State franchise laws, sparked by Tesla, go too far, other automakers charge

It started as dealers vs. Tesla. Now that fight has ignited a confrontation between dealers and other automakers.

Dealers' opposition to Tesla Motors' model of factory-owned stores has led state after state to propose laws defending franchised dealers. Automakers charge that the legal balance in the dealer-automaker relationship, already affected by other dealer-backed legislation, now is shifting too far in favor of dealers.

"At the request of local dealer groups, states set up a labyrinth of protectionist laws that make the car-buying experience difficult and costly for our customers," said Gloria Bergquist, a spokeswoman for the Alliance of Automobile Manufacturers, which represents 12 automakers but not Tesla.

"It's understandable why Tesla or future competitors would want a simpler sales process. When we look at the big picture, we may be at a tipping point. If dealer groups continue their push for more onerous franchise laws, we will be forced to keep an open mind about how best to serve new-car buyers in the future."

Hold on, say dealer advocates. "This is all about the manufacturers and what they want, and their sense is they are losing control over the dealer," said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. "What they call the tipping point is what we see as approaching a level playing field."

Dealers say automakers are the 800-pound gorillas in the relationship and that state laws had to be strengthened to protect retailers from factory bullying and to preserve the franchise system.

Appleton, who also is chairman of the Automotive Trade Association Executives, representing 115 state and metro dealer associations in the United States and Canada, said the alliance is suggesting the franchise system is a "lodestone around the neck of innovation or the manufacturers' ability to succeed in the marketplace.

"That message will send a chill down the spine of 19,000 business owners who have invested in a business based upon representations and commitments from the manufacturers, which the alliance is now signaling are contingent on whether they get their way in a particular statehouse or not," Appleton said. "This is a recipe for disaster, for a deterioration in the relationships between dealers and manufacturers."

A proposed bill in Pennsylvania turned up the heat in the simmering dispute.

That bill, which is supported by that state's dealer association, would allow electric-vehicle maker Tesla to operate factory-owned stores in the state without limits on store numbers or sales volume. It is worded so as to apply only to Tesla.

The Alliance of Automobile Manufacturers opposes the bill, saying it would give Tesla an unfair advantage over automakers such as General Motors, Volkswagen and Toyota.

If dealers sign off on unrestricted direct sales for Tesla, the alliance says, then all automakers should be able to sell directly in that state. Dealers say they would fight such a move vigorously.

The disputes go beyond Tesla and the direct sales issue. The alliance also is pushing back against state legislation, which it says overly favors dealers in such areas as warranty reimbursement, facility renovations and sales and other incentives.

Dealers have pushed 33 bills in 26 states so far in 2014, according to the alliance. That's on top of 38 franchise bills last year, 20 of which were passed into law. The alliance counts 200 such bills in the past seven years.

New Jersey is on the front lines of both the Tesla fight and the overarching franchise-law battle. In April, Tesla's two stores in New Jersey were blocked from making further sales after the state's Motor Vehicle Commission changed dealership licensing rules. Several bills have been filed that would restore Tesla's ability to sell directly; one that would limit Tesla to four stores passed a legislative committee June 5.

A non-Tesla bill backed by the New Jersey dealer association is an additional catalyst for the alliance's pushback, Bergquist told Automotive News. That bill would make changes in a number of areas, including warranty reimbursement and manufacturer incentives. The alliance charges the bill protects dealers at the expense of manufacturers and consumers.

Appleton says manufacturers are misrepresenting the bill, which he says primarily protects consumers. One hotly contested provision of the bill would allow for treble damages in lawsuits. The alliance contends treble damages would encourage frivolous lawsuits and raise the costs of doing business in New Jersey. Appleton says treble damages should only bother manufacturers who plan to violate dealer rights. Automakers who comply with the laws have nothing to fear, Appleton said, because they would have the ability to correct violations before treble damages come into play.

A New Jersey Assembly committee unanimously passed the legislation in early June.

In addition to the Pennsylvania and New Jersey bills, the alliance criticized Colorado legislation passed in 2013, which dealers said aimed to guarantee that all state franchise protections apply to all dealership sales and service agreements regardless of when agreements were last updated. Alliance representatives said the law aimed to invalidate contractual obligations and was potentially unconstitutional and suggested a possible legal challenge. No lawsuit has been filed, but the alliance says it is keeping its options open.

The alliance earlier sued over Florida and Connecticut laws on warranty reimbursement. The Florida challenge is in discovery after a judge in 2012 deemed the case had merit to move forward. The Connecticut lawsuit was dismissed late last year, but the alliance is appealing.

The alliance had been neutral on Tesla's efforts to win exemptions to factory dealership restrictions as long as those exemptions had remained very narrow. For example, recent compromises in Ohio and New York capped the number of stores the EV maker was allowed to operate.

But the Pennsylvania bill is different, the alliance contends.

"It's not about Tesla," Bergquist said. "It's about an unequal system where some companies can skirt the state franchise law and others are facing ever-tightening restrictions."

In a poll of 5,000 consumers conducted by the alliance in April, 77 percent of respondents said all manufacturers should be allowed to sell directly.

Such a change would be verboten, dealers say.

John Devlin, president of the Pennsylvania Automotive Association, which represents dealers in that state, is wary that the traditional automakers now will push to sell directly.

"If they try that, that's a drop-dead issue for us," Devlin said. That would change everything, "and they wouldn't just do it in Pennsylvania."

Such a result would run counter to the dealer association's original intent in supporting the bill: protecting the franchise system. The association wanted to clear up debate over whether Tesla's direct-sales model is legal in Pennsylvania. After seeing the tide of public and political opinion favor Tesla in other states, association leaders thought it best to provide an exemption for Tesla -- but only Tesla.

The proposed legislation would make the restrictions on factory-owned dealerships stronger in case another manufacturer tried to challenge it down the road, Devlin said. "Where we're drawing the line in the sand is with the manufacturers who have a franchise system," he said.

Automakers have been saying for years that franchise laws are tipping in favor of dealers, said Peter Welch, president of the National Automobile Dealers Association. But he's puzzled as to why they now would suggest the franchise system isn't the most effective way to do business. That's unrealistic, and any assault on factory-store restrictions will be defended strongly, Welch said.

The vast majority of franchise bills are proposed as a counterpoint to overreaching or bad behavior by one or more of the automakers, said Welch, who headed the California New Car Dealers Association before being tapped to run NADA in 2013.

The alliance shared its frustrations with Welch about a month ago. Although NADA doesn't get involved in state lobbying, Welch said he offered to help facilitate communication between the state groups and the manufacturers. After all, automakers are valued business partners, he said.

"They never got back to me," Welch said.

Some state dealer association executives have been meeting with representatives from the alliance and from Global Automakers, another Washington trade group whose members include most Japanese and Korean automakers, trying to improve collaboration, New Jersey's Appleton said. A meeting took place last Wednesday.

But Appleton points out: "The alliance's statement broadens the conflict in a way that's going to make it very difficult for these groups to work collaboratively."