Braulio Ramirez

IE 447 Term Paper

Teslas Federal Fight: The Dealership Battle
Tesla Motors is currently battling against several states for the right to sell their product
directly to consumer in their own factory owned stores. Teslas business plan calls to sell their
vehicles directly to the customers, essentially cutting out the middle men dealerships, which in
turn would serve to challenge the dealerships businesses. The way these stores work is that
the consumer goes directly to the gallery where there may be one car on display and states an
interest in buying a tesla car. They are then directed by an employee to a nearby computer
terminal where they fill out an order online which is then processed and handled in the
companys main office in California.
While a few states have allowed Tesla to open up their factory stores to the public,
there has been litigation in several other states that has been trying to stop Tesla motors from
being able to do so. The issue here is that the National Automobile Dealers Associations state
that Tesla is violating franchise and consumer laws in many of the states it is trying to set up
stores in. While there are regulations for franchises set by the federal government most
franchise and consumer laws are set by each individual state themselves which is why Tesla has
had trouble setting up stores in several states so far.
One such example is that of Massachusetts, which recently lost its lawsuit against Tesla
for banning the factory stores. Tesla had opened a gallery in the Natick Mall in Massachusetts
and not long after they were facing a lawsuit from Auto Dealers Association. In the case Mass.
State Auto. Dealers Assoc., Inc. et al v. Tesla Motors MA Inc. or MSADA v. Tesla the plaintiff
stated that Tesla was violating Massachusetts law by conducting sales in the state at
dealerships which are where the company itself has ownership interest. Tesla retorted stating
that technically the sale itself does not take place in the state because any and all orders are
filled in their California factory; Massachusetts instead is just the delivery sight for that sale.
The case was ruled in January 2013 in favor of Tesla in which a Massachusetts Superior court
judge ruled that state law doesnt necessarily give dealers standing to pursue legal claims over
manufacturer-owned stores. This court is unconvinced that the 2002 amendment to Chapter
93B expanded the purpose of the statute to protect the motor vehicle franchise system, stated
Judge Kenneth J. Fishman. (Quinland, Robert Has the Automobile Franchise system run out
of gas?)
The company has had similar successes in other states such as New York and Minnesota
but it has found itself facing a few obstacles in other states. In Texas the company tried to
create an exemption in Texas prohibition of manufacturer-owned dealerships which would
have allowed Tesla to set up shop. In that battle Tesla CEO Elon Musk argued before a state
House committee for an exemption to existing state law that permits new-vehicle sales only by
franchised dealers. (Wilson Amy, Teslas Musk: Ill Take Store Fight Federal) Tesla faced a
comparable challenge in Virginia when the state failed to recognized the companys right to sell
without a dealerships license. When Tesla filed in order to obtain an exemption to obtaining
this license it lost that dispute.
Tesla has been fighting these legal disputes for several years now to almost no avail as
many of the cases are considered for appeal. According to NADA [National Automobile
Dealers Association], 48 states have restrictions on factory-owned dealerships. Of those, Musk
says around 20 have statutes that make Tesla's model difficult, and half a dozen make it
extremely difficult.(Wilson Amy, Bunkley Nick Musk v. Dealers) With all these setbacks Elon
Musk is looking to stop waging these battles on the state level and go straight to the federal
level. He plans on doing one of two options; lobby Congress to pass a bill that would allow
direct sales of electric cars by startup companies similar to and including Tesla, or filing a
federal lawsuit that would challenge the state restrictions as being violations of interstate
commerce.
Both choices present a largely uphill battle for the company because they present many
more issues into the case. Were the company to choose to file a federal lawsuit, they would be
faced with the task of proving to a judge that the many laws and regulations states have over
franchises are irrational or in violation of interstate commerce laws. The issue boils down to
being a states right issue, because if a federal judge votes in favor of Tesla motors, then states
will lose the right to regulate franchises and control consumer protection and distribution of a
primary product within their state borders (Wilson Amy, Bunkley Nick Musk v. Dealers).
While the company is right in saying that States impose many restrictions on interstate
commerce they do have the right to do so as long as they can give a reasonable basis for the
restriction. Thus Tesla has to prove that these restrictions are in violation of interstate
commerce laws or at least that states dont have a reasonable basis for such restrictions.
Because this battle has not yet begun we can only look at the possible facts and
arguments of the case and determine whether Tesla Motors can successfully knock down the
states regulations or if these regulations will be upheld. Interstate commerce, first drawn up in
1887, is defined as being he purchase, sale or exchange of commodities, transportation of
people, money or goods, and navigation of waters between different states. (Interstate
Commerce Law & Legal Definition). It is regulated by the federal government under the
Constitution and give them the power to govern the commerce within and between states
when need be. Using this, the federal government put out a set of regulations and generally
leaves the intricacies of interstate commerce to the discretion of each individual state.
However, should the need arise, the federal government can completely regulate all aspects of
commerce, leaving no freedom to the states to decide, for themselves, this issue. This mandate
gives the federal government authority to regulate commerce within a state when it may
impact interstate movement of goods and services and may strike down state actions which are
barriers to such movement. (Interstate Commerce Law & Legal Definition) As such Tesla would
have to prove that an individual states regulations impact interstate movement of goods which
would give cause for the federal judge to remove such regulations.
Regardless of this, the question still remains; Are state regulations in violation of the
interstate commerce law in regards to prohibiting Teslas factory stores? Proponents of closing
Teslas factory stores can argue that the company is in violation of Section 3 of the interstate
commerce act, which states That it shall be unlawful for any common carrier subject to the
provisions of this act to make or give any undue or unreasonable preference or advantage to
any particular person, company (United States Interstate Commerce Act of 1887) Under
this provision it can be argued that by trying to go around licensed dealerships and selling their
product directly to consumers they are in violation of this very section because they are giving
themselves an unfair advantage by being the only manufacturers who are able to do so at the
moment.
Elon Musk claims that [my] fledgling electric vehicle company will fail unless it is
allowed to operate its own retail network. Tesla dealerships are modeled after Apple stores,
with small locations in high-end, high-traffic shopping centers. (Wilson Amy, Bunkley Nick
Musk v. Dealers) The NADA is worried, however, that Tesla would just be the beginning in a
movement in which manufacturers directly sell their automobiles to the public. Doing so
would, while saving consumers money, make licensed dealerships irrelevant which is another
reason Tesla will have a hard time changing things, because these dealerships hold large
influence in their states governments. The main concern according to NADA is that dealerships
are essential to the economy because they ensure that there are competitive prices for their
customers which explains why they are so adamant on protecting existing franchise laws. This
makes sense because if manufacturers like Tesla are allowed to directly sell to customers from
factory stores they could essentially set much higher prices for the same product because there
are no competitors selling the same products unlike the current dealership system.
Similar cases such as this one have happened in the past with GM and Ford, and the
issue was, for the most part, settled. In the late 1900s these manufacturers tried to operate
their own dealerships like Tesla is trying today, and they had to face the same wrath of the
existing dealership associations. In fact, this was the catalyst for many states strengthening
their franchise statutes to prevent factory stores. (Wilson Amy, Bunkley Nick) States have
created their new franchise laws in order to limit advantageous opportunities that would arise
should manufacturers be allowed to sell directly to customers from factory stores.
In fact, in a federal lawsuit, a judge may look back at this in order to help decide
towards a verdict. A judge would look through each franchise or interstate commerce law in
question and decide whether the State had a reasonable basis for creating such a law and
whether that basis is still valid in todays world. In my personal opinion, Tesla would have a
hard time convincing a judge otherwise because these laws have been around for decades and
so far there have been no such violations so there would be no reason for a federal judge to
think any different and attempt to change these regulations.
For now Tesla can only continue going on a state by state basis trying to change any
regulations made against the companys attempt to own its own franchise. Even in a federal
case they would have to analyze the regulations of each state because interstate commerce
laws give states freedom in creating any regulations they deem necessary. In fact, many states
have created even more regulations just to stop Tesla. While one grand federal case would be
much more manageable than a series of battles between states, I do not see any way for
advocates of Tesla Motors to argue that these states regulations are in violation of interstate
commerce.
On the other hand, Tesla may have an easier time going with their plan to lobby for a bill
in Congress that would allow his company to be an exception towards the many regulations
that exist in regulatory law. The idea here is that the bill would grant Tesla, and possibly any
other similar startup companies a pass that would allow them to sell their products directly to
consumers without having to deal with dealerships. As such Tesla has been lobbying hard to
ensure they have enough allies in Congress for the bill to pass as this will ensure they dont
have as many legal issues as they would should they make a federal case. Also, by doing this,
Tesla can appeal to public support because many consumers would prefer that manufacturers
sell directly to them thus eliminating the extra costs and fees from dealerships.
Tesla has a long uphill battle ahead of it legally speaking. Its plans to sell their product
directly to consumers from factory owned stores is being halted by the states at every turn. Its
leadership, tired of continuous legal battles across several different states plans on taking the
fight to the federal stage under the presumption that many of the regulations and current
existing franchise laws are actually in violation of international commerce. In my personal
opinion I do not believe Tesla will be successful in proving that the States are in violation of this
because there is not much evidence to back this up. For one thing, many of these franchise
laws have been in place for decades and no violation has been found so far. Just as well,
although many state dealer associations have been making amendments to their franchise laws
just to stop Teslas advances, there is no case that these are in violation of interstate commerce
either. In fact, from what I have seen, there are more indications that Tesla is in violation of
interstate commerce laws such as possibly Sec. 3 of the interstate commerce act. Teslas
advocates will have a hard time convincing a federal judge that this is indeed the case, but
should they prove successful in doing so they will effectively change the way the game is
played.












Works Cited

"Interstate Commerce Law & Legal Definition." Interstate Commerce Law & Legal
Definition. USLegal Inc., n.d. Web. 1 Apr. 2014.

Quinland, Robert M. "Has the Traditional Automobile Franchise System Run Out of
Gas?" Has the Traditional Automobile Franchise System Run Out of Gas? American Bar
Association, June-July 2013. Web. 29 Mar. 2014.

United States. Interstate Commerce Act of 1887. By U.S. Government. U.S. Government,
n.d. Web. 1 Apr. 2014.

Wilson, Amy, and Nick Bunkley. "Musk v. Dealers." Business Source Premier. EBSCO,
9 Sept. 2013. Web. 1 Apr. 2014.

Wilson, Amy. "Tesla's Musk: I'll Take Store Fight Federal." Automotive News 87.6564
(2013): 1-41. Apr.-May 2013. Web. 29 Mar. 2014.