(Reuters) - On President's Day last month, about 40 electric-car advocates gathered under the rotunda of the state capitol in Olympia, Washington, where a lobbyist for Tesla Motors Inc urged them to rally against a bill that would prevent the carmaker from opening new sales offices in the state.
By the time the legislature finished its work last week, a coalition of environmentally friendly Democrats and free-market Republicans had stripped the restrictions from the bill. Tesla (TSLA.O) would be free to sell its cars through its own sleek showrooms rather than relying on the dealer networks that have dominated the industry for decades.
It was a welcome win for Tesla after setbacks in Arizona, New Jersey and Texas, where state officials have blocked the startup from selling directly to consumers. But auto dealers were happy with the outcome as well, because the bill carved an exception for Tesla while strengthening rules that require other automakers to sell through their stores.
The outcome in Washington, which must still approved by the governor, shows that the battle between the Silicon Valley startup and Main Street dealers, currently playing out in states like New York and Ohio, isn't necessarily a zero-sum game.
Where there is a ban, Tesla can show off its cars in "galleries" and sell them online. And dealers may be able to co-exist with Tesla in states where it sells directly, so long as bigger players don't try to follow its lead.
"Our issue is not with Tesla itself, it's with the model," said Tammy Darvish, a vice president at Darcars Automotive Group in Silver Spring, Maryland who bought a Tesla of her own. "How can we as auto dealers compete with manufacturers in the same market when we are completely dependent upon them for our inventories?"
The clash pits a billionaire engineer, Elon Musk, against 17,000 businesses, often family-owned, which are engines of their local economies, and which made substantial investments based on ground rules that require automakers work with dealers, not compete against them.
Over the years, dealers have sponsored Little League teams, supported local charities and forged strong ties with the state officials who regulate auto sales.
The conflict came to a head last year after Tesla introduced its Model S, a $60,000-plus sedan that aimed for a wider audience than the two-seat, $101,000 Roadster sports car it introduced in 2009.
Texas and Arizona have blocked Tesla from selling its cars directly in their states, while regulators in New Jersey ruled last week that the company must stop direct sales by April 1.
Colorado, Virginia and Georgia have imposed restrictions.
Tesla successfully fended off limits in North Carolina, Massachusetts and Minnesota last year. The two sides are currently battling in Ohio and New York.
Tesla currently operates 116 sales and service operations globally and aims to add another 90 or so by the end of the year, according to its most recent annual report. Sales are rising fast from last year's 22,477, but it is a niche player so far.
Tesla, which declined to comment to Reuters, argues that dealers don't understand its technology and have little incentive to sell an electric car that does not require its owner to return periodically for maintenance.
Chief Executive and founder Musk, whose charisma evokes comparisons with Apple's Steve Jobs, acknowledges the investment in local dealerships.
"Franchisees ... invested a lot of their money and time in building up the dealerships. That's a fair deal and it should not be broken," he wrote in a blog post last week.
Musk has said that he is not interested in overturning the existing franchise system, but he doesn't want to participate.
Dealers, however, see direct sales of any sort as an existential threat.
The franchise system was set up in the first half of the 20th century by automakers who did not want the expense of building up their own sales force.
Dealers say the existing system encourages competition that keeps car prices low and ensures that customers can still get their cars fixed if a manufacturer goes out of business. They point out that electric cars like the Nissan Leaf and the Mitsubishi i-MiEV are already in their showrooms.
"There are rules in place, and they're working," said David Shepherd, president of Shepherd Team Auto Plaza in Fort Scott, Kansas. Dealers have periodically rebuffed attempts by U.S.-based automakers to sell themselves, but relations have been good in recent years, he said. "Do you want to run risk of having something change when it's not broken?"
Dealers are also politically active. Auto dealers and their employees donated more than $15.1 million to state and local candidates in the 2011-2012 campaign cycle, according to the National Institute on Money in State Politics. That's about the same amount contributed by real-estate agents, insurance agents and other influential groups that rely on state franchise laws.
Tesla employees, by contrast, donated $500 to state candidates during that period.
Tesla counters with its customers, a wealthy group who see themselves as defenders of planet-saving technology. Those involved in the Washington state effort say the visits, calls and e-mails from Tesla owners forced the auto dealers to back down.
"They realized they had a problem and very quickly began negotiating with Tesla," said state Rep. Reuven Carlyle, a Seattle Democrat who helped forge the compromise. He expects Governor Jay Inslee to sign the bill, although an Inslee spokeswoman declined to comment.
In New Jersey, about 20 Tesla owners took part in a last-ditch effort to stop the Motor Vehicle Commission's proposed sales ban. The group next will appeal to Gov. Chris Christie to overturn the decision.
"I think it's far from over," said Michael Thwaite, a New Jersey telecommunications executive who is leading the effort.
Even so, Tesla has found a way to minimize the impact of the direct-sales bans that are in place.
In states where sales are banned, Tesla employees show off cars in "galleries" and tell customers to complete the sale over the phone or online. Current Tesla owners can take test drives to prospective customers, said Mark Rohde, a psychologist active in the Arizona Tesla Motors Club.
"I see this as the future of how we buy cars," said Rohde, who estimates Tesla has sold 500 cars in his state.
Analysts say any lost sales from a direct-sales ban are likely to be minimal. Customers interested in the pricey, cutting-edge cars won't mind completing their purchase online or in another state, they say.
"Does it matter? No. It's really just a lane diversion," said Craig Irwin, an analyst with Wedbush Securities.
Still, electric-car advocates worry that the restrictions may hurt other start-up companies that follow Tesla or don't have its resources.
Since Washington state's new legislation would prevent other startup vehicle makers from selling directly even as it carved out an exemption for Tesla, advocates say they have work to do. They will try to remedy the law in the next legislative session.
"It's crazy, but that's the current mixture of business and politics that we have," said Lee Colleton, a Seattle resident who lobbied to allow direct sales.
Additional reporting by Deepa Seetharaman in San Francisco, editing by Peter Henderson