Scout Motors has suffered another legal setback in its effort to sell vehicles directly to consumers, as a California federal court has rejected a request from the Volkswagen-backed startup and Volkswagen Group of America to dismiss a lawsuit challenging its planned sales model.
Chief Judge Cynthia Bashant of the U.S. District Court for the Southern District of California denied motions to dismiss the case filed by the California New Car Dealers Association. The lawsuit challenges Scout Motors’ plans to bypass traditional franchised dealerships and sell vehicles directly to customers.
California Dealers Challenge Scout Motors’ Sales Model
Scout Motors plans to sell vehicles directly to consumers under its business model, but the approach has faced opposition from franchised dealers operating under Volkswagen Group of America. Some dealers have joined efforts to enforce franchise laws that they argue protect their businesses.
The California New Car Dealers Association filed its lawsuit in April 2025. The association argues that Scout Motors is wholly owned by Volkswagen Group of America and that the automaker cannot use a subsidiary to sell vehicles outside the traditional dealership system, even under a separate brand.
The association also alleges that Volkswagen Group of America plausibly violated California’s Unfair Competition Law through Scout Motors.
California Franchise Law at the Center of the Dispute
The lawsuit centers in part on an amendment to California’s franchise law that took effect on January 1, 2024. The association contends that Scout Motors’ planned direct-to-consumer model violates the amended law, which requires affiliated brands to use franchised dealers to sell and service vehicles.
The association further alleges that Volkswagen is circumventing California law by presenting Scout Motors as a separate brand while competing against its existing franchise dealers.
California is not the only state where Scout Motors has faced legal opposition over its sales strategy. In Florida, the startup has also clashed with existing franchises over its plans to sell directly to consumers.
Court Rejects Second Motion to Dismiss
Scout Motors previously sought to have the California lawsuit dismissed, but the court rejected that request. Volkswagen Group of America raised several arguments during the earlier proceedings, yet the case continued.
The court has now denied another motion to dismiss, allowing the lawsuit to proceed to further discovery.
Anthony Bento, chief legal officer of the California New Car Dealers Association, said the court’s latest decision was consistent with its earlier ruling in March.
“They raised arguments that were available to them the first time around, and the court declined to dismiss the case – now twice. Our claims stand, and we continue with discovery in the case,” Bento said.
Volkswagen and Scout Decline to Comment
Volkswagen Group of America and Scout Motors declined to comment on the latest development.
The lawsuit will now continue as the parties proceed with discovery over Scout Motors’ proposed direct-to-consumer sales model in California.
