Tesla sues for right to sell cars in Michigan

Michael Wayland, The Detroit News
A Tesla showroom in Palo Alto, California. The legal action comes after Michigan officially denied Tesla a new dealership license last week.

A cornerstone of the American automotive industry — franchised dealerships — is being challenged in Michigan as unconstitutional by electric-vehicle manufacturer Tesla Motors Inc.

The Palo Alto, California-based company on Thursday filed a lawsuit in U.S. District Court in Grand Rapids that if successful could upend the state’s vehicle sales laws and have a ripple effect nationally on the country’s franchised-dealer network.

The federal suit is unique compared to suits Tesla has filed in other states to sell its vehicles directly to consumers: This one challenges Michigan law as unconstitutional rather than arguing its right to operate under state laws.

“They deliberately resisted filing a lawsuit about that until now because they wanted it to be a last resort,” said Daniel Crane, a University of Michigan law professor who has closely followed Tesla. “There could be a much wider presence established — particularly if a federal court of appeals ... would ultimately rule this law is unconstitutional. That could really send shock waves around dealers to the rest of the country.”

The Michigan lawsuit was filed by attorney and former Michigan solicitor general John J. Bursch. It names Gov. Rick Snyder, Secretary of State Ruth Johnson and Attorney General Bill Schuette as defendants.

Bursch referred questions to Tesla, which did not respond for comment. Snyder spokeswoman Anna Heaton said the office does not “comment on pending litigation.”

The legal action comes after the state officially denied Tesla a new-dealership license last week. It was denied because the company’s business model of selling its vehicles directly to consumers is illegal under Michigan law, according to a final decision and order released Sept. 15. The state requires a dealer to have a contract with an auto manufacturer — not act as both.

Tesla seeks two things: (1) A declaratory judgment that Michigan’s ban on direct-sales “violates the Due Process, Equal Protection, and Commerce Clauses of the Constitution as applied to Tesla by prohibiting Tesla from selling its vehicles directly to consumers and by precluding Tesla from performing service and repairs within the State”; and (2) a permanent injunction preventing state officials from enforcing the law, including an October 2014 amendment that has become known as the “anti-Tesla” bill that Snyder signed into law.

Some believe Tesla’s best argument could be that Michigan law violates the so-called “dormant” Commerce Clause. It grants Congress the power to regulate commerce and restricts states from passing legislation that improperly burdens or discriminates against interstate commerce.

“The ‘dormant’ Commerce Clause is very well accepted,” said Northwestern University law professor John McGinnis. “You might think if any state is going to be ill-disposed toward Tesla, it would be Michigan given the weight of the traditional car companies there.”

The lawsuit argues the “only conceivable reason” for the law is “to reward the dealers’ generous lobbying efforts by handing them a monopoly.” It singles out Detroit-based General Motors Co. as throwing “its weight” behind the 2014 amendment.

Another argument for Tesla could involve the issue of “economic liberty” and a precedent involving coffins.

The Wall Street Journal earlier this year reported Tesla’s legal staff had been studying a 2013 federal appeals court ruling in New Orleans that determined coffins made by monks could be sold to customers without having a funeral director’s license. That was amid a shortage of coffins after Hurricane Katrina.

The ruling was in favor of the monks and upheld by the Fifth Circuit Court of Appeals. It could give Tesla precedent for selling cars.

In the U.S., Tesla has stores in 23 states and the District of Columbia. It also operates in 20 other countries. There are no countries where Tesla has not been able to sell directly, and the only states in the U.S. where it has not been able to get a license are Michigan, Texas, Connecticut and Utah.

“What Tesla is arguing is that these laws that require franchises have no other purpose other than to inhibit competition,” said Mike Ramsey, an analyst at research and advisory firm Gartner Inc. “Their intention is to undo these laws not in Michigan but in the United States.”

Ramsey argues Tesla has far more to win than lose at this point: “The downside to Tesla is if they lose this lawsuit, then they can’t have a dealership in Michigan.

“If they win this lawsuit, they will potentially destabilize all of the laws in every state that regulates the ability to get franchises.”

Some states — including New Jersey, New York, Ohio and Pennsylvania — have passed legislation that clarifies Tesla’s ability to operate, but at the same time limits the number of dealer licenses or stores Tesla can operate.

In other states, including Texas and Virginia, Tesla has worked with regulators to open “galleries,” or stores, without dealership licenses. Buyers can get information and see or test-drive Tesla vehicles but not purchase them.

The Motor Vehicle Division of the Arizona Department of Transportation granted Tesla its license to sell vehicles there after an Arizona judge this year found the department had wrongfully denied Tesla a license.

According to the suit, Tesla met in June with representatives from the state, with the Michigan Automobile Dealers Association and with local automakers in an attempt to find “a potential legislative compromise that would allow Tesla to sell and service its cars in Michigan.” It states the company was told that without the support of those groups, “the Legislature simply would not pass legislation that would allow Tesla to operate.”

Before the October 2014 amendment — initiated by the dealers association — Tesla believed it had a right to not just open a retail store but a full dealership.

The dealers association, which represents the interests of the more than 650 franchised new-vehicle dealerships in Michigan, maintains Tesla should have to follow the same rules as every other automaker and operate through franchised dealers.

“As we have said, it’s a great company. They seem to make a great car. Dealers in the state would love to sell them and compete against each other but they’ve chosen not to pursue that method as our law states,” said Terry Burns, executive vice president and secretary for the Michigan Automobile Dealers Association. “We will let the courts take over and we look forward to a response.”

Auto dealers have long insisted protections are needed for franchise dealers who have invested millions in storefronts; they worry dealers could be undercut if automakers sell directly to consumers. State laws were passed in the wake of questionable tactics by some automakers more than a half-century ago.

“Tesla is now tired of going state-to-state and having these little regional battles,” Ramsey said. “And since Michigan is being obstinate, they’re using this because it’s a favorable district court for them, they’re using this as an opportunity to pursue a federal measure.”


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Twitter: @MikeWayland