Tesla Running Into Trouble With Franchise Laws

Luxury electric car maker Tesla recently ran into legal problems.  Interestingly, this legal trouble has nothing to the with the cars themselves.  Rather, it has to do with the way that Tesla sells its cars.  Tesla has the audacity to sell its cars directly to customers and cut out the middle man; this is the kind of dangerous nonsense that won’t fly in many states.  Tesla has been effectively banned from selling cars in New Jersey, Texas, and Arizona because they are allegedly in violation of laws that require the automobiles to be sold through dealer franchise. Not surprisingly, the move has many consumers asking why these laws exist and whether they are valid.  The answer to the first question is easy – $$$ and lobbyists.  Automobile dealers have, through lobbyists, thrown around a lot of money to local politicians to ensure that protectionist laws are passed to ensure their continued viability.  Those politicians then pass laws requiring that cars can only be sold through licensed dealers under the guise of safety.  It’s akin to paying protection money to the mob.

The more interesting question is: Are these types of laws valid?  The question is not as easy to answer as it once was.  Under the doctrine known as the “rational basis review,” the Supreme Court has held that just about any law that didn’t discriminate against a protected group like minorities or women was presumed to be valid.  The judiciary was not supposed to be second-guessing legislatures on whether a law had a legitimate public purpose.  However, recently, courts have been looking at these types of laws more closely.  The Fifth and Sixth Circuits recently struck down state laws that restrict who can sell caskets.  The courts found the problems with these particular laws was that they only protected funeral directors against competition and didn’t have the sort of  health and safety justification that could overcome scrutiny.

The multi-million dollar question for Tesla is whether these automobile dealer franchise laws have the sort of safety justification necessary to survive judicial review.  Tesla’s CEO, Elon Musk, certainly doesn’t think they do.  He recently stated:

The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures “consumer protection”. If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of “protection”, this is obviously untrue. As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer’s mind.

These statements certainly ring true for for me.  It’s certainly not a fun process, and there is virtually no sense that the dealer is looking out for you.  I’d much rather buy a car directly from Honda than from a dealer.

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