During the middle part of the twentieth century, a consortium led and funded by leading automobile and oil companies purchased public transit systems nationwide and converted rail and streetcar networks into bus routes, a phenomena known as “bustitution.”[i] Although a federal court convicted the consortium for conspiring to monopolize the sale of busses, the court imposed paltry penalties, ignoring the irreversible damage that had been done from removal of the train tracks.[ii] Presently, a similar battle wages: this time by car dealers who use outdated, archaic state franchise laws to block new market participants (i.e., competition), especially alternative, environmentally-friendly car manufactures, from selling their vehicles. Because of these state franchise laws, one prominent electric car manufacturer, Tesla Motors, has encountered legal difficulties to sell its products in many states where consumers wish to purchase Tesla vehicles.
In the United States, nearly all states have automobile franchise laws, which mandate the separation between car manufacturers and car dealers. Effectively, franchise laws ban manufacturers from direct sales to consumers. Instead, manufacturers sell cars wholesale to dealers who then sell to the end-user consumers; additionally, dealers provide financing, vehicle servicing, and process vehicle recalls. In Pennsylvania, for example, the franchise law is known as the Pennsylvania Vehicle Manufacturers, Dealers and Salespersons Act.[iii] The Pennsylvania General Assembly stated the following purpose for the Act:
The General Assembly of this Commonwealth finds and declares that the sale of new and used motor vehicles in the Commonwealth vitally affects the general economy of the Commonwealth, the public interest and public welfare, and that in order to promote the public interest and the public welfare, and in the exercise of its police power, it is necessary to license manufacturers, dealers and salespersons of new and used motor vehicles doing business in the Commonwealth, in order to prevent frauds, impositions and other abuses upon its citizens and to protect and preserve the investments and properties of the citizens of this Commonwealth.[iv]
Unfortunately, the General Assembly’s purpose, while admirable, is outdated and is supported by car dealers under the guise of protecting the public. Dealers, however, are acting in self-interest in the face of new entrants into the car market such as electric car manufacturer Tesla, whose founder Elon Musk also started PayPal and SpaceX.[v]
In the face of restrictive state franchise laws, Tesla seeks to innovate the car buying experience. In many locations, Tesla places a “flagship” store at high traffic locations, like King of Prussia Mall located outside Philadelphia. Tesla views these stores as showrooms to educate consumers, who then can purchase a Tesla online, with the transaction taking place “in California,” outside the jurisdiction of state franchise laws. As a result, car dealers are fervently lobbying to amend existing franchise laws to encompass online sales initiated within a state, thus requiring all sales of vehicles in a state, whether in person or via the Internet, to go through authorized dealers. Such efforts have had mixed results. North Carolina dealers failed to compel new legislation in their favor; similarly, efforts in New York, Minnesota, and Massachusetts have failed to ban online sales, with court cases ruling in Tesla’s favor.[vi] Tesla’s bid to obtain a dealership license in Virginia, however, failed.[vii] Moreover, just recently New Jersey Governor Chris Christie’s administration effectively blocked Tesla direct sales in the state, an area the company believes “is important for reaching customers in the New York metro area.”[viii]
Relatedly, Texas has very strict franchise laws. Some say these laws protect the more than 280 cities and towns home to car dealers – many of which are small towns of less than 15,000 residents and the dealerships employ a large percentage of the town’s population.[ix] Texas prohibits Tesla from offering test drives or even quoting prices of its vehicles, therefore, Tesla stores in the lone star state are essentially galleries. Tesla, on its site, describes the many steps needed to purchase a vehicle in Texas, as well as the arduous steps needed to service a vehicle in Texas.[x] Tesla and Musk are pushing to avoid the uncertainty of the hodgepodge state franchise laws by preempting federal legislation to permit direct sales and servicing.
Originally, one reason for separating the manufacturers from the dealers was to protect customers in case a manufacturer went out of business. That is, dealer networks could continue to service vehicles after a manufacturer ceases operations. However, there are negatives to this arrangement. First, adding an additional layer between manufacturer and consumer increases costs and decreases transparency. Instead of Ford directly selling cars to consumers, thousands of Ford dealers nationwide independently sell Fords at varying price points. This may be unnecessary, as consumers today are much better equipped than in the past to perform research and due diligence to make informed car buying decisions, and perhaps do not need the expertise of car dealers. Additionally, what many of the pro-franchise law dealers’ arguments fail to consider is that dealers are not the only venue for car servicing. Indeed, thousands of independent mechanics nationwide service cars new and old, including cars no longer being manufactured and cars from defunct companies.
Moreover, consumer protection agencies further protect consumers of products and services. The Federal Trade Commission, for instance, is dedicated to consumer protection, and many states have similar consumer protection agencies.[xi] Many states also have laws referred to as “lemon laws,” which protect car purchasers from faulty car purchases (known as “lemons”).
A recent publication by the American Bar Association calls the traditional car franchise system into question.[xii] The article notes how improvements in technology, especially the Internet, have changed how we purchase many consumer items, such as groceries, music, and other goods, and also cites corporate casualties who failed to adapt to technology like Blockbuster Video and Borders. The article asserts that the immense power car dealers wield in many states would make a blanket dismantling of state franchise laws unlikely; instead, Tesla should seek exemptions from state franchises. Additionally, Tesla has informally explored the possibility of using franchise dealers in the future, once the company is more stable economically.
Legislators should reexamine their state’s approach to these issues. State automobile franchise laws are not static and must evolve to reflect changing social, technological, and economic circumstances. Historically, franchise laws might have made sense; however, outdated laws must be periodically revisited, revised, and if necessary, removed.
Consumer protection must be balanced with freedom of choice. Tesla does not seek the abolishment of franchise laws, but only seeks an exemption to conduct its innovative business outside the confines of entrenched, archaic franchise laws.[xiii] In sum, consumers would not be hurt by such an exemption because they still have choices: the choice to research and choose to purchase a Tesla based on all available information and the choice to purchase any other type of vehicle under the tradition dealer framework.
[i] The term “bustitution” is a portmanteau of “bus” and “substitution” and refers to using busses for journeys usually or historically made by train. Bustitution can be temporary or permanent. For an example of bustitution in the United States, see Guy Span, Paving the Way for Buses–The Great GM Streetcar Conspiracy, BayCrossings.com, http://www.baycrossings.com/Archives/2003/03_April/paving_the_way_for_buses_the_great_gm_streetcar_conspiracy.htm (last visited Jan. 31, 2014) (describing efforts of General Motors and other automotive companies to replace rail networks with rubber tired busses). Interestingly, the dismantling of the Los Angeles Pacific Electric “Red Car” rail system was depicted as a central theme in the 1988 movie, Who Framed Roger Rabbit?
[ii] See United States v. Nat’l City Lines, 186 F.2d 562 (7th Cir. 1951) (leading case concerning intentional efforts to decimate trolley and interurban rail industry). For more about car companies’ roles in decimating the rail industry, see 1974 statement made to the Senate Subcommittee on Antitrust and Monopoly, http://libraryarchives.metro.net/DPGTL/testimony/1974_statement_bradford_c_snell_s1167.pdf.
[iii] 63 P.S.C.A § 818.1 et. seq. (Supp. 2000) (regulating sale of automobiles).
[iv] 49 P.S.C.A § 19.1 (Supp. 2000) (stating legislative intent of Vehicle Manufacturers, Dealers and Salespersons Act within administrative regulations).
[vi] Texas Says ‘No’ to Tesla-Owned Dealerships for Now, FoxNews.com (Jun. 4, 2013), http://www.foxnews.com/leisure/2013/06/04/texas-says-no-to-tesla-owned-dealerships-for-now/ (comparing Tesla’s issues in Texas with other states).
[vii] Why Did the Virginia DMV Deny Tesla Motors a Dealership License?, OpenWatch.net, https://openwatch.net/i/40/why-did-the-virginia-dmv-deny-tesla-motors-a-dea (last visited Jan. 31, 2014). But see Joseph Lichterman, Va. Compromise Allows Tesla to Apply for Single Dealership License, Automotive News (Oct. 3, 2013), http://www.autonews.com/article/20131003/RETAIL07/131009931/# (describing agreement between Tesla and VA DMV allowing Tesla to apply for single dealer license).
[viii] Alan Ohnsman & Terrance Dopp, Tesla Stores May Be Closed After N.J. Blocks Direct Sales, Bloomberg.com (March 12, 2014), www.bloomberg.com/news/2014-03-11/tesla-stores-may-be-closed-after-n-j-blocks-direct-sales.html (quoting president of the state’s dealer association as saying “Tesla should either adjust its business model to confirm with New Jersey law or seek changes to it”).
[ix] Tesla Takes on Texas Auto Franchise Laws, statesman.com (Apr. 10, 2013), http://www.statesman.com/news/business/tesla-lobbies-to-sell-its-electric-cars-directly-t/nXHrY/ (describing Tesla’s plight against Texas franchise law).
[x] Advocacy: Texas, TeslaMotors.com, http://www.teslamotors.com/advocacy_texas (last visited Jan. 31, 2014) (asserting Texas law, specifically Tex Oc. Code Ann. § 2301.476, unjustly restricts Tesla’s ability to sell to and later serve customers).
[xii] Roger M. Quinland, Has the Traditional Automobile Franchise System Run Out of Gas?, American Bar Association, http://www.americanbar.org/publications/franchise_lawyer/2013/summer_2013/has_traditional_automobile_franchise_system_run_out_gas.html (lasted visited Feb. 27 2014) (examining legal challenges facing auto dealer franchise laws).
[xiii] Tiffany Kalser, UPDATED: White House Petition Aims to Allow Direct Sales of Tesla Vehicles in 50 States, DailyTech.com (Jul. 2, 2013), http://www.dailytech.com/UPDATED+White+House+Petition+Aims+to+Allow+Direct+Sales+of+Tesla+Vehicles+in+50+States/article31883.htm (providing overview of Tesla’s battle to sell nationwide).