Tesla and the Awkward Legal Situation – 9/27/16

Tesla Motor’s business model breaks with other car makers’ in a lot of ways, but its direct sell approach that cuts out the middle-man of independent dealership franchises is becoming an issue in some states. States likes Texas and Michigan have already instituted bans on manufacturers direct selling and the fight over the legality of such measure is looking a be a long one.

Just recently, officials in Michigan rejected Tesla’s request to open a company-owned dealership, reflecting the company’s difficulties operating in the home state of Ford and GM. Franchise automobile dealerships and auto makers, which are understandably hostile to what they see as an existential threat and an unfair advantage respectively, have been successful in bringing the state lawmakers to their side on the issue.

Michigan passed an amendment in 2014 in its law regulating motor vehicle manufacturers, distributors, wholesalers and dealers, but Tesla argues that electric cars are best sold to consumers directly from the manufacturer. It bases its argument on the fact that consumers need more information on the new technology. Another issue Tesla is likely looking to address is how owners in Michigan currently have to travel to Ohio to get their vehicles serviced due to the ban on opening up Tesla operated shops.

Still, Tesla is far from done fighting. The electric car maker filed its first federal lawsuit over the case, suing the state of Michigan to overturn its ban on direct sales by auto manufacturers, almost immediately after the rejection. The move comes as a break from a state-by-state challenge of such bans. This case will go before a federal court ruling over the constitutionality of the ban setting the tone for all future cases. The move comes only a year before the release of Tesla’s much anticipated Model 3, its first electric sedan aimed at being affordable enough for mass market appeal.

Arguing successfully that the law violates the constitution with the illegal restriction on the free flow of commerce would allow Tesla to stop the enforcement of the law.

The lawsuit is Tesla Motors Inc. V. Johnson, 16-cv-01158, U.S. District Court, Western District of Michigan (Grand Rapids).

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