Tesla Takes On Franchise Dealerships In Motor City

United States Magistrate Judge Ellen Carmody recently ordered two Michigan lawmakers to turn over to Tesla Motors communications with “nonlegislative third parties” in Tesla Motors Inc. v. Johnson, et al. Tesla issued subpoenas for the two members of the Michigan legislature to turn over any emails and all other communications with third parties during the time period leaning up to the filing of a 2014 amendment, likely in an attempt to discover communications with lobbyists.

Judge Carmody’s order marks a small victory for the automobile manufacturer in its larger battle against state laws banning direct sales to customers, laws that it describes as unconstitutional, protectionist legislation.

Back in October of 2014, the Michigan legislature updated the Michigan Compiled Laws Section 445.1574 in an amendment that read: “A manufacturer shall not . . . sell any new motor vehicle directly to a retail customer other than through franchised dealers.” This law directly affects Tesla because their business model is built around direct sales to customers, as opposed to franchised third party dealers like the other automobile manufacturers that call Michigan’s Motor City home. Two years later, Tesla submitted an application to open up a dealership in the state, but the Michigan Department of State denied the application because Tesla not partnered up with a franchised car dealer as Section 445.1574 requires. Tesla immediately filed suit following the denial of their application, naming Michigan Gov. Rick Snyder, state Attorney General Bill Schuette and Secretary of State Ruth Johnson and seeking a permanent injunction blocking state enforcement of Section 445.1574.

The two lawmakers in question are Senator Joe Hune and Representative Jason Sheppard. It is not surprising that Tesla subpoenaed Senator Hune seeing as how he was the one who introduced the amendment that crafted the ban back in 2014. What is surprising is the fact that Senator Hune’s wife, Marcia Hune, works as a lobbyist for a company that represents automobile dealers in Michigan. For his part, Representative Sheppard was subpoenaed because of statements he allegedly made in June of 2016 that Tesla will “not be allowed to operate in Michigan because Michigan dealers and manufacturers do not want Tesla in the state.” While these actions and connections seem troubling, they may just be the tip of the iceberg. In an attempt to argue against the disclosure of communications as demanded in Tesla’s subpoenas, Assistant Attorney General Rock Wood delivered these foreboding words: “If [Judge] Carmody allows access to lawmakers’ records in such a case, there will be a raft of lawsuits aimed at harassing and intimidating lawmakers to the extent that ‘legislators are spending all their time on this, and can’t legislate.’” While one can certainly imagine that legislators must take a myriad of considerations into account and not everyone will agree with the ultimate decisions, the idea that more transparency would enrage a constituency to the point that they would bring suits against those lawmakers is very troubling.

This is just one of many battlegrounds on which Tesla is fighting to win the right to sell their vehicles directly to customers. Last fall, a Missouri circuit court judge found that the state’s Department of Revenue erred by issuing automobile dealership franchise licenses to Tesla in violation of a direct sale bar similar to the one at issue in Michigan. On the other hand, the Department of Motor Vehicles in Virginia granted Tesla a second dealership location within the state last December.

The Michigan Attorney General’s Office maintains that Tesla should be required to comply with Michigan law and not the other way around. Given the circumstances, though, this law does seem to disproportionately affect small subset of manufacturers—Tesla—so it will be interesting to see where the courts come out on the constitutionality of these direct sale bans. Also of note is the importance of transparency in the lawmaking process—what information should be privileged and how much of a role should lobbyists play in lawmaking?