Tesla’s sales in California are poised to be suspended for 30 days if it doesn’t change its marketing practices that allegedly mislead consumers about its driver-assistance technology, the state’s motor vehicles department said.

The agency said on Tuesday the suspension won’t take effect for 90 days to give the company time to appeal or come into compliance. The California Department of Motor Vehicles accused the company of exaggerating the capabilities of its “Autopilot” and “Full Self-Driving” software and had asked an administrative judge to weigh whether a suspension is warranted.

Tesla shares fell as much as 2.2 per cent on the news in postmarket trading, before paring declines to about 1 per cent. The stock had closed Tuesday at a record high and was up 21 per cent for the year. Tesla didn’t immediately respond to a request for comment.

A suspension of Tesla’s sales license would be a major blow to the Austin, Texas-based company. California, the most populous state, is both the company’s biggest sales market in the US and home to one of Tesla’s largest factories, making even a temporary disruption potentially very costly. Tesla can avoid the suspension if it files a statement that it has stopped using or describes steps it will take to cease using the Autopilot name to describe technology that does not meet certain industry standards.

“This was a ‘consumer protection’ order about the use of the term ‘Autopilot’ in a case where not one single customer came forward to say there’s a problem. Sales in California will continue uninterrupted,” Tesla said in a statement that didn’t provide more details.

Lawyers for Tesla sought to fend off the DMV’s disciplinary action by arguing that its advertising is protected free speech under the First Amendment of the US Constitution. The attorneys also accused the regulator of taking the marketing statements out of context, and failing to account for Tesla’s warnings and disclosures about the driver-assistance systems.

In her written decision, the administrative law judge also recommended suspending Tesla’s manufacturing license for 30 days, but the regulator stayed that order.

“We’re really asking Tesla to do their job, as they’ve done in other markets, to properly brand these vehicles,” Steve Gordon, director of the California Department of Motor Vehicles, told reporters. He said in a statement the company can take “simple steps” to resolve the issue permanently.

Tesla has faced years of scrutiny by federal prosecutors, securities regulators and the National Highway Traffic Safety Administration, as well as lawsuits by consumers and investors, over how its driver-assistance software is marketed and how well it performs.

Tesla recalled 2 million vehicles in 2023 after the NHTSA, the top US auto-safety regulator, determined that Autopilot doesn’t do enough to guard against misuse by drivers. In August, the company had its first significant loss in court, when a Miami jury said it should pay $243 million in damages after finding the Autopilot system partially responsible for a fatal crash.

Chief executive Elon Musk has often called Teslas the safest cars ever made. In recent years he has staked the company’s future on autonomous driving and is now ramping up a robotaxi business.

The California auto safety regulator alleged that Tesla violated state law by making “untrue or misleading” statements in 2021 and 2022, including advertising that its cars would be “able to conduct short and long-distance trips with no action required in the driver’s seat.”

An amended complaint by the DMV filed in November 2023 said Tesla vehicles equipped with driver-assist technology “could not at the time of those advertisements, and cannot now, operate as autonomous vehicles.”

The agency argued that these actions justified the suspension or revocation of Tesla’s dealer and manufacturer license in the state, initiating a lengthy regulatory proceeding within the California Office of Administrative Hearings. A five-day hearing was held in July.

It’s rare for the DMV to take drastic action against manufacturers, but not unprecedented. In 2023, the agency pulled the license for the General Motors Cruise driverless taxi business in the wake of an incident in San Francisco where a vehicle dragged and injured a pedestrian.

Tesla had warned that any decision limiting its ability to manufacture and sell vehicles would have seismic consequences for the state’s economy, given that the company employs more than 33,000 people at its production plant and its 60 retail stores and galleries.

Tesla sales in California make up a significant share of its nationwide business, and the company’s large plant in Fremont is the only assembly line for its Model S and Model X vehicles.

The move by California could have nationwide implications for Tesla’s efforts to expand its businesses selling advanced technology in its vehicles, said Haris Khurshid, chief investment officer at Karobaar Capital.

“If regulators slow Tesla’s autonomy claims there, it directly affects how fast the AI story turns into real revenue,” Khurshid said. “Tesla can still win long term, but rulings like this widen the gap between hype and deployment,” Haris Khurshid said. – Bloomberg