Why Tesla’s Court Decision Is a Big Win

The electric car company has overcome state laws protecting car dealerships from direct-to-customer sales.

Associated Press

Associated Press

This week, the Massachusetts Supreme Judicial Court issued a decision that could impact everyone’s least favorite customer experience: buying a car from a dealership. The SJC rejected a lawsuit that tried to prevent Tesla Motors from operating a showroom in Natick and selling directly to consumers without a traditional franchised car dealership.

Maybe this raises the question in your mind: why can’t I already buy cars directly from the dealer at a factory store or on their website? Or why is there no Amazon.com for cars? The answer: laws. Almost every state has strict laws protecting car dealerships from actions by car manufacturers that might hurt their small businesses. In most states, for instance, automakers can’t run their own dealerships. Nor can they open another franchise location too close to an existing one.

These laws resulted from historical abuse on the part of car manufacturers. A New Yorker article described one example:

In 1920, for instance, the U.S. economy went into a deep recession. But Henry Ford kept his factories running at full tilt, and forced thousands of Ford dealers around the country to buy new cars that they had little chance of selling. The dealers knew that if they said no they’d never see a Model T again, so they ate the inventory

Massachusetts is one of the many states that passed something like a “Dealer’s Bill of Rights” to prevent this sort of thing. Decades later, these laws result in a lot of headaches for manufacturers. GM, the New Yorker points out, “had to shell out around a billion dollars to pay dealers off” when it closed Oldsmobile. The laws might not be great for consumers, either. Shoppers fear the lack of transparency that goes into the pricing of cars. And the protected model makes innovation in the industry—an online store, for instance—difficult if not impossible. But car dealerships are powerful. They are usually important local businesses that pay a lot of taxes and employ a lot of people.

The laws also result in headaches for Tesla, a relatively new manufacturer of electric cars that wants to bypass a network of dealerships and sell directly to consumers. When Tesla opened a store in the Natick Mall, the dealerships jumped. The plaintiffs, the Massachusetts State Automobile Dealers Association and two dealers, pointed out that, according to state law, it is illegal for a manufacturer “to own or operate, either directly or indirectly through any subsidiary, parent company or firm, a motor vehicle dealership located in the commonwealth of the same line make as any of the vehicles manufactured, assembled or distributed by the manufacturer or distributor.”

In its decision, the SJC cast doubt on the idea that this applied to Tesla:

[T]here appears to be a question whether Tesla’s business model involves the operation of a “motor vehicle dealership” within the meaning of [the law], and therefore whether, by its literal terms, the proscription … applies to the defendants at all.

But that’s not how they based their decision. The car dealers argued they had standing to bring the suit because they had suffered economic damage due to Tesla’s violation of the law. The SJC rejected the case because it decided they did not have that standing. The court wrote:

As previously discussed, the purpose of c. 93B historically was to protect motor vehicle dealers from a host of unfair acts and practices historically directed at them by their own brand manufacturers and distributors.
It would be anomalous to find, within this detailed list of rights and protections that are conferred on dealers vis-à-vis their manufacturers and distributors, a lone provision giving dealers protection against competition from an unaffiliated manufacturer.

In other words, what Tesla does is between Massachusetts and Tesla. Other car dealers might think Tesla is breaking the law, but that’s not their battle.

Tesla faces legal fights like this one in plenty of other states, too. So the nation watched with interest how Massachusetts has dealt with the conflict. For anyone hoping to see what happens when a car company can sell directly to consumers, Tesla is going to provide an interesting experiment in Massachusetts.