jurisdiction issues and the fact that it exceeded the amount in controversy that could be discussed with that lawsuit. We have tried to get in touch with him and his attorneys for three days to ask about what was done later but got no response.
All buyback cases involve confidentiality. When we told you about James Klafehn's case, we said he had to sign an NDA (Non-Disclosure Agreement), but that was not correct. The contract he and other affected customers – such as Sergio Rodriguez – had to sign contains a non-disclosure clause. Shahan provided us with a copy of the agreement Tesla usually makes them sign. In that copy, the non-disclosure part is the item n on clause 2.
You can see the whole agreement in the images in this article. InsideEVs managed to see more recent contracts, and the non-disclosure part moved a bit. It is now the item k, also on clause 2. Bernard Brown says:
"Look at that Tesla release agreement on a vehicle it agreed to buy back. It's a key, central piece of the puzzle you've been trying to sort out. You'll see this language:
'2. ... it is expressly agreed as follows:
b. Releasees have determined that there is no defect, failure, or non-conformity with the Vehicle including its component parts or accessories, but that, in an effort to best satisfy Releasor, the Vehicle is being purchased from Releasor under goodwill only.'
Tesla is clearly arming itself to resell such vehicles without giving any disclosures to future purchasers, on the title or otherwise."
Pay attention to the use of the word "goodwill" in the "release and settlement agreement." Again, it is not a random action or just an attempt to blame the consumer for the issues, according to Brown.
"The placement of that statement there makes it appear to some extent that the consumer/owner has 'agreed' that this is so, which would on its face give Tesla's attorneys a couple of things that would help protect it in laundering the lemon: 1) an argument that this is evidence showing that the repurchase was in fact not because of the defects/repair attempts; and 2) putting pressure of a sort on the consumer to be co-opted into telling anyone who asks that the repurchase was not because of the defects/repair attempts."
Said pressure is reinforced by the non-disclosure clauses we mentioned before.
"Another step is another part of that buyback agreement: the confidentiality clause, which is Tesla's very best effort at keeping this whole thing confidential. That language is really something. I'm going to credit it as nearly at the level of Grecian art in slimy lawyerly doublespeak and implicit pressure. It says:
‘n. To the fullest extent permissible consistent with California Civil Code Section 1793.26, Releasor agrees that the terms and conditions of this settlement shall remain confidential and private in all respects (collectively, "Confidential Information"). Except as may be required by law, Releasor may disclose the Confidential Information only to the extent necessary in any proceedings to enforce, or to obtain professional advice with respect to, this Release. Releasor or his agents and representatives agrees that they will not publicize, directly or indirectly, any Confidential Information or otherwise disclose Confidential lnformation to any third party except as specified above;...'
Of course, almost any Tesla owner having his/her car bought back has no idea what that Section 1793.26 says, nor would he/she likely dwell on this paragraph anyway. The owner typically just wants the deal done, and the car bought back."
The lack of legal knowledge and the rush to get rid of the lemon lead these customers to help the lemon laundering succeed, according to Brown.
"If at any point, at that time or later, he/she sees all the emphatic 'Releasor agrees that the terms and conditions of this settlement shall remain confidential and private in all respects' and emphatic language about not disclosing or publicizing the 'Confidential Information,' he/she will very likely believe that he/she can't disclose anything about this settlement.
But California Civil Code Section 1793.26 is a lovely statute that our advocates got through to try to keep confidentiality agreements in exactly this kind of a case involving an automobile manufacturer from suppressing public disclosure of the bad history of a vehicle. The core of 1793.26 says:
'(a) Any automobile manufacturer, importer, distributor, dealer, or lienholder who reacquires, or who assists in reacquiring, a motor vehicle, whether by judgment, decree, arbitration award, settlement agreement, or voluntary agreement, is prohibited from doing either of the following:
(1) Requiring, as a condition of the reacquisition of the motor vehicle, that a buyer or lessee who is a resident of this state agree not to disclose the problems with the vehicle experienced by the buyer or lessee or the nonfinancial terms of the reacquisition.
(2) Including, in any release or other agreement, whether prepared by the manufacturer, importer, distributor, dealer, or lienholder, for signature by the buyer or lessee, a confidentiality clause, gag clause, or similar clause prohibiting the buyer or lessee from disclosing information to anyone about the problems with the vehicle, or the nonfinancial terms of the reacquisition of the vehicle by the manufacturer, importer, distributor, dealer, or lienholder.'
I would say that the buyback settlement language is actually in violation of Section 1793.26, because the second and third sentences do not have any language saying "to the extent permissible consistent with [Section 1793.26]". Those sentences appear directly to prohibit such disclosure, period. This is at the least very deliberate ambiguity. And I'd say that Tesla's attorneys' strategic thinking is that it will at the very least have a strong chilling effect on many of the Tesla owners whose vehicles are bought back, making them fear that if they disclose information about the buybacks or the claims of problems with the vehicles they could be in violation of the agreement."
Brown states that getting these customers frightened to reveal the defects the car had would be Tesla's main goal with the agreement terms.
"As if that weren't enough to try to chill such disclosure by the buyback owners, Tesla put this language in:
'4. If either party institutes a legal proceeding to enforce or interpret this Release or any of its provisions, the prevailing party in such a proceeding shall be entitled to recover all litigation expenses, specifically including, but not limited to, reasonable attorney's fees, expert witness fees, and costs.'
In the US, each side generally pays their own attorney's fees, win or lose. There are exceptions, especially in consumer protection and civil rights law, where statutes provide that losing defendants can generally be required to pay the plaintiffs' attorneys' fees, but those are exceptions. So, with this clause in the agreement, if a person wants to speak out, he/she could well fear that Tesla's attorneys would bring an action against him/her and could possibly saddle him/her with all of their undoubtedly huge attorneys' fees.
By the way, note that only the 'Releasor,' or consumer purchaser, is bound to confidentiality. Tesla has carefully kept its own right to publicize all it wants from this settlement agreement. The main thing it would likely want to publicize is the language that the vehicle had no defects, and the buyback was for 'goodwill' only."
Lemon Laundering Steps
Getting to this point is just the last step of a well-coordinated strategy, according to Brown.
"The first step that you've been investigating is labeling all these repair attempts mere 'goodwill' actions back before the issue of a possible buyback is even raised. That is careful groundwork by Tesla. To borrow a favorite Tesla term, it's also 'ludicrous' on its face in probably almost all instances, but there it is."
Liblang thinks that it is a terrible strategy, but she does not doubt some automakers could try to use it.
"It is possible that the 'goodwill' designation could cover up warranty issues, which could relate to lemon laundering in the sense that it may make it more difficult for a diligent buyer to uncover a bad warranty history when a vehicle has not been bought back by the manufacturer. I see this sometimes in cases where the vehicles are traded in early because the customer is frustrated and does not want to deal with litigation. Then the dealer turns around and designates the problem vehicle as a 'Certified Preowned' to take advantage of being able to sell a relatively new, low mileage vehicle at a higher price. But, in general, I think it is a somewhat feeble method of cover-up. Most experienced lemon law attorneys I know would request production of documents concerning not only warranty claims but also goodwill repairs. Further, using a goodwill designation would leave manufacturers open to 'secret warranty' claims in states that have laws prohibiting such practices (California comes to mind). In short, I think it's a dumb strategy, though I don't doubt that some manufacturers engage in it."
Brown stresses another aspect of these Tesla agreements that you should be very careful about: the forced arbitration clause.
"Another step that Tesla takes is its use of forced arbitration clauses to lemon-related disputes to prevent them from going public. Corporations have in recent years stampeded to use Supreme Court decisions to force consumers into binding arbitration instead of court.
I see from a couple of online posts that Tesla may, in some circumstances, give purchasers the ability to opt-out of its forced arbitration clause. However, so few people would really know what this means, I would bet that the great majority of Tesla purchasers don't pay attention to that language and so don't opt-out."
Consumer Reports wrote an entire article solely about forced arbitration. First, it prevents customers from choosing the best way to defend their rights. Second, it may kill class-action lawsuits as a whole. Finally, arbitrations usually are favorable to companies, which would be the main reason for them to force that on consumers.
The user GlideOutside started his thread in August 2019 and confirmed his old car sold fast. He also mentions that, if Tesla didn't buy it back, he would "pursue lemon law." We would love to hear from the current owner if the car still presents the same defects GlideOutside said it had and if Tesla informed them of the issues.
Summing up, the pieces of evidence presented go beyond naming the repairs as goodwill. Making affect buyers sign an agreement in which they say the cars have no problems whatsoever is the most important one, but the forum threads that recognize it as a common practice from Tesla also speak a bunch in this case. Liblang said:
"Lemon laundering is a serious problem. I do see it a lot in my practice. Even though Michigan does not have a title branding law, in my opinion it is still a material fact that a selling dealer would be obligated to disclose to the buyer, so I still pursue these cases despite the lack of a title branding statute."
We have contacted Tesla about this and will publish the company's side of this story if it responds.
What you can do
Now that you know a possible reason why Tesla may be labeling warranty repairs as goodwill, you can help us and involved customers try to find out more.
In the past, the website www.safetyforum.com hosted the US National Lemon Directory. It was taken care of by Russwin Francisco, and it was an attempt to gather information on all lemon cars sold in the US. We have no idea what happened, but the directory is no longer there and the website domain seems to be for sale. If it was still up, it would make things much more manageable.
What the lawyers and consumer protection entities suggested was that the affected customers should put up a similar database. It could eventually include only the Tesla cars sold as lemons – even if the company does not refer to them as such – to cross-check their VINs with defective used vehicles bought from Tesla.
To work, this database would need the people that signed "release and settlement agreements" to inform their former lemons' VINs and the issues they had. Buyers of problematic used EVs bought directly from Tesla would then have a way to verify if their cars were among those that were repurchased by the company. They could also ask Tesla. We have tried doing that multiple times, but recently we only got an automatic reply and nothing else.
Although the lawyers we spoke to claim Tesla's agreements are illegal, it is not unlikely that the automaker uses these very contracts to sue anyone willing to do that database – particularly the ones who signed them. That is why we may never see such a tool be created unless a lawyer or a consumer protection entity with proper legal backup so decides. Rosemary Shahan and CARS gave it a try:
"We did a check of VINs many years ago, in connection with exposing lemon laundering, but don't have the resources to do that now. Theoretically, it would be feasible if for example there were a forum for Tesla lemon owners to share VINs, or if lemon law attorneys set up a database, or if an attorney gets discovery that can be made public."
If that ever happens, the more people help build it, the more that practice may be prevented. Again, it is a pity the more comprehensive Lemon Database is lost. Being transparent with your customers should be the golden standard for all carmakers – Tesla included.