Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism

Author:Daniel A. Crane
Position:Associate Dean for Faculty and Research and Frederick Paul Furth, Sr. Professor of Law, University of Michigan
Pages:573-607
 
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573
Tesla, Dealer Franchise Laws, and the
Politics of Crony Capitalism
Daniel A. Crane
I. INTRODUCTION ............................................................................. 574
II. THE ANATOMY OF DEALER PROTECTIONISM ................................ 577
A. A BRIEF HISTORY OF DEALER FRANCHISE LAWS ........................ 577
B. TESLAS DIRECT DISTRIBUTION STRATEGY ................................ 579
C. THE TESLA WARS .................................................................... 582
1. A Potpourri of Laws, Compromises, and
Gamesmanship .............................................................. 583
2. The Big Three’s Cautious Waiting Game .................... 589
III. POLICY ARGUMENTS ...................................................................... 591
A. VERTICAL INTEGRATION: GENERAL CONSIDERATIONS ............... 591
B. THE DEALERS FRAIL ARGUMENTS FOR PROHIBITING PURE DIRECT
DISTRIBUTION ......................................................................... 593
1. Breaking the Manufacturer’s “Retail Monopoly” ....... 593
2. Assuring Adequate Levels of After-Market Service ..... 596
3. Complying with State Regulatory Requirements ........ 598
4. Ensuring Vehicle Safety ................................................ 598
5. Dealers as Uniquely Virtuous Local Citizens ............... 599
Associate Dean for Faculty and Research and Frederick Paul Furth, Senior Professor of
Law, University of Michigan. I am grateful for many invaluable conversations with individuals at
Tesla Motors during the preparation of this Article and for helpful comments by Allan Afuah,
John Connor, Doug Ginsburg, Barak Richman, Danny Sokol, Abe Wickelgren, and various
participants in a workshop at the University of Michigan Law School. The views expressed in this
Article are solely my own.
574 IOWA LAW REVIEW [Vol. 101:573
IV. THE LAW AND POLITICS OF THE TESLA WARS ............................... 601
A. LOCHNERS LONG SHADOW AND THE FRAILTY OF JUDICIAL
REVIEW ................................................................................... 601
B. A NEW ANTI-PROTECTIONIST POLITICS? .................................. 605
V. CONCLUSION ................................................................................ 607
I. INTRODUCTION
Public choice theory has long proclaimed that business interests can
capture regulatory processes to generate economic rents at the expense of
consumers.1 Such political exploitation may go unnoticed and unchallenged
for long time periods because, though the rents are captured by a relatively
small number of individuals or firms, the costs are widely diffused over a large
number of consumers.2 The triggering event to expose and mobilize
opposition to the regulatory capture may not arise until a new technology
seeks to challenge the incumbent technology, thus creating a motivated
champion to expose and oppose the regulatory capture and advocate for
regulatory liberalization.
That moment has arrived in the automobile industry. Since the 1950s,
the distribution of automobiles has been pervasively regulated by a patchwork
of state laws promulgated at the insistence of dealers for the ostensible
purpose of preventing unfair exploitation by franchising car manufacturers.3
Among other things, the dealer laws in many states prohibit a manufacturer
from opening its own showrooms or service centers—from dealing directly
with consumers.4 At the time these direct distribution prohibitions were
enacted, the Big Three auto manufacturers (Ford, General Motors, and
Chrysler) completely dominated the U.S. car market, and the dealers argued
1. See, e.g., KENNETH J. ARROW, SOCIAL CHOICE AND INDIVIDUAL VALUES (2d ed. 1963);
JAMES M. BUCHANAN & GORDON TULLOCK, THE CALCULUS OF CONSENT: LOGICAL FOUNDATIONS
OF CONSTITUTIONAL DEMOCRACY (Charles K. Rowley ed., Liberty Fund 2004) (1962); ANTHONY
DOWNS, AN ECONOMIC THEORY OF DEMOCRACY (1957); MANCUR OLSON JR., THE LOGIC OF
COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS (1965).
2. James D. Gwartney & Richard E. Wagner, Public Choice and the Conduct of Representative
Government, in PUBLIC CHOICE AND CONSTITUTIONAL ECONOMICS 3, 11–12 (James D. Gwartney &
Richard E. Wagner eds., 1988) (describing “rational ignorance”); MICHAEL T. HAYES, LOBBYISTS
AND LEGISLATORS: A THEORY OF POLITICAL MARKETS 90 (1981) (arguing that concentrated
interests are more likely to generate political and lobbying activity by organized groups than when
interests are diffuse); Robert D. Tollison, Public Choice and Legislation, 74 VA. L. REV. 339, 367
(1988). See generally Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & ECON. 211
(1976).
3. Jessica Higashiyama, State Automobile Dealer Franchise Laws: Hav e They Become the
Proverbial Snake in the Grass? 2–4 (Apr. 2009) (unpublished manuscript), http://ssrn.com/
abstract=1394877.
4. Id. at 12.
2016] TESLA, DEALER FRANCHISE LAWS, AND POLITICS 575
that they were unable to contractually protect themselves against a franchising
manufacturer unfairly undermining its own franchised dealers at retail.5
Though the U.S. auto market has become considerably more competitive
since the direct distribution prohibitions were enacted, hence diminishing
any power the manufacturers might have to impose draconian contractual
terms, the laws have persisted largely without modification.
The challenge to the status quo has come from the abrupt market entry
of a redoubtable technological challenger to the internal combustion status
quo. In 2012, Palo Alto, California-based Tesla Motors began selling all-
electric vehicles. Tesla, the offspring of entrepreneur Elon Musk—who also
created the online payment service PayPal and the space exploration
company SpaceX—quickly won accolades for its disruptive technology.
Consumer Reports went so far as to call the Tesla Model S the best performing
car of any kind it had ever tested.6 Yet Tesla’s greatest market entry challenge
has not been solving the technological problems of creating a battery than
can run for nearly the fuel range of a typical car or the battery swapping and
supercharging infrastructure necessary to grant Tesla drivers recharging
access comparable to filling stations. Rather, its greatest challenge has been
to obtain the legal right to distribute its cars directly to consumers and to
provide aftermarket service to Tesla owners. Across the country, the car
dealers’ lobby—often with the support of the legacy car companies—has
invoked either the old dealer laws or obtained legislative extensions of them
to block Tesla’s progress. Tesla is fighting a multi-state, multi-front battle in
state legislatures, regulatory commissions, and courts just for the right to
distribute and service its products.
The Tesla story is important on its own terms because of its implications
for innovation in the automotive industry, the dissemination of
environmentally friendly technologies, and energy independence. But it is
also emblematic of a broader problem of economic regulation and frail legal
response—the lack of robust legal tools for the courts to tackle protectionist
or otherwise anti-consumer regulations designed solely to benefit
concentrated economic interests. In the post-Lochner era, courts have been
reluctant to subject protectionist state regulatory schemes to intrusive judicial
review under any legal framework—whether antitrust law, the Dormant
Commerce Clause, Substantive Due Process, or Equal Protection. Only
recently have a few federal courts begun to show some willingness to invalidate
the most egregiously anti-competitive state regulatory schemes as instances of
5. Id. at 1–4.
6. Videos: Cars, CONSUMER REPORTS, http://www.consumerreports.org/cro/video-hub/cars/
hybrids—alternative-fuel/tesla-model-s-20132015-quick-drive/14786539001/2366240882001 (last
visited Nov. 14, 2015) (“The Tesla Model S electric car is the best performing car ever tested by
Consumer Reports.”).

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