Tesla Sues State Of Michigan Over Direct Sales Ban

Tesla is prohibited from selling its cars direct to members of the public in several states by so-called “franchise dealer” laws. They were originally enacted decades ago to protect car dealers from rapacious manufacturers, who would often cancel a dealer’s franchise without notice or permit a competitor to open a dealership next door or across the street. But the laws have changed over time to become little more than a way of protecting dealers from competition. In many states, the local franchise dealer associations have more power with local legislatures than the manufacturers do.

Tesla store in Sydney

When it first began, Tesla decided it wanted to sell its cars itself. It claims that electric cars are inherently different than conventional cars and marketing them requires an educational approach with consumers, many of whom are not familiar with what makes an electric car different. For the traditional dealer, the process is more of a “Wham! Bam! Thank you, ma’am!” experience. What color do you prefer? What equipment do you want? Sign the sales agreement run them into finance, and send them on their way. Typically the only education on offer is what is known in the trade as the “Three C’s” delivery process. It goes like this: See your car? See your keys? See ya later!”

Salespeople are encourage to spend as little time with each customer as possible in order to sell more cars. Compensation is often pegged to how many deliveries each sales person makes each month. The whole process is designed to move speedily from beginning to end. (Full disclosure time: I worked in the car business for a number of years, although my experience was with Saturn, a company that genuinely tried to do business in an ethical fashion using a consultative sales model. But I saw plenty of examples of how the traditional business works. Trust me. I know whereof I speak.)

Tesla has been trying for years to gain admission to critical markets in major states like Michigan and Texas but has been blocked at every turn by powerful dealer organizations. And its not just dealers. General Motors has been particularly aggressive at opposing many of Tesla’s initiatives. Michigan, of course, is home to all three legacy car companies — Ford, GM, and Chrysler. Together, they exert a powerful influence over the state’s government from the governor’s office on down. Just last week, Michigan’s Secretary of State, Ruth Johnson, rejected an application for a dealer’s license filed by Tesla Motors. That apparently was the last straw.

On September 22, Tesla filed suit in federal court in Michigan against the state, the governor, the secretary of state and the attorney general. Here are relevant portions of the suit. “Tesla Motors brings this lawsuit to vindicate its rights under the United States Constitution to sell and service its critically-acclaimed, all-electric vehicles at Tesla owned facilities in the State of Michigan. Particularly egregious protectionist legislation was passed by the Michigan Legislature in 2014. The Michigan Legislature quietly enacted an outright ban on Tesla’s direct-to-consumer sales model, effectively giving franchised dealers a state-sponsored monopoly on car sales within Michigan.”

In a statement about the lawsuit, Tesla said, “Solving this legislatively always has been and continues to be Tesla’s preferred option. For the last two years, Tesla has pursued legislation in Michigan that is fair to everyone and that would benefit Michigan consumers.” The suit asks a federal judge to declare that Michigan’s franchise dealer law violates the due process and equal protection clauses of the Fourteenth Amendment to the U.S. Constitution and the Constitution’s commerce clause. In effect, Tesla argues, Michigan has created an illegal state sponsored monopoly that favors franchise dealers. It claims it should be free to sell its cars direct to the public just as Apple sells its products directly. In fact, much of the Tesla sales process is patterned directly on the Apple sales model. 

The irony is that the states that have kicked up the biggest fuss about Tesla’s direct sales model are states that have so-called Tea Party government leaders. The philosophical underpinnings of the Tea Party are based on the idea that government is always the problem. For Tea Party governors like Michigan’s Rick Snyder and Texas’ Rich Perry, government’s best option is to get out of the way and let business do business, unfettered from state imposed rules and regulations. The hypocrisy of their stated beliefs when contrasted with their actions gives the lie to the strength of their commitment to their political ideals. Sadly, they are too sated with power and money to be embarrassed by their obvious lies to the people who elected them.

The legal situation is interesting. Any decision by the federal court will be binding only within the jurisdiction of that court. On appeal, the case will be heard by a three judge panel of the Sixth Circuit Court. Any losing party can request a rehearing before the entire Sixth Circuit Court. Once the Sixth Circuit has rendered a final decision, it will be binding on other courts in the Sixth Circuit, which includes the states of Michigan, Kentucky, Ohio, and Tennessee. That means it will have no influence on courts in any other states unless and until the US Supreme Court elects to hear the case on appeal.

Here’s where things get tricky. The US Supreme Court is currently short one judge due to the death of Antonin Scalia. That leaves the court divided 4 to 4 on most issues. Until the vacancy is filled, that means who wins in in the Supreme Court is almost automatically the party that won at the circuit court level.  If, through some quirk of fate, this case ever gets to the Supreme Court and that court issues a ruling in favor of Tesla, then and only then will the decision become the law of the land.

Here is the relevant language of the Fourteenth Amendment: “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.” Of course, the Supreme Court says corporations are “persons,” so that makes Tesla a proper party entitled to file suit.

The Fourteenth was specifically added to the Constitution as part of the Reconstruction period following the civil law. Its purpose was to make it crystal clear that the provisions of the Constitution specifically applied to actions taken by the states. It has been the foundation of such landmark court decisions as Brown Vs. Board of Education, Roe Vs. Wade, and Bush Vs. Gore.  By framing its lawsuit as a question of constitutional law, Tesla avoids being run over in the courts by partisan state court judges and sets up a situation in which its claim that is should be allowed to sell directly to the public ultimately could become the law of the land and trump, you should pardon the expression, the efforts by Texas and other states to prop up the anachronistic dealer franchise model.

There is more at stake here than Elon Musk’s ego. Tesla expects to be selling 500,000 cars a year within 18 months. It is doubtful it can do so if it is barred from doing business as it sees fit in several states. That makes this case important to all of us who want to see the changeover to zero emissions transportation accelerate. Musk and company are absolutely right when the say traditional dealers are incapable of selling electric cars effectively. They have little to no interest in them. Most of the time they are parked out back somewhere. Sales people actively try to switch people interested in buying an electric car into purchasing a conventional car instead.

If the electric car revolution is going to happen, blowing up the traditional dealer sales model is essential. Go, Tesla!

Source: Detroit Free Press


Steve Hanley

Closely following the transition from internal combustion to electricity. Whether it's cars, trucks, ships, or airplanes, sustainability is the key. Please follow me on Google + and Twitter.