Truecar is running into roadblocks by Doron Levin @FortuneMagazine January 18, 2012, 7:48 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Truecar, the latest Internet startup to carve a niche in automotive retailing, is running into roadblocks as it tries to expand. The Santa Monica, California-based company is scrambling to avoid a host of legal and public relations pitfalls so it can expand its car-buying service, which it claims already accounts for some 2.8% of all retail auto sales. That proportion would translate to about more than 364,000 sales a year, or about $110 million in revenue, for Truecar. As Fortune reported, visitors to Truecar’s website can survey information about cars, including recent prices at which similar vehicles sell, and then may solicit quote from dealers. If a dealer makes a sale to a shopper based on a lead from Truecar, the dealer pays the company $300. Other automotive sites, such as Edmunds.com, gain revenue by selling leads to dealers, irrespective of whether those leads turn into sales. Truecar said it has suspended operations in Colorado after the state opened an investigation in December into whether the company was complying with regulations covering advertisers and whether it had the required licenses to act as an agent for car buyers. On Wednesday, the company said it adjusted its billing practice, dropping the fee and charging a subscription instead, to comply with laws in Virginia and all others prohibiting “bird-dogging,” or finding customers for dealers. At the heart of Truecar’s troubles are a multitude of state laws designed to protect the franchises of automobile dealers and to control unbridled competition among dealers to sell vehicles. Some customers have complained to states that the car they expected to buy wasn’t available at a dealer, as they expected. The company has been quick to respond. “Truecar is committed to never putting our dealer partners at risk, which means we will always work closely with regulators to identify a workable solution or suspend service,” said Scott Painter, Truecar founder and CEO, in a prepared statement. Over the past two decades the Internet has become a significant factor in retailing, though more so in categories like appliances and apparel than in vehicles. Franchise agreements stipulate that customers in the U.S. must buy from dealers, rather than online. Hence, ventures like Edmunds.com and Kelly Blue Book have built websites that allow shoppers to find information about cars and prices, as well as to solicit quotes from nearby dealers. Edmunds and Kelly typically sell sales leads to dealers at a fixed price or through subscriptions, irrespective of how many of them turn into sales. The leads are created when on-line shoppers fill in forms and declare their interest in buying a vehicle. Truecar broke from the more common model by giving leads to dealers free of charge, instead imposing the $300 fee only on those that turned into sales. Avi Steinlauf, chief executive officer of Edmunds.com said: “Edmunds.com’s mission is to inform and educate consumers and to create realistic expectations about the retail process. In the process, we do not impose prices on dealers, we do not create false consumer expectations, and we do not break the law.” Rather than charge dealers according to the number of leads, Edmunds.com recently modified its pricing model. Edmunds.com now sells access to its leads via a subscription fee to its service. Honda Motor Co. HMC has told its U.S. dealers that it will withdraw advertising support monies from any dealers that advertise “below invoice” pricing of its cars. Honda says “below invoice” violates its standard covenant with dealers who accept advertising support. Honda regards Truecar as an advertising platform and says Honda dealers have used the buying service to advertise below-invoice pricing of Honda vehicles. John Mendel, executive vice president of Honda’s U.S.-based sales subsidiary, said “we never tell our dealers with whom they may chose to do business. However. we are passionate about protecting our customers and the Honda Brand and will not support any actions to the contrary.” Penske Automotive PAG , with more than 150 dealers in the U.S., has elected as a matter of policy not to transact sales using Truecar. Group 1 Automotive, another dealer chain, said it has instructed dealers to stop sharing pricing information with Truecar. According to Group 1, In some instances Truecar gained access to specific descriptions of transactions and precisely the amounts customers paid for cars. Edmunds and Kelly, by contrast, only use an average of a large number of sales to tell visitors to its websites an approximate value of specific models. The Truecar initiative is under intense regulatory scrutiny in several states and the subject of vigorous debate among dealers and manufacturers. How the numerous hassles are resolved could have a bearing on how customers will shop for their next cars. Editor’s note: A previous version of this story incorrectly calculated the number of annual car sales that Truecar has likely arranged, based on the company’s claim of a 2.8% share of the market. This calculation has been corrected.