America is a great nation for many reasons, but our justice system often finds itself at the butt of many jokes. There's simply a plethora of silly court cases that have no merit. That said, one thing investors prefer to avoid is having the companies they own taken to court, for one reason or another. Unfortunately for investors of TrueCar (NASDAQ:TRUE), that's the situation they find themselves in. Let's take a look at the details and better understand the implications this will have on TrueCar's business.
Starting with the facts, 117 new-car dealership franchises are suing TrueCar for more than $250 million. According to the lawsuit, the dealerships are claiming they are losing three to seven sales per month because of TrueCar's advertising and sales leads to its more than 10,500-strong dealership network.
"TrueCar's false or misleading advertising," the suit continues, includes "false 'no-haggle' claims," "bait-and-switch" advertising, "false factory invoice claims," "false financing claims," "false transparency claims" and "false rebate claims," according to Automotive News citing the lawsuit.
First, it should be noted that these disgruntled dealerships are a very small fraction of the industry. TrueCar's certified dealer network, as previously mentioned, boasts nearly 10,500 dealerships across the nation. That's nearly one out of every three dealerships in America, and drastically more than the 117 accounted for in the lawsuit. Clearly, there are far more dealerships that are on TrueCar's side than those against it.
Also, investors should note that less than 5% of all non-fleet U.S. car sales occur through TrueCar. That slice of the pie emphasizes a couple of factors. It emphasizes that there is a lot of room for growth in TrueCar's business for investors, and it also emphasizes that with less than 5% of industry sales, it's a very difficult argument for dealerships to suggest TrueCar is directly crippling dealership sales.
Furthermore, it should also be noted that there are no consumers in the lawsuit, only dealerships. That's important because TrueCar generates its revenue by giving online consumers pricing information and sending strong leads to dealerships to complete the sale -- after every completed sale from a TrueCar lead, dealerships pay the company roughly $300.
As long as consumers see value in TrueCar's services, the business model remains strong. The case is little more than a legal attack from TrueCar's competitors. If there were consumers involved in the lawsuit, that would be concerning for investors, but that isn't the case.
Here's what TrueCar has to say about the suit:
We have high confidence that we are compliant with all laws applicable to our business, including those referenced in this litigation. We will defend the lawsuit, and our business practices vigorously and we expect to be fully vindicated.
TrueCar goes on to call the lawsuit meritless, and that seems accurate, in my opinion. In fact, it's almost humorous to me that dealerships are essentially suing TrueCar for being good at what it does. Perhaps those 117 dealerships would find their time better spent applying to be a part of TrueCar's dealership network?
Daniel Miller owns shares of Apple. 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.