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Tesla Sues Michigan to End Ban on Direct Auto Sales

Sept. 22, 2016
Until now, Tesla has been challenging prohibitions of its sales model on a state-by-state basis. This is its first federal lawsuit on the matter.

Tesla Motors Inc. is cranking up the pressure to sell electric cars directly to customers, filing its first federal lawsuit over the practice on the home turf of General Motors and Ford. Tesla sued the state of Michigan to overturn its ban on direct sales by auto manufacturers.

Until now, Tesla has been challenging prohibitions of its sales model on a state-by-state basis. A federal court ruling over the constitutionality of the ban would have national implications as the company races to bring the Model 3, it’s more affordable electric sedan, to market late next year.

“States can regulate business, but can they do what they appear to be doing here, keeping Tesla out?’’ asked Carl Tobias, a professor of constitutional law at the University of Richmond. "It’s not a frivolous claim. They have a strong argument, but it depends on the judge and what they can prove.’’

Tesla says it’s been stymied by the grip of automakers and dealers on the legislature in Michigan, which along with Texas, Connecticut and Utah is among the few states where it has so far been unable to get a license to sell directly to consumers. The Palo Alto, California-based maker of electric cars and energy storage devices currently operates stores in 23 states and the District of Columbia, as well as in 20 other countries.

“Solving this legislatively always has been and continues to be Tesla’s preferred option," the company said in a statement Thursday. "Unfortunately, the local auto dealers and local manufacturers have made clear that they oppose any law that would allow Tesla to operate in Michigan. Given their position, the leadership of the Michigan legislature recently informed Tesla that it will not even hold a hearing to debate the issue.”

2014 Amendment

Michigan passed an amendment in 2014 in its law regulating motor vehicle manufacturers, distributors, wholesalers and dealers. The bill, signed by Michigan Governor Rick Snyder, was an “anti-Tesla” amendment, designed to favor the state’s automakers and franchise dealers, the company said in the suit. Tesla owners in Michigan currently have to travel to Cleveland or Columbus, in Ohio, to get their vehicles serviced.

Tesla sued in Grand Rapids, Michigan, seeking a court order barring the state from enforcing the ban.

Reviewing Suit

“We are currently reviewing the suit,” Megan Hawthorne, a spokeswoman for Michigan Attorney General Bill Schuette, said in an e-mail. The Michigan Automobile Dealers Association and the National Automobile Dealers Association didn’t respond to requests for comment.

Instead of dealerships with large lots, Tesla operates stores in highly visible retail locations where there is a lot of foot traffic. General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV have operated under franchise laws that have been on the books for decades and were originally put in place to prevent manufacturers from opening stores that would compete directly with mom-and-pop dealers.

The state has prevented Tesla from operating through the direct-sales ban and by rejecting Tesla’s application for a vehicle dealer license, according to the lawsuit. The state hasn’t ruled on Tesla’s request to register a vehicle repair facility, more than nine months after its initial application, John Bursch, Tesla’s lawyer, said in the complaint. Bursch is the state’s former solicitor general, and he argued on behalf of Michigan’s ban on same-sex marriage before the Supreme Court.

A Stalemate

"They were at a stalemate," said Daniel Crane, a law professor and antitrust expert at the University of Michigan. "Bursch is a very well-known Michigan lawyer in constitutional circles."

Arguing successfully that the law violates the constitution with the illegal restriction on the free flow of commerce would allow Tesla to stop the enforcement of the law, Tobias said.

“Otherwise, they’re just blocked,” he said.

Tesla eschews the traditional franchise dealership model, saying that electric cars--as a new technology--are best sold to consumers directly from the manufacturer, in part because consumers have so many questions about safety, batteries and how to charge their vehicles.

The company said it was unable to reach a compromise at a June meeting that included Michigan’s automakers, franchised dealers and state lawmakers. According to the lawsuit, “In the words of one legislator who attended the meeting: The Michigan dealers do not want you here. The local manufacturers do not want you here. So you’re not going to be here.’’

The lawsuit is Tesla Motors Inc. V. Johnson, 16-cv-01158, U.S. District Court, Western District of Michigan (Grand Rapids).

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