Without Franchisees, Can Tesla Violate Franchise Laws?

Steve Finlay 2

October 12, 2012

2 Min Read
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Consider the difference between protection and protectionism.

Protection is what’s needed to avoid getting hurt. Think airbags. Protectionism is what’s in place to prevent competition. Think monopolies.

But what some people see as protection, others consider protectionism, and vice versa.

An example of that is found amid the dispute brewing between the National Automobile Dealers Assn. and Tesla Motors. At issue is how the fledging auto maker sells its electric vehicles.

Tesla runs 17 showrooms in 10 states. Those are factory-owned. That vexes NADA. The trade group claims the direct-sales setup violates dealer franchise laws.

Virtually every state has those. They go way back. Dealers sought such legislation to protect them from real and potential abuses by auto makers, such as selling franchises and then opening their own stores in the same market.

As franchisees, dealers put their own money into independent operations. They want and need reasonable legal assurance an auto maker isn’t going to yank a franchise without just cause or build a factory outlet down the street.

Courts consistently have upheld franchise laws over the years. Even the U.S. Supreme Court did so by a 9-0 decision, back when the possibility of such unanimity existed among the justices who seem so divided now.   

Dealers see franchise laws as protecting their substantial investments. But critics claim the laws are an outdated form of protectionism that thwarts competition. They see it as the same old story of car dealers trying to rip people off, in this case by perpetuating an anachronistic selling system.

Well, auto makers, not auto dealers, came up with the dealer-franchise system. Auto makers did so because they didn’t want to pour their own money into nationwide sales and service outlets.

And any fair person must recognize the unfairness of a company selling franchises, then opening factory stores that compete with franchisees.

But here’s what is different about Tesla: The new auto maker never issued any franchises. It opened its own stores from the onset. Its stores are not competing against franchisees, because there are none. So how can Tesla violate a franchise law?

Or so the legal argument goes. People agreeing with it think Tesla has an open-and-shut case. We’ll see, because this one seems bound for court.       


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