Why doesn't Tesla start its own non-profit dealership to sell in states that disallow direct selling

[jbcarioca]

If in your years of work you didn't find a solution, step aside and let others have it.

Good thing you weren't Tesla's lawyer. You probably would have told them it couldn't be done.

Or at least say something specific and relevant instead of general thread crapping.

Not crapping. If you knew anything at all about my career your second paragraph would not have been there. Those who know me professionally know my track record in regulatory matters.

My point is simple. If we do not understand exactly what the impediments are we cannot find a way around them. Ignorance simply exacerbates the problem by making such male solutions seem to work.

Bluntly, any solution for Tesla that she involves anything defined as a dealer under the prohibitive State statutes cannot work. That is why Tesla is mounting legal challenges in Federal courts.

If in the meantime creative application of things like cooperative firms can serve traditionally, great! In every case there n the US that a manufacturer has established temporary solutions to bypass rules it has cost them fortunes to recover. Cases: Southeast Toyota, and Mercedes-Benz USA, BMW USA back in the 1950's. Tesla will not repeat those errors.

 

[bhzmark]

Bluntly, any solution for Tesla that she involves anything defined as a dealer under the prohibitive State statutes cannot work.

Don't be blunt be specific. Why couldn't a independent free-standing entity that is not controlled by Tesla and isn't a typical dealer, be a dealer for Tesla?

I get that Tesla probably doesn't want to concede an inch and even entertain any sort of independent dealer. But put that aside.

Why cant an independent nonstock or coop entity (ie not a subsidiary or even sibling of Tesla) be a dealer for Tesla in Texas or Michigan or LA or CT?

 

[bhzmark]

Question: how to completely eliminate any otherwise applicable auto dealer statutes. So far that last factor has held this one back, exacterbated by the cooperative control rules.

Which auto dealer statutes are applicable ? Are there laws that say all auto dealers must be owned by overweight Little League-donating free market (except in my particular case) Republicans?

 

[wdolson]

FWIW, most car dealers, even the gigantic corporate ones like AutoNation and CarMax, are devout Republicans.
Unfettered deregulation of interstate commerce is also a devoted Republican issue.
"State's Rights" is yet another devoted Republican issue.

If you listen to the rhetoric and then watch the feet, the two go in different directions. The Republicans always talk about unfettered deregulation and states' rights and they are all in favor for them when they favor their underlying agenda, but if either of those things goes counter to their real agenda, they go out the window in a heart beat.

In this case the Republican car dealer owners want their fiefdom's protected from an upstart rival (Tesla). This is one of the three headwinds Tesla needs to tack into to make it. The other two are the oil industry and the car makers. The oil industry is probably the least concerned about Tesla, they see Tesla as a threat for the distant future because they see the most aggressive roll-out of electric vehicles still leaves ICE as the majority of vehicles on the road for decades to come and in the short term an increase in electrical demand helps their allied industries producing coal and natural gas (natural gas comes up as a by product when oil is brought up from the ground). Wind and solar will eventually push out coal and natural gas, but again it will take time, electric cars are going to spike electrical demand.

The car makers resist Tesla in large part because they don't want to abandon all their intellectual property in ICE tech and switch to something new. They see the switch as expensive and something of a paradigm change, but in the long term, it doesn't change their bottom line much. They can still sell just as many cars and they might even end up selling more for a while as people switch technologies, they just don't want to go through the hassle getting there.

The car dealers are the most threatened by Tesla. They face a threat from two directions if Tesla succeeds. If Tesla gets a big market share, that means fewer cars they sell and if the car makers decide to adopt Tesla's model, that leaves them out in the cold. As the car industry has shifted in the US, a lot of car dealerships have closed down. When GM went bankrupt I think they dropped something like 1/3 of their dealerships. Dealerships also make most of their profits from service and EVs don't require as much service so they are out in the cold there too.

Tesla is a long term existential threat to the fossil fuel industry, it's another competitor in an already crowded market for car makers, but it poses a potential short term threat to the car dealers. So the dealers pull out every legal trick they can to make Tesla's existence as difficult as possible. Car makers help when they can, and would like to see Tesla lose, but they are less enthusiastic about fighting.

 

[EV-lutioin]

The amazing part of this situation is how much upside there is out there for Tesla. At last count, there were 25 states that don't allow direct sales. Imagine how much unrealized demand is still out there. This may partially explain the exuberance for Tesla stock.

 

[JPUConn]

If Tesla is reading this. I have zero dealership affiliation. I will gladly open a Tesla franchise dealership and allow Tesla 100% say/control in Connecticut. I don't want any $ for it nor would I look to make any profit.

 

[wdolson]

The amazing part of this situation is how much upside there is out there for Tesla. At last count, there were 25 states that don't allow direct sales. Imagine how much unrealized demand is still out there. This may partially explain the exuberance for Tesla stock.

There is a Wikipedia article that describes the Tesla situation in many states. The whole thing is very complex and varies dramatically month to month. If you find an article from 2015, the information is completely out of date.
Tesla US dealership disputes - Wikipedia

There are some states where Tesla can do business, but with limitations. At least for a while they could only have one sales and one service center location in Oregon, but they are talking about opening another service center, so that has probably changed. In Washington State, Tesla can do business without any draconian restrictions, but for some weird reason only Tesla is allowed to do direct sales. That's just what I know about the two states I'm most associated with (I live in Washington but on the border of Oregon and my service center is in Oregon).

Demand seems to be a separate thing from whether Tesla can do business in a state or not. Tesla ownership in Texas is relatively high, but the state is one of the most restrictive on sales. Demand in Georgia dropped when the state incentives went away. But when Washington limited the state incentives to cheaper EVs only, I don't think it had a big impact on sales.

I think the stock exuberance has more to do with where people think Tesla might be in 10 years. It's quite possible Tesla is going to be the leader everyone is chasing in the car industry in 10 years. They probably won't be the world's biggest car seller, but they might be the most profitable. With their hands in the energy industry too, they could end up a very big company.

Tesla also hasn't penetrated a lot of markets yet. They just started selling cars in South Korea and will be expanding into other markets in the coming years.

 

[Electroman]

If Tesla is reading this. I have zero dealership affiliation. I will gladly open a Tesla franchise dealership and allow Tesla 100% say/control in Connecticut. I don't want any $ for it nor would I look to make any profit.

I am just curious to know why would this not work ? !

 

[stopcrazypp]

Why doesn't Tesla start its own non-profit dealership (sufficiently independent to comply with the laws and local origin and all-that) to sell in states that disallow direct selling?

Laws forbid manufacturer from owning a dealership/service center, but they could start an independent foundation or company or something, there must be a way to play by the rules but avoid marking up the price unnecessarily for the consumer.

There must be a legal way around it.

Thanks.

If it is any way tied to Tesla (even indirectly) it would either directly violate state dealership laws (in states that have them), or if the dealership groups sues, the judge will side with the dealership for Tesla violating the spirit of the law. And in the rare chance that route doesn't work, it'll almost be trivial for dealership groups to lobby to "clarify" the law (as they have successfully done in the past).

Also, I would imagine most of those laws have provisions against discriminating when issuing dealership franchises. So if Tesla does allow such a "non-profit," some states will have laws that would force Tesla to sign other completely unrelated groups as dealerships (Tesla can't just exclusively provide it to who they want).

Also by doing even a single dealership, you poison the well, since the dealership groups will use that as an example of why Tesla should only be able to do it with a dealership, and you can pretty much forget about the law ever changing to allow Tesla to open a direct store.

Tesla has lawyers working specifically on this problem. If this was a viable solution, they would have done it already a long time ago.

 

[Troy]

Tesla will never license any independent dealer anywhere in the USA because of legal reasons. Even if they had only one independent dealer anywhere in the USA, it would completely ruin their legal strategy forever. Tesla's argument is that current franchise laws don't apply to Tesla because the law protects the franchisee from the franchisor but Tesla doesn't have any franchises, therefore it doesn't apply.

A long time ago Ford tried to get rid of some franchises they didn't want anymore by opening factory stores nearby and selling at a discount. To prevent this kind of bullying from happening again, they came up with the dealership laws. According to these laws,

• in most states the manufacturer can't open stores within a certain distance to an independent dealer,
• the manufacturer can't provide maintenance or repairs directly to customers. Therefore over-the-air software updates are not possible. People need to go to the dealer and have the software updated there because it is considered a maintenance service.
• in some states, the manufacturer can't sell directly to customers. That would mean no more online sales for Tesla unless an independent dealer completes the final delivery step and gets a big bonus.

Tesla's argument has always been that none of these dealership laws apply to Tesla because Tesla doesn't have any independent dealerships anywhere in the USA. They only have factory owned stores and service centers.

Watch the following video from 2:20 to 4:48.

 

[xyeahtony]

Tesla tried to do what the OP is suggesting in Michigan, and they shot that down. Have a "former" Tesla employee open a "franchise" showroom but that was still defeated by the dealership lobby who saw right thru it.

The attempts by dealerships to halt progress are laughable and sad. They know their industry is dying and finished and are doing everything they can to forestall the inevitable.

 

[Phillip L]

I am from Canada but I have no doubts as to just how difficult it is to defeat the political influence peddled by moneyed interests in the Republic to our south.
It will be a long, hard fight.
Winston Churchill: " You can always count on Americans to do the right thing - after they've tried everything else"

Tesla can open up dealerships in a neighbouring state that does allow them to operate. So set up a Tesla store in a small city or town right on the border as close to major markets in the Luddite states like Texas, making it obvious that these are to service and sell to Texans wanting Teslas, (heck, even call it the Dallas Tesla outlet) and making sure Texans see the economic benefits accruing to, let's say, Ardmore or Durant, Oklahoma (I just pulled these off the map, as an example) instead of Dallas/Fort Worth, Texas.
Have events like, order your Model S online, and join ten other Texans from Dallas on meet and greets in Dallas, ten others in Fort Worth, etc then shuttle you all on a Saturday to pick up your new Tesla in Ardmore, where as a group of twenty or thirty or more you can be introduced at a big barbecue picnic to your new car, and then make a Tesla convoy back to the Lone Star State. Make sure for the first few to invite the local Dallas TV station to cover the event.

 

[bhzmark]

If it is any way tied to Tesla (even indirectly) it would either directly violate state dealership laws (in states that have them)

Dealerships have to be tied to the manufacturer through their franchise agreement which will certainly put limitations and requirements on what the dealership can do and not do.

The states that I have looked at focus on control by the manufacturer including indirect control. So the issue is just really finding that line of how much control mfr can have through a franchise agreement versus the impermissible types of control that you would have such as through ownership.

I would imagine most of those laws have provisions against discriminating when issuing dealership franchises.

laws that would force Tesla to sign other completely unrelated groups as dealerships (Tesla can't just exclusively provide it to who they want).

Possible. Undesirable. I haven't heard of any specifically. But does anybody have any citations?

by doing even a single dealership, you poison the well, since the dealership groups will use that as an example of why Tesla should only be able to do it with a dealership

I agree. Which is why the dealerships that Tesla uses should just be an obvious workaround the stupid laws and be designed to fold up as soon as Tesla is allowed to do it themselves.

If this was a viable solution, they would have done it already a long time ago

Elon has taught himself rocket science and battery technology, car manufacturing etc. and led teams to do things that others said couldn't be done., I wouldn't conclude from the failings of others to find a solution that it can't be done.

 

[bhzmark]

Tesla tried to do what the OP is suggesting in Michigan, and they shot that down. Have a "former" Tesla employee open a "franchise" showroom but that was still defeated by the dealership lobby who saw right thru it.

I see no evidence that that happened. I think you are confused. Tesla applied for a dealer and service licenses in its own name and it was rejected for violating the provisions that restricts mfrs from selling new and used cars and servicing them.

In Tesla's complaint they state:
"On November 13, 2015, Tesla submitted two applications to the Department, one for a vehicle dealer license (required to sell new and used vehicles Case 1:16-cv-01158-JTN-ESC ECF No. 39 filed 02/16/17 PageID.317 Page 16 of 40 17 within the State), and the other to register a vehicle repair facility (required to service vehicles in the State). After nearly nine months of back-and-forth correspondence, the Department noticed a hearing in August 2016, indicating its “intent to deny the dealer license.” The notice was accompanied by a complaint in which the Department took the position that Tesla’s dealer license “should be denied.”

And then:

"A hearing was held on September 7, 2016. On September 12, 2016, Administrative Law Examiner Jay Thomas Todd sustained the Department’s denial, in effect ruling that a vehicle manufacturer cannot sell new vehicles directly to consumers. The Examiner further ruled that the Department should consider Tesla’s application for a used vehicle dealer license, which is governed by different sections of the Michigan code. On September 21, 2016, the Department denied Tesla’s application for a used vehicle dealer license, citing Michigan Compiled Laws section 445.1574(1)(h) as the basis for its denial. On December 19, 2016, the Department denied Tesla’s application to register a vehicle repair facility, citing the prohibition in Michigan Compiled Laws section 445.1574(1)(q)."

Michigan responded: "ANSWER: Defendants admit that the administrative law examiner found that the legal basis for the denial of the application for the class A (new car) dealership license was warranted. Defendants further admit that Plaintiff’s class B application (used car) and Plaintiff’s application to engage in the business of a motor vehicle service and repair facility were rejected pursuant to MCL 257.209 due to the applications’ inconsistencies with MCL 445.1574(1)(h) and (1)(q) respectively."

The main laws that are the problem are

MCL 4445.1574(1)(i) which provides that “[a] manufacturer shall not . . . Sell any new motor vehicle directly to a retail customer other than through [its] franchised dealers, unless the retail customer is a nonprofit organization or a federal, state, or local government or agency. This subdivision does not prohibit a manufacturer from providing information to a consumer for the purpose of marketing or facilitating the sale of new motor vehicles or from establishing a program to sell or offer to sell new motor vehicles through franchised new motor vehicle dealers that sell and service new motor vehicles produced by the manufacturer.

MCL 4445.1574(1)(h) which provides that “[a] manufacturer shall not . . . [d]irectly or indirectly own, operate, or control … a used motor vehicle dealer.”

MCL 445.1574(1)(q), provides that “[a] manufacturer shall not . . . [o]wn a motor vehicle service and repair facility, except that a manufacturer may own a service and repair facility for the repair of manufacturer-owned vehicles.”


Michigan Legislature - Section 445.1574

The underlined "its" in the first law is the its that was deleted to more clearly prohibit Tesla from selling (although Michigan claims that the law still prohibited Telsa even before that deletion.)

 

[bhzmark]

Tesla also states in its complaint:

"Tesla has determined that its direct sales model is the only viable means for selling its cars. As described above, Tesla’s direct sales model has proven to be a highly effective means of selling Tesla’s innovative electric vehicle technology. As Tesla’s experience shows, customers are willing to adopt this new technology when given significant time to learn about it in the environment of Tesla’s stores. As a market entrant with a novel product, Tesla believes that the traditional dealer model—incentivizing high-pressure, high-volume sales at the highest negotiable price, with as many add-ons and surcharges as possible—would be a disastrous way to bring Tesla’s novel cars to market. Additionally, because Tesla maintains control of its sales and service operations, it is able to provide the highest level of customer service at all stages of the car-buying and ownership process, thereby solidifying its reputation and building goodwill."

Conceding sales from a standalone independent entity, even if it was not the traditional scummy middleman add-no-value dealer, would weaken this argument. Although it wouldn't clearly undermine it -- it would just be that while ideally in truly free market states, Tesla prefers to sell direct. But in states where it has to sell through an independent dealer, it prefers a new type of independent dealer who doesn't have a profit motive to make money from sales and especially service, and instead just executes its franchise agreement as efficiently as possible, as Tesla would do in its mfr owned sales and service locations.

 

[stopcrazypp]

Dealerships have to be tied to the manufacturer through their franchise agreement which will certainly put limitations and requirements on what the dealership can do and not do.

The states that I have looked at focus on control by the manufacturer including indirect control. So the issue is just really finding that line of how much control mfr can have through a franchise agreement versus the impermissible types of control that you would have such as through ownership.

Possible. Undesirable. I haven't heard of any specifically. But does anybody have any citations?

I agree. Which is why the dealerships that Tesla uses should just be an obvious workaround the stupid laws and be designed to fold up as soon as Tesla is allowed to do it themselves.

Elon has taught himself rocket science and battery technology, car manufacturing etc. and led teams to do things that others said couldn't be done., I wouldn't conclude from the failings of others to find a solution that it can't be done.

A lot of this is incorporated in franchise law, where if there is franchisee screening, there needs to be a fair and consistent method of doing so, and it must be disclosed to prospective franchisees. Here's an article on that:
http://www.dskaplanlaw.com/images/articles/The Legal Risks of Franchisee Screaning.pdf

I don't see a way you can structure prospective franchisee applications in a way that ensures that the traditional dealership groups are locked out, while still being fair and consistent. And as I pointed out, the dealership groups have proven, time and time again, that they can easily lobby to "clarify" existing law, if Tesla tries this type of trickery. And they would be justified in this case, since this isn't about direct stores, but rather issuing franchises in an discriminatory fashion.

Tesla has tried various methods around the law (including getting a license directly irregardless of the law prohibiting manufacturers). If this was ever a viable solution (and this is not the first time this is suggested, I see it frequently suggested in articles about Tesla's battle with dealerships), I'm pretty sure they would have tried it at least once.

Also keep in mind that judges aren't stupid. Something too obvious as dancing around the "independent" part can easily be shot down in a lawsuit. And giving it to a completely unrelated person/group is risky since Tesla can't guarantee that the person/group won't turn in the face of potential profit, or isn't a plant by dealership groups in the first place.

 

[bhzmark]

A lot of this is incorporated in franchise law, where if there is franchisee screening, there needs to be a fair and consistent method of doing so, and it must be disclosed to prospective franchisees. Here's an article on that:
http://www.dskaplanlaw.com/images/articles/The Legal Risks of Franchisee Screaning.pdf

I don't see a way you can structure prospective franchisee applications in a way that ensures that the traditional dealership groups are locked out, while still being fair and consistent. And as I pointed out, the dealership groups have proven, time and time again, that they can easily lobby to "clarify" existing law, if Tesla tries this type of trickery. And they would be justified in this case, since this isn't about direct stores, but rather issuing franchises in an discriminatory fashion.

Tesla has tried various methods around the law (including getting a license directly irregardless of the law prohibiting manufacturers). If this was ever a viable solution (and this is not the first time this is suggested, I see it frequently suggested in articles about Tesla's battle with dealerships), I'm pretty sure they would have tried it at least once.

Also keep in mind that judges aren't stupid. Something too obvious as dancing around the "independent" part can easily be shot down in a lawsuit. And giving it to a completely unrelated person/group is risky since Tesla can't guarantee that the person/group won't turn in the face of potential profit, or isn't a plant by dealership groups in the first place.

That article deals with discrimination of protected class franchisees. Luckily overweight antifreemarket republicans aren't a protected class.

Given general concepts of freedom of contract (including the contracts clause in the constitution) I'm hopeful that manufacturers can discriminate against for profit franchisee applicants (as long as they aren't discriminating against a true protected class).

Any citations ? In Texas or Michigan eg that would be relevant?

And yes judges aren't stupid, but they also have to follow the law, and if you literally comply with the law but otherwise frustrate the people who benefit from the law God bless you. -- that is what creative lawyers help their clients do all the time.

 

[stopcrazypp]

That article deals with discrimination of protected class franchisees. Luckily overweight antifreemarket republicans aren't a protected class.

Given general concepts of freedom of contract (including the contracts clause in the constitution) I'm hopeful that manufacturers can discriminate against for profit franchisee applicants (as long as they aren't discriminating against a true protected class).

Any citations ? In Texas or Michigan eg that would be relevant?

And yes judges aren't stupid, but they also have to follow the law, and if you literally comply with the law but otherwise frustrate the people who benefit from the law God bless you. -- that is what creative lawyers help their clients do all the time.

First part deals with protected classes, second part deals with franchisee testing.

Not a lawyer, so I wouldn't know where to look for the specific provisions (which from the article may just be part of contract law, not as specific as franchise, much less automobile franchise law, so a huge area to look through).

Also, by non-profit, I presume that is just operation mode, not status (as an organization primarily doing car sales would likely not qualify). How do people propose to do this in a way that would meet an independence test?

 

[bhzmark]

First part deals with protected classes, second part deals with franchisee testing.

Not a lawyer, so I wouldn't know where to look for the specific provisions (which from the article may just be part of contract law, not as specific as franchise, much less automobile franchise law, so a huge area to look through).

Also, by non-profit, I presume that is just operation mode, not status (as an organization primarily doing car sales would likely not qualify). How do people propose to do this in a way that would meet an independence test?

It wld meet the test by not being owned or controlled by Tesla. As a taxable (not tax-exempt) nonstock nonprofit corporation or co-op it wouldn't have any equity owners. Its control would rest in a self appointed board, or co-op member appointed board. Tesla couldn't directly or indirectly control the governance of the entity. So that part should satisfy the state requirements for car mfr to not control.

But it would be connected to Tesla like other dealers through a dealer franchise agreement that allows a dealer to use the mfr name and logo and buy and sell and service cars. Tesla would still have lots of input into the dealer in that way. Tesla could also capitalize it with debt and have training for the employees etc. Alot of the details would work the same for Tesla owned locations. Except Tesla just wouldn't technically own it or have governance control.

The best reason for not doing it I think, is that it is a partial concession to the backwards states. But for big markets like Texas and Conn. It might be worth it as this isnt really a concession the current independent dealers. It is just a workaround for Tesla that also makes a bit of a mockery of the dealers. Showing that they are really unnecessary no value added middlemen and Tesla can do a better job without them.

 

[stopcrazypp]

It wld meet the test by not being owned or controlled by Tesla. As a taxable (not tax-exempt) nonstock nonprofit corporation or co-op it wouldn't have any equity owners. Its control would rest in a self appointed board, or co-op member appointed board. Tesla couldn't directly or indirectly control the governance of the entity. So that part should satisfy the state requirements for car mfr to not control.

But it would be connected to Tesla like other dealers through a dealer franchise agreement that allows a dealer to use the mfr name and logo and buy and sell and service cars. Tesla would still have lots of input into the dealer in that way. Tesla could also capitalize it with debt and have training for the employees etc. Alot of the details would work the same for Tesla owned locations. Except Tesla just wouldn't technically own it or have governance control.

The best reason for not doing it I think, is that it is a partial concession to the backwards states. But for big markets like Texas and Conn. It might be worth it as this isnt really a concession the current independent dealers. It is just a workaround for Tesla that also makes a bit of a mockery of the dealers. Showing that they are really unnecessary no value added middlemen and Tesla can do a better job without them.

I'm talking about financially/operationally independent, not just in governance. If Tesla operates it just like Tesla owned locations in terms of financing the operation, just having different owners or governance may not necessarily meet a test of independence.