The starting bell clanged in November when Ford Motor Co. filed its landmark suit.
Ford sued the Texas Motor Vehicle Division because it threatened to fine Ford and some of its dealers for operating an allegedly illegal online used-car lot in Houston.
Though Ford is the only company to challenge a state's ability to regulate the Internet, other companies could follow. General Motors last year supported a lobbying effort in Georgia charging the franchise law hinders e-commerce. And buying service Autoweb.com sought an attorney general's opinion to defend the fees it charges dealers for online referrals.
The Texas fracas is the beginning of a legal showdown for control over online auto sales. As Web-related sales volume picks up, the stakes will be higher and more companies will be willing to defend their online businesses in court or in state legislatures.
State franchise and licensing laws are designed to protect dealers and consumers. Many state laws restrict factory involvement in retail operations and some ban or restrict auto brokering.
Ford, General Motors and some of the online buying services complain the state laws need to be updated because they fail to address Internet sales. If they succeed, these online upstarts could wrestle control of online sales from the dealers.
Making a federal case
Ford's lawsuit against the Texas Department of Transportation argues the Internet is a form of free speech protected by the U.S. Constitution and a vehicle for interstate commerce, which is regulated by Congress.
The company sued the state motor vehicle division after it filed a complaint against Ford with the Texas Motor Vehicle Board. The division charges Ford's online used-car lot violates a Texas law prohibiting manufacturers from selling vehicles directly to consumers. It also accuses Ford of retailing cars without a dealer's license.
The state claims Ford is retailing because it set the price of vehicles offered for sale. Ford argues the transactions were ultimately handled through dealerships.
When Ford asked a federal court in Austin to block the motor vehicle division's complaint, but the court refused. A hearing on the case is set for March.
Dan Myers, a Tallahassee, Fla., dealer attorney who specializes in franchise law, believes Ford's case is weak. 'When you make the constitutional argument, you are out of nuts and bolts,' said Myers.
But the suit is not over yet. And though Ford is in hot water in Texas, it has not had complaints from regulators in four other states where it offers fixed-price used cars online, said company spokesman Pete Olson.
In fact, some states might side with Ford. Because the Internet involves interstate commerce, authorities in these states think online sales are a federal matter, said Rick Alexander, executive director of the National Association of Motor Vehicle Boards and Commissions.
'We (as an association) are looking at whether the states have the right to regulate Internet commerce,' said Alexander.
Bans on brokers
State restrictions on auto brokering are an obstacle for online buying services, which match dealers with online customers for a fee. Some states view these services as brokers, depending on the way they make money on vehicle sales.
So far, the online buying services have not lobbied for changes in franchise laws. But they eventually could resort to lobbying if state regulation poses a significant threat to their business.
Eight states ban auto brokering and eight others that allow brokers still require them to be licensed, according to the National Associa-tion of Buyers' Agents. Eighteen states require a franchise agreement in order to get a new-car dealer's license, the association says.
There also are states that ban bird-dog fees, which are commissions paid to anyone who is not a licensed salesperson.
'There is a question as to whether these buying services are unlicensed salespeople getting an illegal kickback,' said Joel Aronson, a Washington, D.C., dealer attorney. 'What's the difference between paying somebody a bird-dog fee for sending you a customer and paying Autobytel.com for sending you a customer? Autobytel.com is just the electronic version of a broker.'
Generally, state licensing authorities view a buying service as a broker if the company charges dealers a fee per transaction or makes a commission on the sale. Some states see referral fees as transaction fees, even though not all referrals result in sales.
Most state regulators have left Internet buying services alone. Only a few states, including Arkansas and Wisconsin, have started to issue warnings to online buying services they believe are brokering. And Texas is the only state to crack down on Internet companies as brokers, threatening to fine the dealers who do business with them.
Autoweb.com, of Santa Clara, Calif., is the only buying service to question the state. When the Texas Motor Vehicle Division threatened to fine Autoweb.com for brokering, the company tried to get a favorable opinion from the Texas Attorney General. But the buying service needed a state legislator to sponsor its request for a legal opinion, and it lost its sponsorship.
The company has no plans to fight the motor vehicle division. 'We are a young company,' said Aimee Jorgensen, the company's attorney. 'We are really focused on trying to grow our business.'
In a similar case, the Texas Motor Vehicle Division ordered Irvine, Calif., buying service Autobytel.com to pay a $1,000 civil penalty and change the fees it charges dealers. The company changed its fees and made peace with the state.
Autobytel.com became so concerned about brokering laws it got a used-vehicle dealer's license in California and opened E-Autos Direct.com, a used-car facility. The corporation meets the minimum requirements of a used-car dealer.
Although some franchise lawyers question whether a California used-car dealer's license will help the company outside the state or fend off potential brokering violations on new vehicles, Autobytel.com thinks the license helped.
'We are on the forefront of compliance,' said Mark Lorimer, the buying service's CEO.
And Autobytel.com might be onto something. Some state regulators are open to 'virtual' used-car lots as long as they are licensed to do business in at least one state.
'We might approve certain Web sites because they are willing to abide by the model regulations and are licensed in one state,' said Chuck Supple, the president of the National Association of Motor Vehicle Boards and Commissions and the chief of dealer licensing in Wisconsin. 'Instead of licensing them in every state, they would get this seal of approval.'
Online challengers to traditional dealerships have at least two points in their favor: the Internet's popularity with consumers and governments' reluctance to regulate Internet companies.
Elected officials in particular hesitate to tamper with the Internet, which has fueled economic prosperity. And jurisdictional questions remain unresolved. Said Patricia Stroud, executive director of the Arkansas Motor Vehicle Commission. 'If the feds don't assist the states, we are going to be like this (in confusion) 20 years from now.'
As it fights Texas, Ford is trying to drum up consumer support. Though it is too early to tell whether the appeal will generate much response, Ford has received backing from a Texas e-commerce advocacy group.
Internet advocacy groups could become influential allies in attacking state franchise laws. 'If you can't buy (cars) without going through a dealer, that would discriminate against the Internet,' said Ben Isaacson, executive director of the Association for Interactive Media, one of the largest e-commerce advocacy groups in the country. 'It sets a dangerous precedent for any legislation to regulate e-commerce any different than another industry.'