Last month, the Massachusetts Supreme Court issued a ruling clearing the way for Tesla to sell cars directly to customers in Massachusetts.
For two years, certain dealers and the Massachusetts State Automobile Dealers Assn. have tried to stop Tesla from selling cars without the use of a dealer. In 2012, Tesla opened a “sales gallery” in a mall in Natick, MA.
The decision was highly anticipated as Tesla has tried to sell cars without dealers in a number of states. The Massachusetts Supreme Court held the plaintiffs did not have standing to challenge Tesla because the electric-vehicle maker did not already have a dealer network in the state.
In other words, the only party that could challenge Tesla’s direct sales of its cars was a Tesla dealer. Because the brand has no dealers in Massachusetts, no one had the standing to stop Tesla, absent a change to the statute.
The Massachusetts Superior Court reached a similar decision when it dismissed the dealers lawsuit in November 2012.
The dealer group argued that Mass. Gen. Laws. Ch. 93B, §4(c)(10) makes it illegal for Tesla 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.”
Another section of the law (Ch. 93B, §15[a]) grants any dealer injured by a violation of the act to file an action against the offender.
But the Massachusetts Supreme Court rejected the dealer group’s argument for a couple reasons. First, a motor-vehicle dealership, under the Massachusetts law, is defined as a seller of vehicles to a consumer pursuant to a franchise agreement. Because Tesla has no dealers, or franchisees, it could not be a dealership.
Second, the Massachusetts law was written to protect dealers from the manufacturers with which they are affiliated, not manufacturers to which the dealers have no connection.
This is a significant decision for Tesla which has tried to sell cars directly to consumers without the use of a dealer network. Tesla has stated it does not have the resources to establish a dealer network given the current level of sales of its high-end, electric cars.
The Massachusetts decision may not give the automaker much leverage in other states, because it is highly dependent on the construction of the Massachusetts statute. Many other state statutes are drafted differently and allow dealers or the state’s attorney general or a motor-vehicle board standing to enjoin direct motor vehicle sales by a manufacturer (see e.g., Tex. Occ. Code OC. CODE ANN. § 2301.476). Direct sales of Tesla cars are barred in Texas and many other states.
So what does the ruling mean for other automakers?
Based on the Tesla decision, a Chinese car manufacturer or other domestic automaker could enter the market and open a company-owned dealership in Massachusetts. This assumes, of course, that the automaker doesn’t already have franchised dealers in Massachusetts.
However, there are two things to keep in mind. First, the Massachusetts Legislature could pass a law soon that overrules the Tesla ruling. It is a costly proposition to open a dealer network that includes sales and service. The likelihood of a change to the law is high, so the investment must be balanced against this risk.
Second, because state franchise laws are drafted differently, manufacturers should evaluate each state’s law before determining whether to open a dealer network in any other state. Again, other states with laws like Massachusetts’ likely will face pressure from dealer groups to change the law to avoid a Tesla-like problem in their state, as happened in Michigan this week.
There is no doubt the Tesla ruling is significant, especially for Tesla as it fights to sell cars without an independent dealer network. However, state motor-vehicle dealer associations generally have very effective and active lobbying organizations. This could be a very short-lived victory for Tesla.
Louis S. Chronowski is a member in Dykema's Chicago office and focuses his practice on commercial litigation. He can be reached at [email protected] or 312-627-2113.
