The Effect of Franchise Laws on Tesla’s Operations

The Effect of Franchise Laws on Tesla’s Operations
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Abstract
Research illustrates that some companies rely on an in-house model for their sales and marketing functions, which helps them sell directly to their customers. Conversely, others opt to trade through intermediaries, sometimes leading to differing incentives between companies and vendors. In selling its cars, Tesla intends to use the internet and its Tesla-owned and operated stores to sell directly to consumers. The company’s business model has caused an uproar because incumbent dealers view the distribution technique as a threat. Incumbent dealers contend that if Tesla introduces the distribution model and clients prefer it, other manufacturers may opt to distribute their cars without engaging dealers. Having considered the plight and looming crisis that may occur with the implementation of this distribution model, various states termed Tesla’s direct-sales model unlawful, meaning that state-level dealer licensing regulations prohibit Tesla’s operations. Tesla’s woes demonstrate the crucial role played by a state in determining competitive industry conditions. Tesla has contested the right to sell its products through Tesla-owned stores in various states. Therefore, this report aims to provide a comprehensive review of the economies of franchising and its influence on Tesla’s operations when the company attempted to establish a second outlet in Virginia.
The Effect of Franchise Laws on Tesla’s Operations
Since its introduction in 1890, the production of fully electric vehicles has become common in various countries, such as China, the United States, Norway, France, and Germany. Remarkably, this increased production stems from shifting customer expectations, technological innovations, and new safety and vehicle emissions conventions. Although these seem to be the primary factors causing the production of fully electric cars, reports illustrate that much of the mainstream acceptance and excitement for such vehicles stems from Tesla Motors Inc.’s (TSLA) continuous advancements. Tesla’s mission statement is the backbone of its successful business model. Although Tesla leads in producing and selling electric cars, emerging reports indicate that franchise law will likely influence the company’s economic stability. Primarily, there are vital economic implications associated with the manufacturer’s model when selling its merchandise.
Research illustrates that some companies rely on an in-house model for their sales and marketing functions, which helps them sell directly to their customers (Morton & McDermott, 2018). Conversely, others opt to trade through intermediaries, sometimes leading to differing incentives between companies and vendors. In selling its cars, Tesla intends to use the internet and its Tesla-owned and operated stores to sell directly to consumers (Gupta & Maurya, 2017). The company’s business model has caused an uproar because incumbent dealers view the distribution technique as a threat. Incumbent dealers contend that if Tesla introduces the distribution model and clients prefer it, other manufacturers may opt to distribute their cars without engaging dealers (Beard & Ford, 2016). Therefore, having considered the plight and looming crisis that may occur with the implementation of this distribution model, various states termed Tesla’s direct-sales model unlawful, meaning that state-level dealer licensing regulations prohibit Tesla’s operations.
Tesla’s woes demonstrate the crucial role played by a state in determining competitive industry conditions. In this case, the regulations issued by the state prevent the entry of advanced technology. The economic theory states that companies acting separately or jointly may try to influence the watchdog to attain outcomes that raise their profits. Some attempts to increase profit margins include creating barriers for new participants or establishing an environment with weak competition. Economic experts assert that such regulations make it difficult for this retail sector to change and innovate despite being the largest, with annual sales reaching close to $1 trillion (Morton & McDermott, 2018). Tesla has contested the right to sell its products through Tesla-owned stores in various states. Therefore, this paper aims to provide a comprehensive review of the economies of franchising and its influence on Tesla’s operations when the company attempted to establish a second outlet in Virginia.
In the last five years, some states have changed their dealer franchise laws to either expressly forbid or permit the direct sale of motor cars within their borders. Most state laws allowing for limited direct sales appear to be specifically written to apply to Tesla since they demand that a manufacturer either has no active franchise agreements in a pertinent market area or an active direct sales business. Legislation that has just been proposed tends to allow direct sales by new manufacturers. In most jurisdictions that allow direct sales, a manufacturer still needs to have a dealer license or permit to do business there (Stolze, 2015). Some jurisdictions, such as Utah, only permit manufacturers selling brand-new non-fossil-fuel-powered vehicles, such as those that run on electricity or hydrogen fuel, to employ the direct-sales model. Other jurisdictions, like Ohio, permit direct sales, but only for manufacturers who entered the market by a specific date and imposed a cap on the number of dealerships direct sales manufacturers may run within the state.
Instead of revisions to the legislative text, Tesla’s ability to sell cars through its direct-sales model results from a favorable judicial or administrative decision regarding the applicability of state law in some jurisdictions, like Arizona (Hartman, 2021). In these states, individual cases will likely determine whether manufacturers can sell cars directly to customers. Some states, like Louisiana, have lately improved protections for franchise dealerships by expressly forbidding direct sales (Papscun, 2022). A summary of the state direct-sales policy is shown in the chart below. Direct sales are officially prohibited by law in at least 17 states, but they are explicitly permitted by law in at least 18 other states. Additionally, at least nine states have rules that forbid all new direct sales while permitting existing direct sellers to keep a specific number of outlets. At least 8 of the states that allow direct sales have ties to laws mandating that the manufacturer only offer non-fossil fuel, electric, or zero-emission automobiles.
State

Source

Accepts Direct-Sales?

Explanation

Alabama

Franchise Law
Ala. Code § 8- 20-4(3)(h)

NO

Manufacturers cannot lease or sell new cars to consumers in Alabama under the state’s franchise statute. Direct sales of “alternative fuel cars” were to have been made possible by amending Ala. Code § 8-20-4, but Senate Bill 22 was never passed out of committee.

Alaska

Franchise Law
Alaska Code §
45.25.300

UNCLEAR

I could not locate any statutory provision that specifically allows or forbids direct sales.

Arizona

Franchise Law
Ariz. Rev. Stat Ann. § 28-4460

UNCLEAR
(limited direct sales)

Manufacturers are typically forbidden by state franchise law from improperly competing with auto dealers. However, after an Arizona administrative law judge concluded that Ariz. Rev. Stat Ann. § 28-4460, which governs manufacturer-dealer competition and discrimination, did not apply to the business, Arizona DOT gave Tesla a license to sell cars. Tesla now has a license to sell cars in the state. Still, it is unclear if other automakers, like Tesla, do not have any franchise dealerships in Arizona, would be permitted to sell cars to customers directly. Direct-sales choices would probably be made on a manufacturer-by-manufacturer basis because of the licensing system and the lack of any specific legal authority to engage in direct-sales.

Arkansas

Franchise Law
Ark. Stat. Ann. § 23-112-403

NO

Except for their employees, charitable organizations, and the federal government, manufacturers cannot sell directly to customers under Arkansas law.

California

Franchise Law
Cal. Veh. Code § 11713.3

YES (limited direct sales)

Only franchised dealers selling the same line make in a certain market area are prohibited from competing with manufacturers under California franchise legislation. Manufacturers can engage in direct sales as long as there are no local franchises selling the same line make.

Colorado

Franchise Law
Colo. Rev. Stat.
§ 44-20-126

YES

According to Senate Bill 167 of 2020. A manufacturer may own, run, or control a motor vehicle dealer if the business solely produces electric vehicles and has no franchised dealers of the same line-make. Although there are few exceptions, the law formerly forbade manufacturers from owning or managing a dealership. Particularly, the legislation does not prevent a manufacturer from running a dealership provided there are no other retailers in the state selling “the same line-make.” The law had previously permitted manufacturers to continue operating an existing dealership so long as it was open on January 1, 2009, and had remained open ever since.

*Connecticut

Franchise Law
Conn. Gen. Stat.
§ 42-133cc
Dealer licensing law
Con. Gen. Stat.
§14-52b(b)

NO

The general rule of Connecticut franchise law is that manufacturers cannot unjustly compete with dealers who have already signed franchise agreements to sell the same range of products in a given market. Although limited direct sales might be possible, the applicable dealer licensing requirements forbid manufacturers from getting dealer licenses to engage in dealer business. Con. Gen. Stat. 14-52b was to be amended in 2019 to permit some manufacturers to participate in direct sales, but House Bill 7142 was never passed. According to the proposed legislation, manufacturers must be all-electric.

Delaware

Franchise Law
Del. Code Ann. tit. 6 § 4901 et seq.

UNCLEAR

Delaware franchise laws forbid manufacturers from unfairly competing with new car dealers operating under a franchise agreement in a particular market area and selling the same line-make. A dealership cannot be operated by or under a manufacturer’s control except under temporary ownership.

Florida

Franchise Law
Fla. Stat. § 320.645

YES (limited direct sales)

Manufacturers can sell cars directly to consumers in Florida as long as no franchised dealerships are selling them there.

Georgia

Franchise Law
Ga. Code. § 10- 1-664.1

YES
(limited/no new direct- sales)

Georgia law permits some manufacturers to participate in direct sales if certain requirements are met. The Georgia General Assembly passed House Bill 393 in 2015, specifically written to allow Tesla to do direct sales in the state. Applicable law provides that a manufacturer may engage in direct sales of motor vehicles at no more than five locations as long as the manufacturer:
1) Had been selling motor vehicles in the state as of January 1, 2015
2) Exclusively sells zero-emission vehicles
3) Has never sold its vehicles through a franchised dealer in the state
4) Acquired a controlling interest in a franchisor.

Hawaii

Franchise Law
Hawaii Rev. Stat. §437-1 et seq.

UNCLEAR

No explicit clause forbids or permits manufacturers to engage in direct sales. According to Hawaii law, a “vehicle dealer” is any business that sells “three or more vehicles within a calendar year” and is not specifically mentioned in a statute. The definition of “dealer” in Hawaii excludes several organizations but not automakers.

Idaho

Franchise Law
Idaho Code § 49-1601 et seq.

UNCLEAR

No specific statute permits or forbids direct sales, as far as I can tell.

Illinois

Franchise Law
Ill. Rev. Stat. ch. 815 § 710/4

UNCLEAR
(pending legislation to allow for limited direct sales)

Although manufacturers are not permitted to operate as dealer franchises, direct sales do not appear expressly prohibited under Illinois law. A bill (House Bill 2857) is now in the works that would outright forbid direct sales, with some exceptions, such as for manufacturers with a repair center in the state, no active franchise agreements, and a history of receiving new car dealer licenses.

Indiana

Franchise Law
Ind. Code § 9- 32-11-20

YES
(limited/no new direct- sales)

The Indiana General Assembly passed House Bill 1592 in 2017, changing state law to forbid direct sales. However, the bill essentially allows Tesla to keep running in the state by making an exception for companies that received a license to sell cars before July 1, 2015, and opened a service center there before January 1, 2018.

Iowa

Franchise Law
Iowa Code § 322.3(14)

NO

According to Iowa law, manufacturers cannot operate, control, or have a financial interest in motor vehicle dealers.

Kansas

Franchise Law
Kan. Stat. Ann.
§ 8-2438

NO

According to Kansas law, manufacturers cannot run or own new car dealerships. This clause is part of Article 24 of the state constitution, which also contains clauses about franchise agreements.

Kentucky

Franchise Law
Ky. Rev. Stat. § 190.070

NO

According to Kentucky law, manufacturers cannot own, manage, or control a car dealership.

Louisiana

Franchise Law
La. Rev. Stat. Ann. § 32:1261(A)(1)(k)

NO

Louisiana passed Senate Bill 107 in 2017, which ou...