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Sunday, 16 October 2016 19:21

Dealerships say Tesla should have to play by the same rules, but are the rules unconstitutional?

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Tesla is currently banned from setting up its direct-to-consumer stores in Michigan. The California-based automaker is suing the state to allow it to operate under its business model, a move that’s opposed by the traditional car dealership organizations. Tesla is currently banned from setting up its direct-to-consumer stores in Michigan. The California-based automaker is suing the state to allow it to operate under its business model, a move that’s opposed by the traditional car dealership organizations. Photo Courtesy of Tesla Motors

While considering buying an all-wheel-drive Tesla Model S electric vehicle in 2014, Jim MacInnes had to drive roughly four hours to Windsor, Ontario to give it a test drive.

Five months after he ordered it over the internet, Tesla delivered the car to his parking lot at Crystal Mountain Resort, where MacInnes is the president and CEO.

Now with 34,000 miles on his car, MacInnes gets routine maintenance done — changing wiper blades, refilling fluids, adjusting alignment — every 12,500 miles. But in order to do so, Tesla sends a flatbed truck from Grand Rapids to his northern Michigan resort and shuttles it down to Cleveland for maintenance. Tesla gives him a loaner until his car is returned three days later.

Such is the experience for those who own Teslas in Michigan, and how it might stay if major automakers and dealers have their way.

In 2014, Gov. Rick Snyder signed a bill that supporters say simply clarifies existing rules requiring auto manufacturers to sell their vehicles through licensed dealerships. However, critics say the Legislature hastily adopted the law changes and roundly call it an “anti-Tesla” bill for what appeared to exclusively target the company’s plan to sell and service vehicles directly, bypassing the dealership model.

Last month, the state denied Tesla’s application for a dealership license. 

In light of strong political resistance driven by lobbying from dealerships, the progressive California-based electric vehicle maker is fighting back through the courts. It filed a lawsuit in U.S. District Court in Grand Rapids last month, saying Michigan’s law violates due process and equal protection under the 14th Amendment and discriminates against interstate commerce.

“Rather than try to compete with Tesla, some of these well-connected players have tried to block Tesla from local markets altogether by lobbying state legislatures for protectionist legislation,” the company said in court filings.

Tesla operates stores in 23 states and Washington, D.C.

Legal experts say Tesla’s lawsuit could have major implications in the way vehicles are sold in Michigan and perhaps nationally, as the case has potential to reach the U.S. Supreme Court, according to one scholar. 

The company has enlisted attorney John Bursch, a high-profile lawyer who was appointed by Attorney General Bill Schuette as solicitor general and who has argued several cases before the U.S. Supreme Court.

Tesla has also threatened to withhold manufacturing expansion in Michigan if it’s not allowed to sell and service cars directly. 

The Palo Alto, Calif.-based company operates Tesla Michigan, a tool and die plant, in Grand Rapids.

Automotive News and Crain’s Detroit Business Publisher Keith Crain described this maneuvering by Tesla as “blackmail” and “outrageous” in an Oct. 2 op-ed that called for the company to play by the same rules as other automakers.

While Tesla supporters agree there is a fairness element in the dispute, they say the rules in place are unfair. Tesla believes they are unconstitutional. 

“I’m disappointed in the way things have turned out,” MacInnes said of excluding Tesla. “It’s the highest-quality car I’ve ever driven. I think it’s anti-competitive, really.”

DEALERS LEAD THE FIGHT

The Michigan Automobile Dealers Association is Tesla’s primary opponent, claiming that the 2014 law Snyder signed simply clarified the manufacturer-dealer relationship.

“The real concern from the dealers’ perspective is we’ve had a law on the books for many, many years and that has served every manufacturer in the world very well,” said Terry Burns, executive vice president and secretary of the industry group. “It has worked great for dealers and consumers, setting up a level of competition between dealerships that gives the absolute best price for the consumer. We happen to agree with that law.

“With a vertically integrated system where the manufacturer owns everything, there’s not much competition there.”

However, some say this competition between dealerships isn’t really competition at all. 

“I’ve heard this argument and I don’t quite get it,” said Larry Ward, executive director of the Michigan Conservative Energy Forum, a coalition of conservative groups that support clean energy development. “You can go from one dealer to another and negotiate prices differently. But that’s not really competition. The price (on the car) is relative to (which dealer) marks it up more. Competition is allowing other sellers of vehicles into a market.”

Tesla critics also say if the company wants to sell cars here that it should just adopt the dealer model.

In its court filing, Tesla said “it could not succeed by selling and servicing its vehicles through a traditional network of third-party dealers, and the high-pressure, commissions-driven sales environment they foster. 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 in a low-key, low-pressure environment. For example, unlike traditional car dealerships, Tesla sells its cars at uniform and transparent prices based on the configuration and options that a customer selects for the vehicle. Thus, at Tesla, customers will never be rushed into a purchase, haggle over the price of the car, wonder if they could get a better deal across town, or puzzle over confusing add-on products, like GAP insurance or rust-proofing. Tesla’s results, measured by sales and Tesla’s superlative survey rankings, show that this model has immense benefits for consumers.”

Ward, who has pre-ordered a Tesla 3, said he wouldn’t even be able to have his car serviced in the state.

“That’s pretty bad for free-market believers,” he said. “It’s odd, but I get it. The dealerships’ lobbying is very strong. But it’s crazy — that’s not how our market works. It’s blocking market participation. It’s a shame.”

Critics also say lobbying efforts by major automakers like GM and the dealers association have entrenched lawmakers in refusing to let Tesla sell and service directly.

The Michigan Campaign Finance Network reported earlier this month that auto dealers have given more than $1 million to state officeholders and their caucuses. The dealerships’ political action committee has donated to all but two of the 144 currently serving legislators, the MCFN found.

State Rep. Aaron Miller, a Republican from Sturgis in Southwest Michigan who introduced a bill in February to allow Tesla stores as long as they are at least 10 miles from a traditional dealership, said the dealers’ influence with lawmakers is clear.

When asked why his fellow Republicans, in particular, are putting up roadblocks to Tesla, he said: “That’s the big question. I would say there is not enough grassroots support screaming for this. There’s not enough pressure to make a change, but there obviously is a lot of pressure on the other side to keep it the same.”

Burns said his group’s lobbying has been transparent and in the interest of consumers.

“We’ve been in this business longer than Rep. Miller has even been alive,” Burns said. “It’s been functioning well, we’re very involved in our communities and we value that. We’re very transparent with what we do and we donate to officials who our members suggest.”

PRECEDENT IN WINE?

The key question in Tesla’s lawsuit is whether Michigan’s manufacturer-dealer law violates the 14th Amendment and whether its intrastate commerce laws negatively impact interstate commerce, said Thomas Edmunds, who specializes in finance and commercial law at Western Michigan University’s Haworth College of Business.

If it does restrict interstate commerce, it could be found unconstitutional, he said. 

And ironically, it’s only been about 10 years since a comparable Michigan law was struck down by the U.S. Supreme Court, Edmonds added.

In 2005, the Supreme Court ruled in Granholm v. Heald that Michigan and New York laws that allowed in-state wineries to sell directly to customers but required out-of-state wineries to go through distributors were unconstitutional.

“I don’t see any distinction between what the Legislature tried to do for the Michigan wine industry and what it’s trying to do for auto dealers and manufacturers,” Edmonds said. “And I’d suggest that with the history of this particular issue, Tesla can substantiate the process and legislative history that this (law) was not coincidental and clearly designed to keep Tesla and others out of Michigan in favor of Michigan dealerships.”

Given Michigan’s recent history on such a legal question, Edmonds added: “When the Supreme Court tells a state something and it doesn’t do it, usually it tells it again.”

“If I were the legislative service bureau or counsel to the Senate in Lansing, I would have issued a memorandum saying, ‘You’re gonna get burned on this one,’” Edmonds said of the Tesla law. “But pandering is one of the specialties of the legislative body. No one wants to make retail car dealers angry and no one wants to make General Motors angry. They may have tongues slightly in cheek on this one.”

‘WE NEED TO MOVE IN THE OTHER DIRECTION’

Miller, who has six Republicans and one Democrat co-sponsoring to his bill, said he’s backing the legislation because “it’s the right thing to do.”

“In a case like this, Tesla’s being told: ‘You can set up business here, just exercise the dealer model.’ They’re saying they don’t want to,” Miller said. “So let’s change the rules.”

State Rep. Gary Glenn, a Midland Republican and co-sponsor of the bill, said “it’d be fine with me” if all manufacturers could sell cars directly to consumers.

“Typically, people who compete in the free market system have been able to adjust and be able to stay competitive,” he said. “I’ve come to the conclusion that 90 percent of every piece of legislation we deal with is protectionist in some fashion, or protecting one industry or interest. We need to move in the other direction. We don’t have to do it overnight, but I don’t see why Tesla can’t market its product in a different fashion. That shouldn’t threaten the ability of auto dealers to continue to profitably run their businesses.”

While recognizing the “significant influence” auto manufacturers and dealers have had in Michigan for decades, Glenn said “it doesn’t detract from my belief that new competitors ought to be allowed free and open access to the marketplace. I don’t think it’s government’s role to step in and block their ability to meet a need or desire by consumers.”

Ward of the Michigan Conservative Energy Forum said a coalition of Republicans has been building not just in support of Tesla but more broadly for the clean-energy sector. 

Officials with the Christian Coalition of Michigan and Young Conservatives for Energy Reform wrote in an Oct. 10 op-ed in Midwest Energy News that Michigan’s opposition to Tesla is also ironic. 

“Michiganders are literally helping build the parts to cars we cannot buy. And in an odd twist that signifies economic faith in the groundbreaking company, the Michigan Department of Treasury has invested in nearly 340,000 Tesla shares worth $72 million for state retirement funds,” the officials stated in the op-ed.

Crystal Mountain Resort’s MacInnes, who also chairs the state Utility Consumer Participation Board and is closely involved in Michigan energy issues, said he understands how political influence is shaping the debate, but he believes there should be a clear choice for consumers.

“I just don’t think it’s fair to exclude a company that wants to sell direct in Michigan,” he said. “I understand dealerships maybe don’t want more competition, but entrepreneurship is the basis of our economy here. People are creating exciting new products, bringing them to market. We need to reduce the barriers to that.” 

Read 3900 times Last modified on Sunday, 16 October 2016 19:41

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