As EVs disrupt auto sales, courts and legislators step in to referee

At issue is whether EV-makers can sell cars without traditional dealerships, and whether legacy carmakers must sell their own EVs through dealers.
Unsold 2023 Aviator sports-utility vehicles sit in a long row at a Lincoln dealership Sunday, June 18, 2023, in Englewood, Colo. (AP Photo/David Zalubowski)

The rapid adoption of electric vehicles coupled with direct-to-consumer sales models has disrupted the automotive industry, thrusting state lawmakers and the courts into the role of referee between manufacturers and dealers.

The outcome of these battles will determine how cars are bought, sold and serviced as the country transitions gradually from internal combustion to zero-emission cars and trucks.

Two key issues are at play: whether EV-makers like Tesla, Rivian and Lucid can sell their vehicles without going through traditional dealerships, and whether legacy manufacturers such as Chevrolet and Ford are bound to the dealership model as they roll out their own EVs.

“It’s not so much that the war over direct sales is accelerating, it’s that it has shifted,” said Daniel Crane, a law professor at the University of Michigan who has written about direct sales laws.

Decades-old dealer franchise laws are being put to the test in the courts while high-stakes lobbying fights are playing out in state capitals. As of 2021, 18 states allowed direct sales of cars and 17 states banned the practice, according to tracking by the National Conference of State Legislatures.

Tesla is often a proxy for whether EV manufacturers are winning or losing ground to the powerful auto dealer lobby. This year, Florida and Mississippi offered contrasting case studies.

In Florida, Gov. Ron DeSantis (R), who kicked off his presidential campaign with Tesla founder Elon Musk’s help, signed legislation this month that requires automakers to continue selling through their dealership network. But the law includes an exception that will allow Tesla to continue selling directly to consumers since it does not have a dealership network.

“In doing that, we made a clear delineation between a manufacturer that has never had dealers and maybe never will, and those who have been heavily dependent upon their dealerships to be their marketing and sales presence in Florida,” Ted Smith, president of the Florida Automobile Dealers Association, told Carscoops.com.

By contrast, Mississippi Gov. Tate Reeves (R) signed legislation in March that bars Tesla and other direct-to-consumer carmakers from setting up new company showrooms in the Magnolia State. Instead, the law requires EV-makers to work within the state’s existing dealer franchise framework.

“It just ensures that there’s one set of rules for everyone and electric vehicle manufacturers will be treated just like legacy manufacturers, and if they want to have dealerships in this state, they will have to follow the franchise laws that’s been on the books for over 50 years,” state Sen. Daniel Sparks (R) told the Clarion Ledger.

Critics of the Mississippi bill assailed it as a protectionist measure that serves the interests of auto dealers at the expense of the car-buying public.

Crane, the law professor, is also critical of laws that shoehorn EV makers into the traditional dealership model.

“They’re trying to lock in a one-size-fits-all distribution model from 80 years ago, and that’s not a good idea,” Crane said. “They’re straight-jacketing the whole market.”

Auto dealers in Mississippi and elsewhere face a bigger threat to their bottom line than Tesla and other EV newcomers: the potential that legacy manufacturers will adopt a similar sales model. 

U.S. auto dealers have watched warily as Mercedes-Benz and its dealers in Australia have battled in court over the German automaker’s decision to adopt an agency model, where cars are offered for a fixed price and dealers are paid a commission. Automakers in Europe are making a similar move

Ford Motor Company CEO Jim Farley announced last year that the company plans to sell its EVs online with a fixed price.

This year, the Virginia Automobile Dealers Association backed legislation aimed at inoculating dealers in the Old Dominion against what happened in Australia. The new law seeks to make clear that legacy manufacturers cannot bypass dealers and go directly to consumers.

“Seeing what had occurred around the globe in other countries certainly led us to wanting to be prepared and make sure our franchise laws are updated and have some strong safeguards for customers,” Ralston King, vice president for legislative affairs at VADA, said in an interview earlier this year.

“It’s not about Tesla, Rivian or Lucid — this is not about them,” King said.

King said he hoped the Virginia law becomes a model for other states, as auto dealers seek to protect the existing sales and service franchise system.

The National Automobile Dealers Association did not respond to a request for comment from Pluribus News. But outgoing NADA Chairman Mike Alford defended the dealer model in a speech in January.

“The dealer franchise system is the most consumer-friendly, efficient, and effective model of distribution for motor vehicles in the U.S,” Alford said, according to a press release. “Dealers are truly essential to the future of [internal combustion and EVs]. … [O]nly a local dealership network can provide the personal relationship consumers want.”

The automotive manufacturing industry counters that the franchise system is outdated and makes it hard to adapt to changing consumer expectations, especially as EVs become more commonplace. 

“I’ve been doing this a long time, and I’ve never seen this many bad state bills across the country to change the franchise system,” John Bozzella, president and CEO of the Alliance for Automotive Innovation, said in a statement in March.

“Instead of working together to modernize the automobile buying experience for the 21st century, [auto dealer associations] across the country are pushing these bills that add a lot of extra costs to the system and in some cases ban the innovations that would improve a customer’s buying and ownership experience,” Bozzella said.

Last month, Auto Innovators sent DeSantis a letter urging him to veto the Florida bill. 

State efforts to restrict how cars are purchased have also drawn the attention of the Federal Trade Commission, which as far back as 2015 was urging state lawmakers to take a hands-off approach.

“States should allow consumers to choose not only the cars they buy, but also how they buy them,” wrote two FTC directors in a blog post titled, “Direct-to-consumer auto sales: It’s not just about Tesla.”

“Absent some legitimate public purpose, consumers would be better served if the choice of distribution method were left to motor vehicle manufacturers and the consumers to whom they sell their products,” the post said.

Consumer Reports, the review and ratings nonprofit, has taken the position that direct-to-consumer auto sales generally benefit car buyers, so long as there are protections in place to prevent price and lending discrimination and ensure customer care after the purchase.

Quinta Warren, CR’s associate director of sustainability policy, noted that barriers to direct sales have a disproportionate effect on EV sales, which could result in less consumer access to EVs. That, Warren said, could make it harder for states to meet emission reduction goals and prevent some consumers from benefiting from the cost savings associated with owning and operating an EV.

“Lawmakers should be thinking not just about the dealerships but about helping people in the state,” Warren said.

Courts have also been drawn into the battle over the Tesla auto sales model. In May, the Delaware Supreme Court reversed a lower court ruling that blocked Tesla from opening a car gallery in the Ocean State. The justices found that the state’s franchise law governs the relationship between dealers and manufacturers but does not apply to Tesla because it does not have dealers.

Last year, Lucid Motors sued Texas and Tesla sued Louisiana over those states’ prohibitions on direct auto sales. Similar litigation brought by Tesla in Michigan in 2016 ended with a settlement that allows Tesla to operate showrooms and service facilities in the state.

Illinois car dealers filed an appeal in January after a judge ruled that EV makers could sell directly to consumers.

It is not only EV makers that are disrupting the automobile sales industry. So are companies such as Carvana, which has sought to bring an e-commerce model to used car buying.

Illinois lawmakers this year unanimously approved legislation making clear that auto sellers can conduct off-site sales where the purchase is conducted online and the car delivered to the buyer’s home.