Challenging the Establishment: How EV Manufacturers are Changing the Way Cars Are Sold

Over the past few weeks, our weekly reading has included articles (here, here, and here) about the challenges Tesla and other EV manufacturers have mounted to state dealer franchise laws that effectively prevent direct-to-consumer car sales, whether in a brick-and-mortar context or online.

Why do these laws exist, and how and why are manufacturers fighting them now?

State dealer franchise laws go back decades and were enacted in some form or another in every state by the turn of the century. See Derek E. Empie, Note, The Dormant Internet: Are State Regulations Of Motor Vehicle Sales By Manufacturers On The Information Superhighway Obstructing Interstate And Internet Commerce?, 18 Ga. St. U.L. Rev. 827, 849 n. 153 (2002) (collecting statutes); see also Peter Luu, Preemptive Federal Legislative for EV Manufacturers to Sell Direct to Consumers, 2023 J. L. Mob. 1 (updating statutes).

Through a positive lens, the laws were intended to “protect consumers from potential fraud, to protect local dealers from vertical integration under circumstances where manufacturers hold disproportionate market power over dealers, and to connect consumers with dealers who serve as their best chance for a trustworthy and long-term relationship.” Note, supra, at 828. According to the National Automobile Dealers Association, the laws remain essential to protect consumers and to “level the playing field between large automakers and small local dealers” that bring jobs and revenue to local communities. The franchise model also can benefit auto makers by shifting inventory risk, financing, and repairs to a third party (the dealership). Indeed, while the first automotive dealership in the U.S. is credited to William Metzger (who ironically sold electric cars), it was Ford that originated the franchise model in the early 1900s to solve the problem of selling cars at mass production levels.

As our consuming habits and sales channels have evolved, however, dealerships and the franchise laws that protect them have come under scrutiny. This scrutiny has only intensified as EV-only automakers like Tesla, Rivian, and Lucid have rejected the dealership model entirely, instead offering buyers the opportunity to shop models in mall storefronts and place orders online—no haggling, no middle-man fees, and no time lost test driving along the local “auto mile.”

This has made car buying almost as easy as placing an order on Amazon ... unless you live in a state where it’s not. As this recent law review article notes:

Seventeen states explicitly prohibit direct sales. In such states, consumers who wish to buy direct must travel outside their state to pick up their vehicle. For example, in Connecticut, where direct sales are prohibited, consumers who wish to buy a Tesla generally travel to New York to pick up their vehicles. In Texas, Tesla cannot even sell its vehicles in the state where it is headquartered.

And while the landscape is evolving (see the first paragraph), opposition to change is always strong, and the combined dealership voice is loud. Turning back to Connecticut as an example, a local source reported earlier this year that “[p]roposals to allow direct EV sales [in the state] have faced perennial opposition from groups such as the Connecticut Automotive Retailers Association (CARA), which represents new-vehicle dealerships. A number of union leaders have also spoken out against direct EV sales, in large part because of concerns that such legislation could jeopardize the employment of some of the thousands of people who work at car dealerships in the state.”

Even in states where direct vehicle sales are not banned entirely, they still may be limited, as in Florida where new legislation bans direct sales except by a narrow class of manufacturers (like Tesla, Rivian, and Lucid) that do not already sell through franchise dealerships in the state. In still other states, manufacturers who wish to opt out of the dealer franchise model have found loopholes, such as in New Mexico where Telsa sells its vehicles on self-governed tribal lands.

Other than a proclivity for disruption, why are EV-exclusive automakers so resistant to the franchise dealership model? Tesla’s CEO, Elon Musk, personally addressed this question in a 2012 statement entitled “The Tesla Approach to Distributing and Servicing Cars,” explaining his belief that:

Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business [in service revenue], and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public.

Musk also gave a nod to the fact that “[t]he U.S. automotive industry has been selling cars the same way for over 100 years and there are many laws in place to govern exactly how that is to be accomplished,” committing that Telsa would “not seek to change those rules” and not “act in a manner contrary to those rules.”

A decade later, though, these claims are all subject to question—EVs have proven to be extremely expensive to service, and Tesla is actively challenging state laws both directly and indirectly, as noted above.

Of course, one benefit of the direct-sales model that Musk did not note in his 2012 statement, but that Tesla has aggressively sought to protect and leverage, is the ability to require consumers to resolve any claims they may have against the automaker in private arbitration rather than public litigation. In other words, as cynically summarized in the headline of a recent New York Times article, “Tesla’s Direct Sales Model Helps It Thwart Customer Lawsuits.”

While arbitration provisions are commonplace in automotive purchase agreements, under the traditional dealership model, these agreements typically are between the dealer and the consumer rather than the manufacturer and the consumer. The resulting lack of privity (i.e., a direct contractual relationship) between the manufacture and the ultimate consumer restricts the manufacturer’s ability to force claims into arbitration, as illustrated by Subaru’s failed attempt earlier this year to compel arbitration in a putative class action alleging violations of the Illinois Biometric Information Privacy Act (BIPA).

While arbitrability is probably not the sole motivating factor for EV automakers to eschew the dealership model, it is hard to imagine it does not enter the calculus at all. Not only does arbitration offer a private forum, it often allows companies to avoid class actions and other resource-intensive litigation. As reported in the New York Times:

Tesla’s relative immunity from consumer and employee litigation gives it a financial advantage over more established automakers. Since the end of 2017, the American Arbitration Association has handled 21 consumer complaints against Tesla, awarding a total of $280,000, according to the group’s data.

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By comparison, Ford Motor agreed in 2019 to pay $17 million to owners who complained about defects in their cars’ entertainment systems. And Volkswagen agreed to pay $15 billion to owners of diesel vehicles with illegal emissions systems.

It is no surprise, then, that Tesla has sought to compel arbitration in cases involving everything from claimed sudden unintended acceleration to alleged privacy violations—a tactical move that would not be possible but for its direct sales model.

For more on this, stay tuned for our next Thoughts from the Driver’s Seat with Mike Nelson.

Copyright Nelson Niehaus LLC

The opinions expressed in this blog are those of the author(s) and do not necessarily reflect the views of the Firm, its clients, or any of its or their respective affiliates. This blog post is for general information purposes and is not intended to be and should not be taken as legal advice.