Halting Progress: Michigan’s Ban on Direct-to-Consumer Auto Sales

Author: Jon Kelly, Associate Member, University of Cincinnati Law Review

The cost of filling up at the gas station is an unsavory ritual for most drivers. So it should be no surprise that the concept of the electric car has been resuscitated over the last decade. However, electric cars have seen limited success in the U.S. auto market due to the underdeveloped state of the technology. Tesla is one company seemingly poised to turn the tide on electric car sales, and its newest model would likely be a viable competitor with gasoline powered cars. Tesla has adopted a “direct to consumer” sales model, as opposed to the traditional franchise-dealership model employed by other car companies. Michigan is the most recent state to pass a bill (H.B. 5606) prohibiting car sales under the “direct to consumer” model. However, H.B. 5606 enforces a business model that does not work for electric cars. Michigan should repeal H.B. 5606 and allow Tesla at least some access to Michigan. H.B. 5606 creates an unwarranted barrier to entry in the automotive market and threatens to limit consumer access to competitive products and innovative technology.

Michigan Is Not Alone

Michigan’s passage of H.B. 5606 is one of the many legal battles that Tesla is fighting across the country. Most states already have laws that prohibit an auto manufacturer from competing directly with the dealerships that sell the manufacturer’s cars.[1] However, Tesla does not franchise dealerships; instead it maintains “showrooms” where consumers can learn about its cars and complete the sale at the store or online. The cars are then delivered directly to purchasers’ homes, unless, of course, their state has banned direct-to-consumer sales. Some states, including Ohio, enacted a legislative compromise that limits Tesla’s number of stores in the state and bans any future manufacturer from selling directly to consumers.[2] H.B. 5606 will likely keep Tesla out of Michigan completely.

Tesla’s recent victory in Massachusetts was the likely catalyst for H.B. 5606’s passage. In September, the Supreme Court of Massachusetts held that its dealers did not have legal standing to sue Tesla under its dealership law.[3] The Massachusetts’s law was similar to Michigan’s dealership law prior to H.B. 5606, in that it prohibited auto manufacturers from owning dealerships in the state that carried product lines sold at franchised dealerships. The Court held that only franchisees affiliated with a manufacturer could sue that manufacturer, and therefore that unaffiliated dealerships had no claim of unfair competition against Tesla.[4] The court reasoned that the legislation was meant to protect dealers from the unequal bargaining power dealers have with the manufacturers with whom they contract, not to protect against any form of competition.[5] In light of the Massachusetts Supreme Court’s ruling, Michigan’s H.B. 5606 appears to be an attempt to impose anti-competitive measures in the interests of state auto dealers.

H.B. 5606 changed little wording from the previous version of the Michigan dealership law, yet its impact is significant. The previous statute stated that a manufacturer could not “[s]ell any new motor vehicle directly to a retail customer other than through its franchised dealers . . . .” H.B. 5606 removed “its” from the statute, so that any new car sale must be through a franchised dealer.[6] The new version of the law bars Tesla—and any future “direct to consumer” car company—from selling its cars in the state, unless it is through a franchised dealership. The law will likely extend the ban to Tesla showrooms, since the second part of the subsection only allows manufacturers to provide information that would facilitate a sale by a dealership.[7] Michigan’s law thus effectively precludes Tesla from establishing any presence without first establishing a franchised dealership.

Innovation Requires Removing Barriers

Electric cars currently lack the affordability and convenience of their gasoline powered counterparts, but their desirability will likely increase as oil supplies fall and gas prices rise. Empirical evidence shows that traditional franchise dealerships favor gasoline over electric cars.[8] Dealerships generate significant profits from maintenance costs of gasoline cars, which incentivizes dealers to dissuade consumers from purchasing electric cars.[9] Electric cars, with low maintenance costs, do not offer the same consistent income to dealerships after a sale.[10] Legislatures do not have to favor companies like Tesla, but forcing them to participate in an unfavorable business model is an unnecessary barrier to market entry. H.B. 5606 is such a barrier to entry; its dealership requirement forces Tesla into a business model that is ill-suited for electric cars.

The main problem with H.B. 5606 is that it only represents the interests of a small group of dealers rather than the interests of the public or even the automobile industry as a whole. As renewable energy sources grow and the cost of biofuel extraction continues to rise the demand in the market will swing from gas powered cars to electric. Countries that embrace the eventual market shift will be ahead of those that do not in terms of infrastructural and technological growth in this field. The United States can ensure its competitiveness by embracing electric cars while they are still new, so that the country’s domestic market can enter the international electric car market as a sophisticated manufacturer rather than a vulnerable importer. Guarding an archaic business model hinders progress by reducing any incentive to remain competitive, but competition keeps prices at true market levels and ensures technological advancement. Banning sales from an auto manufacturer, simply because they do not include a middle party in the transaction, goes against the interests of consumers and is inimical to the capitalist ideals that undergird the American economy. Michigan cannot even rely on the claim that the law protects their auto industry, because Tesla alone purchases over $170 million in auto parts from Michigan suppliers.[11] Lawmakers should not fold to the interests of a handful of dealerships and sacrifice an emerging and viable market in the process.

Some states have found alternatives to Michigan’s outright ban of Tesla’s business model. In Ohio, the legislature allowed Tesla to retain three showrooms, but prohibited Tesla or any future manufacturer from directly selling to consumers. This compromise seems to protect the interests of dealers while allowing Tesla to approach Ohio citizens. But it still fails to allow for competition among different business models. Consumers have access to a massive and varied automotive marketplace through the Internet. Many of the justifications for the franchise-dealership system are outdated. The main argument in favor of dealerships is that they provide the consumer with bargaining power, whereas prices directly from manufacturers would not be subject to negotiation. But the internet did not exist when these theories of consumer bargaining were first introduced; consumers were limited to their local marketplace unless they wanted to expend considerable time and energy on an automobile purchase. Today consumers have access to information for price comparisons, and can force competitive pricing through open market choice. Consumers should be able to decide for themselves whether they prefer the dealership model or online shopping now that their respective bargaining power has increased.

The Future of Progress

Michigan’s recent ban on direct to consumer auto sales is an attempt to preserve an old business model at the expense of an emerging market. Electric cars offer a cleaner, and eventually probably a cheaper alternative to gas-powered cars, but they will never reach that potential if they cannot reach consumers. States are not under any obligation to favor electric cars, but barring consumers’ access to these cars because their manufacturers’ business model does not involve dealerships is the wrong choice. Michigan would be right to repeal H.B. 5606 and allow Tesla to introduce a budding technology and new sales model. The end result will be a leaner and more competitive Michigan automobile market.

 

[1] Texas, Arizona, New Jersey, and Maryland have already banned manufacturers’ direct sales to consumers. Chris Isidore, Tesla’s Latest Battleground State: Georgia, CNN Money (Sept. 2, 2014, 5:52 PM), http://money.cnn.com/2014/09/02/news/companies/tesla-georgia.

[2] Jackie Borchardt, Ohio Senate Oks Compromise to Allow 3 Tesla Motors Stores in Ohio, Cleveland.com (Apr. 1, 2014, 2:44 PM), http://www.cleveland.com/open/index.ssf/2014/04/ohio_senate_oks_compromise_to.html.This deal applies only to Tesla, and prohibits future entrance from any other company.

[3] Massachusetts State Auto Dealers Ass’n v. Tesla Motors MA, Inc., 15 N.E.3d 1152 (2014).

[4] Id. at 1162.

[5] Id.

[6] H.B. 5606, 97th Leg., Reg. Sess. (Mich. 2014).

[7] Id.

[8]Nissan’s leaf has struggled at dealerships compared to its gasoline powered competitors. Cliff Weathers, How Tesla and New Car Technologies Could Make Auto Dealers Obsolete, Salon (8:00 AM Oct. 11, 2014), http://www.salon.com/2014/10/11/how_tesla_and_new_car_technologies_could_make_auto_dealers_obsolete_partner/.

[9] Id.

[10] Id.

[11] Dustin Walsh, Tesla Courted Suppliers in Bid to Stop Bill Banning Direct Sales in Mich., Automotive News (6:22 PM Oct. 20, 2014), http://www.autonews.com/article/20141020/RETAIL/141029990/tesla-courted-suppliers-in-bid-to-stop-bill-banning-direct-sales-in.

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