Tesla's Retail Model Presents a Challenge for the Franchised Dealers Act

America’s hottest automotive company, Tesla Motors, is currently embroiled in a bitter dispute with car dealerships around the United States. Tesla’s retail marketing approach is unique from other automotive companies because it bypasses dealerships and sells directly to consumers, following a model established by Apple where a niche product is shown and sold directly to consumers. However, this sales model is illegal in many states which only allow licensed franchisees to sell new cars. States passed such laws to protect both dealers and consumers, by preventing the sort of vertical monopoly which, in the days of the Big Three Detroit automakers, might be perceived as limiting the ability of consumers to shop for the best price on a car.

Dealers are concerned that if Tesla is successfully able to sell cars directly to consumers, other automakers like Ford and Toyota might do the same. This is not the first time that traditional dealerships have tried to thwart new sales approaches. In 1999, dealers successfully won bans in several states to prevent Internet sales of automobiles by anyone other than an existing licensed dealer.

Tesla has been fighting battles in both the courts and the legislatures. In 2012, dealership associations in Massachusetts and New York sued Tesla under each state’s Franchised Dealer Act. In 2013, a Massachusetts court dismissed the lawsuit in that state and a New York court ruled in favor of Tesla.

The legislative fights have erupted in states without dealer protection laws or in states, like New York, where Tesla was able to successfully defeat litigation claiming that its sales model violated established dealer protection laws. For example, earlier this year, Tesla was able to defeat a bill in Missouri which would have made direct car sales by a manufacturer illegal. While the bill did not win support in the Missouri legislature this year, it will be revisited next year. Tesla had the support of the Federal Trade Commission, which released a statement that these types of laws “operate as a special protection for [independent motor vehicle dealers] – a protection that is likely harming both competition and consumers.”

It remains to be seen whether these legal challenges will put a halt to Tesla’s seemingly meteoric growth since its founding a little over a decade ago. Undoubtedly, the uncertainty of how certain state dealerships will react to Tesla setting up retail stores in their backyards may slow Tesla’s expansion into certain markets. Tesla’s innovations, both from a technological and sales standpoint, must certainly be recognized and praised; however, its experience is a reminder to companies that the legal and public policy aspects of any new product or venture must be considered.

Related topics: Retail, Retail Sales