MAXWELL J. LEVINE – “Our goal when we created Tesla a decade ago was the same as it is today: to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.”
Tesla Motors’ (“Tesla”) mission statement constitutes a revolution in the global automotive industry, which generates over $2 trillion annually. As a relatively young start-up company that independently manufactures its own automobiles and lithium batteries, the most significant challenge Tesla has faced in accomplishing its mission is managing its manufacturing costs. Currently, Tesla produces one model—the Model S—which retails for over $71,000. In order to maintain this lower price point, Tesla has developed a controversial method to sell its vehicles.
The cost-saving innovation that has sparked lawsuits is Tesla’s direct sales model. The direct sales model allows Tesla to sell directly to consumers. Meaning, Tesla bypasses dealerships, keeps total control of its brand, and eliminates price increases that would be passed on to the consumer by dealerships.
While the practice may provide savings to consumers, dealerships consider Tesla’s direct sales model to be a threat to their businesses. Dealers fear that Tesla’s direct sales model would pave the way for other market entrants or startups to completely sidestep the traditional franchised dealership. If enough manufactures sell exclusively direct to the consumer in the future, franchised dealers would become a thing of the past.
Dealerships have lobbied to invoke dealer-franchising laws to halt Tesla’s direct sales practice. Dealers and state governments have had varying success in their efforts to prevent Tesla from conducting direct sales.
In Massachusetts State Automobile Dealers Association, Inc. v. Tesla Motors MA, Inc., Massachusetts State Automobile Dealers Association (“MASADA”) alleged Tesla had violated motor vehicle regulations, by owning and operating an automobile dealership that sells the cars it manufactures. These regulations prohibit methods of unfair competition and deceptive acts or practices.
However, the regulation defines “motor vehicle dealership” as any business that sells new motor vehicles to consumers pursuant to a franchise agreement. Tesla successfully motioned for dismissal of the case by arguing that members of MASADA lacked standing because they were not “affiliated dealers” of Tesla. The court reasoned, that because members of MASADA were not affiliated dealers pursuant to a franchise agreement with Tesla, Tesla’s direct sales could not have caused an injury to MASADA and therefore, MASADA lacked standing.
Despite Tesla’s legal victory in Massachusetts, Tesla was unsuccessful in Michigan. In Michigan, lawmakers successfully prevented Tesla from engaging in direct sales by deleting one word in a statute. The original law in Michigan, stated that a manufacturer, importer, or distributor shall not “[s]ell any new motor vehicle directly to a retail customer other than through its franchised dealers … .” To terminate Tesla’s direct sales model, Michigan lawmakers enacted a new law, which states that a manufacturer shall not “[s]ell any new motor vehicle directly to a retail customer other than through franchised dealers… .” Tesla describes the removal of the word as “critical” because it was designed to “force Tesla, a company that has never had a franchise dealership, into a body of law solely intended to govern the relationship between a manufacturer and its associated dealers.” Whether the old law prevented Tesla from selling cars in Michigan or not, the new law seems to have removed the loophole.
The dealership sales model benefits customers by having dealerships compete with one another, while the direct sales model allows car manufacturers to curb price increases and retain complete control over their products. Tesla’s goal is “to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.” If direct sales help Tesla put more environmentally-friendly electric cars on the road, without harming consumers, laws should support it.
