FILE PHOTO: A Tesla Model S car is seen in a showroom in Santa Monica, California, U.S., January 4, 2018. REUTERS/Lucy Nicholson

By Tina Bellon

NEW YORK (Reuters) - Tesla Inc on Thursday reached an agreement to settle a class action lawsuit with buyers of its Model S and Model X cars who alleged that the company's assisted-driving Autopilot system was "essentially unusable and demonstrably dangerous."

The lawsuit said Tesla misrepresented on its website that the cars came with capabilities designed to make highway driving "safer."

The Tesla owners said they paid an extra $5,000 to have their cars equipped with the Autopilot software with additional safety features such as automated emergency braking and side collision warning.

The features were "completely inoperable," according to the complaint.

Under the proposed agreement, class members, who paid to get the Autopilot upgrade between 2016 and 2017, will receive between $20 and $280 in compensation. Tesla has agreed to place more than $5 million into a settlement fund, which will also cover attorney fees.

The case has been closely watched in the automotive and legal communities, as it was the only known court challenge Tesla has faced with regard to its assisted-driving technology.

Tesla's Autopilot system has come under increased scrutiny in recent months after two Tesla drivers died in crashes in which Autopilot was engaged. The most recent crash, in March, is being investigated by safety regulators.

Tesla said in a statement it "wanted to do right" by its customers and, as part of the proposed deal, agreed to compensate car owners who had purchased the 2.0 version of Autopilot and "had to wait longer than we expected" for the driving features to become active.

"Since rolling out our second generation of Autopilot hardware in October 2016, we have continued to provide software updates that have led to a major improvement in Autopilot functionality," the company said. Even though the settlement only covers U.S. customers, Tesla said it would compensate "all customers globally in the same way."

The proposed settlement does not mention the safety allegations but focuses on the delay in making the promised features available to consumers.

Steve Berman, a lawyer for the car owners, did not immediately respond to a request for comment.

The agreement, announced in a filing in San Jose federal court late Thursday, must be approved by U.S. District Judge Beth Labson Freeman.

Autopilot, released in 2015, is an enhanced cruise-control system that partially automates steering and braking. Tesla has said the use of Autopilot results in 40 percent fewer crashes, a claim the U.S. National Highway Traffic Safety Administration repeated in a 2017 report on the first fatality, which occurred in May 2016. Earlier this month, however, the agency said regulators had not assessed the effectiveness of the technology.

The 2017 lawsuit in San Jose federal court named six Tesla Model S and Model X owners from Colorado, Florida, New Jersey and California who alleged the company had engaged in fraud by concealment, and had violated various state consumer protection and unfair competition laws.

They sought to represent a nationwide class of consumers.

(Reporting by Tina Bellon; editing by Noeleen Walder and David Gregorio)