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Federal Trade Commission makes the case for Tesla Motors vs. state prohibitions
Posted on January 08, 2016 by Matt Pressman
Tesla Motors' unique company-owned store/retail approach continues to come under fire by franchise auto dealership associations in many states. These dealership associations lobby (and “contribute” to) government officials to protect themselves from any competitive selling models. The result: government officials in multiple states have banned Tesla altogether from opening their own stores. And, in some other states, Tesla can only open a “gallery” space to display their Model S – but they’re not allowed to help customers in the sales process, quote any pricing, or, even offer test drives.
However, encouraging support has come from the Federal Trade Commission (FTC) which has publicly backed Tesla in a number of public statements on the matter. Some of FTC’s top brass have issued scathing indictments of states that have blocked Tesla Motors from selling direct to its customers. And more action is coming from the FTC this month. But, before we get to that, let’s take a look at the FTC's public support for Tesla Motors and manufacturer-direct sales to customers.
First in 2014, top officials at the FTC published these remarks: "For decades, local laws in many states have required consumers to purchase their cars solely from local, independent auto dealers. Removing these regulatory impediments may be essential to allow consumers access to new ways of shopping that have become available in many other industries. This very question has been raised across the country, as a still-young car manufacturer, Tesla, pursues a direct-to-consumer sales strategy that does not rely on local, independent dealers. In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy."
Then, last year, more top FTC officials joined the chorus: “There have been reports of the challenges faced by Tesla Motors in selling its luxury electric cars directly to consumers. In state after state, the company has faced legislative and litigation resistance to its business plan to sell its products without using a network of third-party dealers like other auto manufacturers. Over the past year, FTC staff have urged… legislators that state prohibitions against direct consumer auto sales by manufacturers should be eased. Our point: States should allow consumers to choose not only the cars they buy, but also how they buy them… FTC staff supports the movement to allow for direct sales to consumers."
In addition, the FTC sent a pointed letter to Michigan’s Senator Darwin L. Booher: “A blanket prohibition on manufacturer sales to consumers is an anomaly within the larger economy… We urge the legislature to consider abandoning the direct sales prohibition in Michigan’s existing law, and instead permit manufacturers and consumers to reengage the normal competitive process that prevails in most other industries.”
Let’s fast forward to the latest news from the FTC. According to The Car Connection [Tesla Could Be Poised For Big Win: FTC To Hear Pros & Cons Of Franchise Laws]*, change could be looming around the corner -- change effected not by individual states, but by the Federal Trade Commission. On Tuesday, January 19, the FTC will hold a series of panel discussions on topics related to the auto industry. Those topics include:
- The pros and cons of state regulations related to dealership placement and closure;
- The benefits and drawbacks associated with state oversight of warranty repairs; and,
- The future of the auto industry and how regulations may need to change to encourage competition and innovation.
But perhaps the most interesting discussion will take place at 2:15pm, and it'll focus on the topic of direct distribution from automakers to consumers:
"Some states restrict the ability of car makers to sell their vehicles directly to the ultimate consumer, mandating the use of independent, franchised dealers. Several new entrants into automobile manufacturing have sought to bypass or overturn these restrictions and deal directly with the public. Are restrictions on direct distribution in this industry in the public interest? This panel will include experts on both sides of this contentious issue."
Among the six panelists in that session: Todd Maron, General Counsel, Tesla Motors... Should be interesting, no?
The FTC is a federal agency, not a legislative body, so there's little direct action it could take to upend the longstanding state franchise model. That said, the very fact that the FTC is hosting this kind of an event signals that it sees the potential for trouble on the horizon… the auto industry of the future needs to encourage innovation while also being adaptable, making room for smaller companies like Tesla and new entrants like Google and Apple… The discussions on the 19th will likely be the first of many held at the federal and state level. We'd be a little surprised if state franchise laws were completely overturned -- at least in the near future -- but don't be shocked if the feds help open up the market to more competition down the road.
Source: Road and Track
You can check out a live webcast, which kicks off [Tuesday, January 19] at 9am EST. (There'll be a link on the FTC website the day of the event.) Interested parties are also encouraged to submit comments, either online or by mailing them to Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex B), Washington, DC 20580. (Snail-mailers should to write "Auto Distribution Workshop, Project No. P131202" on their submissions.)
And, its not just the FTC who supports Tesla Motors’ right to sell direct to its customer. Leading economists and legal experts have weighed in on this affront to the free market system. And, a compelling letter was signed in support of Tesla’s right to sell direct by powerful political allies on both the far right and left sides of the aisle including the Koch brothers’ Americans for Prosperity and the Sierra Club. As the FTC and others shine the light on states blocking Tesla from selling its cars and pressure continues to mount, the tables may soon turn in Tesla's favor.
*Source: The Car Connection