State motor vehicle dealer laws are on a crash course with internet sales. Electronic sales platforms make it increasingly difficult to answer the question: Where does a sale occur? Courts have repeatedly limited the applicability of state dealer laws to the geographic boundaries of each state, making the answer to that question critical to determining a law’s applicability. Tesla Motors recently announced it was abandoning its legislative push to allow for direct consumer sales. Instead, when faced with problematic state laws, Tesla will simply sell over the internet “in” California. This may be an expected development for Tesla, but it lights the path for other manufacturers to utilize a similar model with their existing dealer network.
There is a growing trend of dealership consolidation, creating large corporate dealer entities. Their large size presents an opportunity for a manufacturer and a dealer group to join together and make an end-run around state dealer laws. The two entities can agree to make all vehicle sales “in” a particular state. This gives increasingly sophisticated dealer groups an opportunity to sit down at the table with manufacturers, where the two entities have the freedom to make an arm’s-length transaction not burdened by a particular state’s laws.
Most states’ dealer laws expressly prohibit contractual waivers of their regulations. Because of the physical presence of dealerships, states can mandate facilities requirements and regulate manufacturer-authorized warranty or service work occurring at dealership locations in-state. These are geographic hooks that keep state dealer laws in play. However, sales activity on the internet is not restricted by geography.
This is a component of the manufacturer-dealer relationship that is ripe for disruption. It will not be long before a manufacturer and a large dealer group with a multi-state presence come together and agree to make all vehicle purchases “in” a state with a more favorable regulatory landscape.
Every year state motor vehicle dealer laws continue their expansive march. These regulations began over a half century ago out of a desire to blunt disproportionate bargaining powers by manufacturers at the time. What is less clear is when these laws have, or will, overshoot their mark and create the incentive for disruption.
The march of “e-commerce” continues to destroy preconceived notions of what people are willing to purchase over the internet. Consumers have long since taken advantage of these opportunities and they are voting with their wallets. The analog to this development is a change in dealership distribution models that leverages the disruptive powers of the internet. When it comes to these trends, the motor vehicle industry is long overdue.
Papering over vehicle sales out-of-state provides an end-run around state regulations. Tesla Motors saw this opportunity, but its vertically-integrated distribution and sales model made implementation simple. The rest of the automotive manufacturing industry is primed to pursue similar opportunities in partnership with the growing number of billion-dollar dealership groups.
