The California Department of Motor Vehicles on June 8 approved Mercedes-Benz's automated driving system on designated highways under certain conditions without the active control of a driver.
California is one of Tesla's largest markets, accounting for 16% of the carmaker's global deliveries last year, according to Reuters calculations.
But the German carmaker beat Tesla to become the first carmaker to receive authorisation to sell or lease cars with an automated driving system to the public in California.
The approval was granted to Level 3 Mercedes-Benz 'DRIVE PILOT' system that allows a driver to legally take their eyes off the wheel but must be available to resume control in need.
The 'DRIVE PILOT' system can only operate on highways during daylight at speeds not exceeding 40 miles per hour, the DMV said.
Other systems currently on public roads such as Tesla's Autopilot or General Motors' Super Cruise are classified SAE Level 2, which handle some driving tasks but require drivers to pay attention at all times.
Tesla calls its level 2 driving assistant system as "Full Self-Driving" and says a driver must constantly supervise the feature and intervene as needed to maintain a safe operation.
The permit grants Mercedes-Benz permission to offer its 'DRIVE PILOT' system on California highways in the Bay Area, Central Valley, Los Angeles, Sacramento and San Diego and on interstate highway connecting Southern California to Nevada.
Earlier this year, Mercedes-Benz also received an approval to deploy advanced automated driving systems on Nevada's roads.