Ford Motor Co. has sued the state of Texas in federal court to block enforcement of the state's strict franchise law, and BMW of North America Inc. is threatening to do likewise.
The battle against restrictive state franchise laws has moved to the courthouse from the statehouse after automakers were unable to stop dealers from getting tougher legislation passed.
At issue in Texas are two key points: whether manufacturers may sell vehicles directly to consumers, and whether they may create separate franchises for new models from the same make.
Texas is the battleground because it has passed some of the most restrictive franchise legislation in the nation and has one of the country's most aggressive dealer licensing agencies.
Ford filed suit in federal court in Austin challenging the Texas Motor Vehicle Division's interpretation of a state law barring factories from selling vehicles directly to consumers. The agency's tough stand against Ford's online used car lot forced the automaker to shut down the operation in Houston.
Although it has not done so yet, BMW says it will take its dispute over the X5 sport-utility to court if the automaker does not get its way with the Texas Motor Vehicle Board. One of BMW's Texas dealers has filed a complaint with the board challenging the company's right to market the X5 as a separate franchise.
BMW set open-end standards, including a sales quota for certified used BMWs that dealers need to meet to sell the X5. Nationwide, about 80 percent meet standards.
BMW says the X5 is a truck, and therefore not part of the original franchise agreement. Texas requires manufacturers to supply dealers with all models produced for their make.
'We will take this to court to protect our national strategy and protect the investment our dealers have made in the franchise,' said Tom McGurn, general manager of retail and industry relations.
The Texas Motor Vehicle Division has filed a complaint with the Texas Motor Vehicle Board saying Ford has used a Web site to sell used vehicles directly to Houston consumers without a dealer license. The division also argues that Ford is not allowed to act in the capacity of a dealer.
The Web site, Fordpreowned.com, allows customers to select an off-lease vehicle that has a no-haggle price. Once it has confirmed the customer is a serious buyer, Ford sends the vehicle to a dealer. The dealer takes title to the vehicle and closes the sale. Ford contends the dealer has retailed the vehicle, but the state contends Ford is the retailer because it sets the price and offers the vehicles for sale.
Ford contends the state of Texas has no authority to regulate Internet sales, which involve interstate commerce. The company also says the Web site is a form of free speech, which is a federal matter.
Ford also maintains the division of motor vehicles has violated the company's rights of due process because it presumed Ford broke the state law before giving the company a chance to make a legal defense. Division officials wrote letters to Houston Ford dealers warning that they could be fined for participating in the online used car lot before the state granted the company a hearing. A hearing before the motor vehicle board is scheduled Jan. 6.
Brett Bray, director of the Texas Motor Vehicle Division, said Ford has no right to seek relief from a federal court. 'Ford must exhaust administrative remedies,' said Bray. 'It needs to go through the administrative process and appeal to the state court system before availing itself of the federal courts.
BMW has entered an agreement with Texas to allow all its Texas dealers - qualified or not - to sell the X5 until the company's dispute over the X5 franchise is resolved.
BMW is not alone in creating a separate franchise for a light truck. Mercedes-Benz USA Inc. also set up a separate franchise for the M class. And though they have not actually set up separate franchises, other manufacturers have required dealers to meet strict standards in order to receive new models.
Texas was the first state to bar manufacturers from setting up a sort of sub-franchise - a separate franchise within a make. Other states such as North Carolina and Virginia have copied the Texas statute.
Though BMW's McGurn said BMW is narrowly focused on fighting for the marketing strategy of the X5, the case could have much broader implications for other manufacturers who want to restrict the distribution of new models.