Tesla Vs. the State of Michigan Why the state is banning Tesla sales and where Tesla stands

Michigan’s auto dealers think their system works — the system where they compete amongst each other to sell and service cars. Auto industry newcomer Tesla Motors believes it’s better to sell its innovative electric cars in an innovative way: directly to the public, cutting out dealers altogether.

While the state Legislature and regulators side with dealers — banning all direct manufacturer-to-consumer sales in 2014 and blocking Tesla’s efforts to set up shop here since a lawsuit, filed by Palo Alto, Calif. based Tesla, against the state in September means that the courts will ultimately decide how Michiganders car shop.

“Michigan is one of four states banning direct sales, which are allowed in 23 states and the District of Columbia,” Tesla said. Michigan, like the other three states that are banning direct sales; Texas, Connecticut and Utah, may have a tough time defending its position.

“The issue is not, are dealers all bad? Of course not. The question is, why should the law mandate a particular method of distributing a product?” said Daniel Crane, a University of Michigan law professor and antitrust expert who has closely followed the case. “Unless there’s a compelling reason, let the consumer decide.”

However, Crane added that courts have, at times, shown “reticence to strike down economic legislation just because it’s silly.”

In its suit, Tesla alleges the state’s “highly protectionist” prohibition is “effectively giving franchised dealers a state-sponsored monopoly on car sales within Michigan” by banning manufacturers from directly selling or servicing the cars they make.

As a result, the nearest Tesla sales and service center for Lansing customers is suburban Cleveland, Ohio, according to Tesla’s website.

“Giving auto dealers a monopoly on car sales benefits them, but harms consumers. This is recognized by the Federal Trade Commission as well as a broad coalition of consumer advocates, economists, free-market supporters, law professors and the public generally,” Tesla said in a prepared statement.

Terry Burns, executive vice president of the East Lansing-based Michigan Automobile Dealers Association, argues consumers actually benefit from having various dealers to choose from for any make.

“We don’t think there’s any harm in doing it the way it’s done today,” Burns said. “Customers are provided for. It ensures customers have competition, that they have places to go to buy a car, work on their car.”

In its suit, Tesla argues that “it could not succeed by selling and servicing its vehicles through a traditional network of third-party dealers,”

because, “Tesla is new to the industry, and because all-electric vehicles are new to most customers, Tesla’s sales model has focused on educating consumers about its products and technology …”

Burns said many of his constituents can and want to take on that challenge.

“It would be very easy to sell (Tesla) through traditional dealer markets. Dealers do a phenomenal job with that,” Burns said. “Every other electric vehicle, every other hybrid, all over America are sold by dealers.”

“There are many, many dealers in the state that would love to be a Tesla dealer,” Burns said.

Tesla doubts dealer interest is sincere. As one leading legislator told Tesla, “The local auto dealers do not want you here. The local manufacturers do not want you here. So you’re not going to be here.”

Several local dealers and General Motors did not reply to requests for comment.
Beyond legalities, Crane said Tesla’s position lines up with expectations of today’s shoppers.

“They’re used to shopping on the Internet,” he said. “Consumers today are sophisticated enough to have choices in how they buy cars,” in the same way they can go to an Apple store, other online retailers or independent stores to buy Apple products.

While Tesla in its statement said, “solving this legislatively always has been and continues to be Tesla’s preferred option,” observers doubt an out-of-court compromise is likely.

“It’s been very politically difficult for Tesla to work the Legislature in Lansing,” Crane said. “It’s dead-end at the moment, politically.”

Western Michigan University professor of finance and commercial law Thomas Edmonds added, “This is a political environment. It may be better for the Legislature to have it imposed on them, [rather than agreeing to a compromise].”

“I don’t see a lot of incentive for them to do anything [ahead of a court ruling],” Edmonds said. “It would be seen as giving in prematurely.”

Edmonds believes Tesla will eventually prevail, comparing Tesla’s suit to an earlier lawsuit against the state under former Gov. Jennifer Granholm. That case saw courts overturn state restrictions on wine sales from out-of-state wineries.

“It was designed to protect and further the interest of in-state wineries,” Edmonds said of the overturned law. “The parallels between that (the Tesla suit) and the Granholm case, at least in my opinion, are very strong.”

Burns isn’t so sure. “You never know what’s going to come out of a lawsuit,” he said.

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Omar Sofradzija

Omar Sofradzija

Omar Sofradzija is an adjunct journalism instructor at Michigan State University. Prior to that, he was a columnist and reporter at the Las Vegas (Nev.) Review-Journal, where he covered the development and launch of that city's Metropolitan Area Express (MAX) bus rapid transit system and the Las Vegas Monorail.

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