Tesla sues Michigan for the right to sell cars: is this the end of franchise laws?

September 23, 2016

The gloves have been loosening for years, and now, they've finally come off: Tesla Motors is preparing to throw punches in the courtroom as it sues Michigan for the right to sell cars. If the company makes its case successfully, it could have implications far beyond the borders of the Wolverine State.

Until now

Tesla has fought a long, uphill battle to break into the U.S. auto market.

The company's focus on electric vehicles would've made that challenge tough enough, given the public's range anxiety and today's low gas prices.

But making matters worse is the fact that Tesla has ditched the auto industry's decades-old, dealership-centered sales model, preferring to sell its cars directly to consumers. That's put Tesla in violation of franchise laws from coast to coast.

Tesla has overcome many of those laws by lobbying state legislatures and waging campaigns to sway public opinion. Today, the company can sell vehicles in 23 states and the District of Columbia.

But Tesla doesn't have a perfect record. In Texas, for example, state legislators were unmoved. (That, in turn, may have cost Texas its bid to host Tesla's first gigafactory.) Connecticut and Utah have been equally resistant. 

And then there's Michigan. 

In 2014, Tesla had been negotiating with regulators in Michigan for the right to establish a foothold in the state. Things seemed to be going well, but then, in the span of 48 hours, Michigan legislators amended and passed a bill that effectively prohibited Tesla from operating in the state. Here's one of the key passages, which says that an automobile manufacturer may not...

"(i) Sell any new motor vehicle directly to a retail customer other than through franchised dealers, unless the retail customer is a nonprofit organization or a federal, state, or local government or agency. This subdivision does not prohibit a manufacturer from providing information to a consumer for the purpose of marketing or facilitating the sale of new motor vehicles or from establishing a program to sell or offer to sell new motor vehicles through franchised new motor vehicle dealers that sell and service new motor vehicles produced by the manufacturer."

As you can see, the law allows Tesla to operate its well-known "galleries" and share information with interested shoppers. However, it can't sell directly to consumers.

Unfortunately, that's exactly what Tesla wants. It applied for a Michigan dealership license back in February, likely in the hopes of opening as small number of shops, as it's done in Maryland and elsewhere.  

At the time, we wondered what Tesla might've been planning. Was the company finally capitulating to franchise laws? Was it willing to wheel and deal?

No, it appears that Tesla determined it had a good chance of overturning Michigan's franchise laws if those laws restricted its ability to do business in the state. Now that Michigan has refused to issue Tesla a license, the company has standing to sue.

What does it all mean?

There's no question that a state can regulate commerce within its borders. But in court, Tesla may make a slightly different argument--namely, that Michigan isn't just regulating commerce, it's actively working to keep companies like Tesla out. 

The distinction between those two arguments is nuanced, but it's there. If Tesla can bring it into relief during a trial, the company could prevail. And if the company can prove that the 2014 bill was targeted specifically at Tesla, that could give added weight to its case.

If Tesla wins the case, it could have massive implications for both automakers and dealers. Depending on the way that the decision is worded, it might even upend franchise laws across the U.S.

That possibility surely makes dealers nervous. Judges have ruled in favor of Tesla in at least four states, and if it happens this time, the ramifications could be huge for dealers, who are already terrified of Tesla's influence.

Will Michigan and its dealers blink? Will they try to settle this out of court? We'll keep you posted. 

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