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Any business law experts on this board? Question regarding dealer associations' actions.

Any business law experts on this board? Question regarding dealer associations' actions.

Could you give us your opinion of whether dealer associations' action of monopoly the buying, selling and servicing of automobiles in any way violet the federal antitrust laws? I can't see how one group of business' attempt with the sole purpose of eliminating competition does not.

May be we should start another White House petition? This time to ask the Justice Department to look into any antitrust violations?

jordanrichard | 18. März 2014

I am certainly not an expert, but I am going to venture a guess that it doesn't. I don't believe the term "monopoly" can be applied to an association (NADA).

TeslaTap.com | 18. März 2014

I'm not a lawyer, but it would seem restraint of trade (especially across state borders) might be a better direction. No idea who regulates that in the US government.

carlk | 18. März 2014

I know it's illegal for officers from two competing companies that hold significant market shares to even hold meetings to discuss marketing or pricing without the presence of some government officials. The purpose is to prevent market monopoly which is not restricted to just a single company.

triss1 | 18. März 2014

I am a business lawyer, although lawyers should never claim to be experts in anything.

I do not believe that a dealers' association petitioning government is violative of the antitrust laws. The right to petition government is protected in the Constitution, and would likely trump the antitrust laws in any case.

The issue is with the legislatures that pass the laws, not with the associations that ask them to do it.

The interesting stuff comes when local safety concerns run up against interstate commerce. There was a case in the 50s or 60s concerning mud flaps on trucks. States were requiring different sizes and shapes of mud flaps in an attempt to deal with local safety issues (ie, prefer locally-owned trucks). The Supreme Court held those laws violated the commerce clause. If a state banned the importation or use of a Tesla that was purchased elsewhere it would raise similar issues, but I would be surprised if a legislature controlling the manner of sale within a state violated anything. For example, some states permit gasoline pumps to be self-service, NJ doesn't.

Having said all that, law is made based on specific factual circumstances, so without knowing the facts of any particular case it's not possible to really predict the outcome.

PaceyWhitter | 18. März 2014

I am a lawyer (not business like triss1). I would agree that a dormant commerce clause argument would be the best attack, but it is by no means a slam dunk.

Rheumboy | 18. März 2014

I'm not a business lawyer but I did stay at a Holiday Inn last night so what was your question?

Out4aDuck | 18. März 2014

I can remember 20 years ago asking my boss why companies like GM and Ford don't sell directly over the internet. He said, "They can't. It's illegal. They have to sell through dealerships." It didn't seem fair back then either.

carlk | 18. März 2014

Did you guys hear the story that City of San Jose is suing MLB for violating monopoly laws because it does not allow A's to move to the city from Oakland? Pundits say San Jose is not likely win because congress has given MLB antitrust exemption years ago on the ground (inappropriately) that it's an amusement not a business. This seems to tell me business associations are regulated by the Sherman antitrust act too. No?

@triss1 I got your point but can state laws protect one group of business from competition be declared in violation of the federal antitrust law?

CT-Greg | 18. März 2014

To me, the NJ statutes are quite clear. A franchisor is not allowed to sell directly to the public, and the definition of a franchisor is a person who grants a franchise to another person. Until and unless Tesla grants a single franchise somewhere I don't see a good faith argument that they can't sell directly.

triss1 | 18. März 2014

@carlk
In general the antitrust laws deal with the actions of private individuals, not bad legislatures. States are generally free to pass laws as they see fit for the betterment of their people. Betterment, of course, being determined by the legislature.

I know everyone here would like to believe this sort of legislation is illegal, but let me ask you if you feel the same way about drug stores. Most states prohibit the dispensing of prescription drugs except by pharmacies. This does create a type of monopoly in the pharmacy industry, and manufacturers of drugs are not allowed to sell them direct. Most of us would agree that this is reasonable. We also have similar rules about who can install electrical wiring or build certain structures that create near monopolies for tradesmen. The fact that many of us believe that direct sales are a good way to buy cars does not mean that the legislatures that require "skilled" dealers are acting unreasonably or illegally.

Brian H | 18. März 2014

triss;
Yeah; unfortunately, what auto dealers are skilled at is not a public good! It would be prosecuted if made transparent.

GabrielB | 19. März 2014

A little research on Wikipedia and Ask.com makes it abundantly clear that Auto Dealership Associations and State Franchised Car Dealer Laws exist primarily to protect established dealers and their new car sales, used car sales, AND service sales.
http://en.wikipedia.org/wiki/Car_dealerships_in_North_America

A really great read is Ref 1 from the wiki above; "Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers"
http://www.justice.gov/atr/public/eag/246374.htm
This paper advocates eliminating bans on direct sales, in the best interests of the car buying public.

Per tables and graphs in the Ref above; Net annual profits per NADA Average Dealership for new car sales are good, a little up and down. However, service profits exceed new car profits and increase year over year just like health care. (Maybe ICE cars need an Obama affordable service plan).

What might have been understandable manufacturer and dealer policies for a fledging car industry in the late 1800's and early 1900's amounts to nothing but collusion in these modern times, and seriously undermines the public interest. Per Ref 26, in 2001 Texas even banned used lease car sales over the internet.

Just like the Jim Crow Laws from 1876 to 1965 segregated the Nation, State Franchised Car Dealer laws are segregating the car buying public from the vehicles they wish to purchase, and more importantly, HOW they purchase them. Just like Poll Taxes, car buyers are being forced to pay up a Franchised Dealer Tax if they choose to walk in and vote there by using their dollars to buy a car.

Like the Jim Crow Laws, it might take a while to abolish State Franchised Car Dealer Laws Nationwide. What can be done in the meantime? How about something like an underground Franchised Dealership?

How about Tesla Motors, Inc. selects a "trusted partner" (my cell# is...). This trusted partner, through a Tesla Motors Non-Transferable Franchised Dealer Contract (renewed annually as needed), leases from Tesla Motors those Tesla Dealerships-Showrooms-Galleries that are located in Unfriendly States. Lease terms are $1 per year per showroom. The TM Franchised Dealer agrees to provide room for TM Consultants whom are there to provide information to current and prospective customers. TM receives new car internet orders as they do now, and sells the car FBO (for benefit of) to the Franchised Dealer for $1 over TM Invoice. The Franchised Dealer then sells the car to the FBO customer for $2 over TM Invoice. All service is referred to existing TM Service Centers. For an outstanding and well done job, the TM Franchised Dealer would receive an annual bonus equal to the cost of utilities, fees, and taxes the Franchised Dealership must pay to the State. Of course auto sales tax and auto license fees are paid by the customer.

This plan, or some variation, should provide the same “Tesla experience” for all concerned, and should meet the requirements of the State Franchised Car Dealer Laws.

SamO | 19. März 2014

What the state of TX and NJ have done is violate the "dormant commerce clause" by favoring local businesses over interstate business.

Justice O'Connor has written that: "The central rationale for the rule against discrimination is to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent."

The Court has defined "protectionist" state legislation as "regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 273–74(1988).

Elon Musk and Tesla Motors could file suit in federal court for violation of the commerce clause, equal protection etc. They have hinted that they intend to go that route. I'm just surprised they waited as long as they have so far.

@triss1

The difference between a drug company selling directly and having a intermediary is that drug companies are not forbidden from opening pharmacies. Like in Tx and NJ.

TX and NJ are, however, favoring their local business over an out of state one. Without a single rational basis. No hearings or facts have been presented to show Tesla Motors cannot effectively sell and service their own cars. To use legal language : not a scintilla of evidence for the effectiveness of the dealership model has EVER been presented.

Legal SLAM DUNK for Tesla.

tes-s | 19. März 2014

I don't have a law degree, but I stayed in a Motel 6 last night and know that the dealers are not violating antitrust laws.

SamO | 19. März 2014

There are no antitrust issues, just Commerce Clause and equal protection.

tes-s | 19. März 2014

Perhaps, but the dealers and dealer associations have no way to be in violation of those - just the government.

triss1 | 19. März 2014

@SamO: I assume you are not a lawyer, since I would be surprised if any lawyer described a constitutional argument as a slam dunk.

I do not know whether drug companies are prohibited from owning pharmacies. I've never researched the question, but I must say I'm not aware of any drug companies that do. My point was about reasonable controls imposed on markets. There are many differences between the sale of drugs (or electrical wiring) and the sales of cars, but that's just the point--legislatures are given the benefit of the doubt that they are acting reasonably in controlling their local markets for the benefit of their citizens.

The reason I do not think this is a slam dunk (or even likely a winner) as a commerce clause or equal protection case is that the laws in question do NOT necessarily favor local interests over out-of-state interests. If NEWEV Motors were to open its factory in Texas, it would be banned from direct sales to the same extent that Tesla is (assuming, of course, no change in the law). The discrimination is by type of owner, not geography.

PorfirioR | 19. März 2014

I am far from a lawyer but I see how wine club memberships, as well as wholesalers (Costco, Sam's, BJ's) seem to work around some of my own state's regulations. Couldn't the same apply to a car? What if Tesla's were sold only to "club members" in those states like NJ and TX?

If feasible, the idea could either be a stand-alone Tesla Club or afiliated with an existing membership model (i.e. imagine a Tesla store at every Costco).

P.S. At least where I live, you can buy a car at Costco and Sam's Club, although I am not quite sure how it works.

SamO | 19. März 2014

@triss1

Remember what happens when you ass-u-me.

Read the cases on point.

Your argument that TX law would effect TX manufacturers equally is null. They don't have manufacturers. They don't have manufacturers without dealerships. The law doesn't consider the hypothetical world. Just the world we live in.

TX and NJ are restraining interstate trade.

I have studied this and spoken to certain experts in this field (this has been pissing me off for a while) professors of Con Law. They used the words "clearly violations" and "restraint of interstate commerce".

I used the words slam dunk (perhaps in appropriately given the currently corrupted Supreme Court).

petero | 19. März 2014

Not being a lawyer, my OP may not be worth the electrons of this post, but…

On November 14, 2013, AutoblogGreen posted this article - “Texas to give rebates on natural gas and plug-in vehicles, excludes Tesla.”

“ …Texas legislators approved the rebates, which can total up to $2,500 from the state … but managed to exclude the Tesla Model S from the list of electric cars eligible for a rebate, according to Fuel Fix. The issue is that only cars sold through Texas dealerships apply.”

http://green.autoblog.com/2013/11/14/texas-to-give-rebates-on-natural-ga...

Texas may have done Tesla a favor.

jordanrichard | 19. März 2014

Samo, how are the laws in AZ, TX, and NJ restrainig interstate trade? Don't get me wrong I think those 3 states are full #$%t. The modified law in NJ just says the sale can't be commenced in NJ. Meaning no money can be exchanged physically in NJ. It also means the "galleries" can't do test drives. Nothing says you can't just order the car on line, oh wait, that is how it wokrs anyways. Then take delivery right across the street from the Gov. mansion. Which now I think about it, that is what all NJ buyers should do. Have your car delivered right in front of his house.

AmpedRealtor | 19. März 2014

The dealerships and their associations are not afraid of Tesla or EVs, they are afraid that if Tesla is allowed to sell direct then so can GM, Toyota, Ford, and everyone else. That is at the crux of why the associations are bullying legislatures into passing protectionist legislation. The dealerships are afraid of competition from the manufacturers they sell.

Some years ago, Apple had no company stores and did not sell over the internet. If you wanted to buy a Mac, you had to go to an independent reseller and purchase it there. When Apple made the decision to sell online and open its own company owned stores, all of the independent resellers went out of business. That leaves NADA and the rest shaking in their boots.

The obvious solution is to carve out an exemption for Tesla. But then, how is that fair to the other car manufacturers who can then claim to be damaged because they are being forced to sell through a middle man, which requires the vehicle manufacturer to discount sales to these dealers and lose that 8% markup that they could pocket if allowed to sell directly.

I hope Tesla sues, if for no other reason than to throw a shaft of light onto this antiquated and almost criminal model.

omarsultan.ca.us | 19. März 2014

I am not sure you are argue any kind of restraint of trade as the states are not stopping Tesla from selling in their states, just establishing how they are sold, which is a uniform standard that is being applied to all dealerships, so you cannot argue that Tesla is being unfairly singled out with particularly onerous requirements.

Not a lawyer, so take this for what its worth (i.e. nothing).

O

triss1 | 19. März 2014

@Samo: OK, I'll bite. What kind of law do you practice? In which state?

Oh, and by the way, most states' canons of legal ethics prohibit lawyers from making statements like yours about the Supreme Court. Here is the Illinois prohibition:

A lawyer shall not make a statement the lawyer knows to be false or with reckless disregard as to its truth or falsity concerning the qualifications or integrity of a judge...

I disagree with many of the Court's rulings, but in my book you should have some evidence before you label someone (not to mention nine eminent jurists) as "corrupt."

Maybe you should talk to some professors of legal ethics while you're talking to the Con Law folks.

NKYTA | 19. März 2014

@omar "which is a uniform standard "

Right, but there is exactly one auto manufacturer at the moment that these laws apply to (that doesn't have a dealership model).

So, uniform in the way the laws were written maybe, but targeted nonetheless, no?

carlk | 19. März 2014

@AR "I hope Tesla sues, if for no other reason than to throw a shaft of light onto this antiquated and almost criminal model."

That's exactly what I was thinking. Tesla's mission is not just to sell a lot or EV's but to change how (all) cars are designed, manufactured, marketed, purchased and serviced. Sure there will be casualties for people who could not or would not go along with the change but isn't that always the case when human progresses were made?

omarsultan.ca.us | 19. März 2014

@NKYTA:

Agreed--the effective impact is only on Tesla, but I think you would have a hard time arguing that it was written to punitively target Tesla, since it sets the same bar for everyone. Disingenuous, but clever.

O

hsadler | 19. März 2014

So, if I live in (Tx, Nj, or Az) and my neighbor builds a custom car - capable of being DMV registered - I cannot buy it from him?

NKYTA | 19. März 2014

@O, "Disingenuous, but clever"

How about insidious? ;-)

jordanrichard | 19. März 2014

hsadler, that is different. Your neighbor is not a recognized auto manufacturer. Also custom cars have vin numbers already assigned. He would be just customizing and existing car. Only new car manufacturers can establish new VIN#s

Also, no one is saying that one living in one of those states can't buy a Tesla. In TX there are some 400 MSes on the road and technically not one of them was bought in TX. They bought them from a company (Tesla) in CA and had it shipped and registered in TX. This is no different than one buying a Ferrari from a dealer in another state, because there isn't a Ferrari dealer in thier home state.

SamO | 19. März 2014

@triss1

Thanks goodness there's this little thing called the First Amendment that supersedes Illinois rules of conduct.

The evidence of their corruptions is ample and available in dozens of news stories regarding personal bias, and refusal to recuse themselves when they are conflicts of interest.

You may disagree but frankly don't care. Perhaps you should focus on the OP.

http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2994&context...

http://www.casebriefs.com/blog/law/constitutional-law/outline-constituti...

tes-s | 19. März 2014

Hard to argue the law in NJ was targeted at Tesla, since the law was on the books before Tesla existed.

Heard a short clip of Christie addressing this - he said Tesla has to talk to the legislature.

Captain_Zap | 21. März 2014

@AR

You said, "The dealerships and their associations are not afraid of Tesla or EVs, they are afraid that if Tesla is allowed to sell direct then so can GM, Toyota, Ford, and everyone else."

I think that this is what the dealers want everyone to believe.
I really believe that they fear the EV more than their own manufacturers that they have franchise agreements with. There is evidence that some dealer associations do not want to sell EVs from their own manufacturers.

jordanrichard | 21. März 2014

Captain Zap +1. You see, Tesla's revenues will only go up. A dealership's revenue will in fact go down. Dealers make a majority of their money from parts and service. Since an EV requires next to nothing in those terms, they will lose money hand over fist. The dealers have absolutely nothing to gain by selling EVs, except perhaps some good PR, but PR doesn't pay the bills.

The other thing the dealer associations keep crying out loud is about the jobs that would be lost if GM was able to sell directly to its customers. This is what I guess you wold call a "strawman" argument. If GM, Ford, or whoever built their own stores, they are still going to need salesman, lot attendants, finance, service/parts dept. etc. It is the actual dealership owners that will lose their "job". Think about it. Tesla has "sales people", finance, service and parts. At a point they will have to have a physical lot (used models). So it really isn't any different. It's the owners and the NADA that are scaring thier own employees into thinking that the world is coming to an end for them.

Homebrook | 21. März 2014

@GabrielB I like the way you think.

DouglasR | 21. März 2014

I am a retired lawyer (commercial law, but not specifically antitrust). My opinion, however, is worth what you paid for it.

For reasons stated above, when the dealers get together and urge the state legislature to pass a ban on direct sales, their actions are protected by the First Amendment as political speech. So no violation of the antitrust laws there.

Also, when states enact a regulatory scheme that constitutes a restraint of trade (e.g., the ban on direct sales), their actions are generally given a "state action" exemption from the antitrust laws. Thus actions that would be unlawful when committed by a private citizen are typically permitted when committed by the state.

The dormant commerce clause provides a possible argument against these bans, but not a very strong one. It would be difficult to show that these statutes were intended to favor local businesses over out-of-state businesses. That may be the result in this instance, but it is not a necessary consequence of the direct sales ban (the case would be VERY different, however, if a state attempted to prevent its citizens from buying a Tesla in another state and having it delivered).

A more promising avenue would be to argue that the state laws should be read to ban direct sales by manufacturers who have franchise dealers in the state. Since the primary purpose of these laws is to protect (small) franchisees against the overwhelming power of the (big) manufacturers, applying the law to manufacturers with NO franchisees imposes a burden on commerce that is not directly related to the purpose of the law. This argument might work in states where the statutes are somewhat ambiguous, such as New Jersey.

In general, however, I believe the legal case against direct sales bans is not very strong.

DallasTXModelS | 21. März 2014

@Rheumboy

I love how you always post what I'm thinking. Those kind of statements kept me in hot water with 12 years worth of public school teachers.

DallasTXModelS | 21. März 2014

@Rheumboy

I love how you always post what I'm thinking. Those kind of statements kept me in hot water with 12 years worth of public school teachers.