Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism by Daniel A. Crane

Cross-posted from the Motor Law blog:

Thanks to Public Lawyer's Consumer Law & Policy Blog  I can bring to your attention an interesting article entitled Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism by law professor Daniel Crane. Here's the abstract, to save you following the link back to CL&P:

Tesla Motors is fighting the car dealers' lobby, aided and abetted by the legacy Detroit manufacturers, on a state by state basis for the right to distribute its innovative electrical automobiles directly to consumers. The Tesla wars showcase the important relationship between product innovation and innovation in distribution methods. Incumbent technologies may block competition by new technologies by creating legal barriers to innovative distribution methods necessary to secure market acceptance of the new technologies. While judicial review of such special interest capture is generally weak in the post-Lochner era, the Tesla wars are creating new alliances in the political struggle against crony capitalism that could contribute to a significant re-telling of the conventional public choice story.

I can, I hope, perform a useful service by explaining the significance of Lochner v. New York, 198 U.S. 45, (1905), a case which marked the beginning of what is now called the Lochner era in the Supreme Court, marked by the Court's using its interpretation of substantive due process to strike down laws held to be infringing economic liberty or private contract rights, including state legislation that regulated business. The relevant Wikipedia entry will tell you probably all you need to know, perhaps rather more. The era came to an end with the Court's decision in West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937), where it upheld minimum wage legislation introduced in Washington State and thereafter took an attitude more favourable to the New Deal than had previously been the case. (It is thought that Roosevelt was about to pack the Supreme Court with new appointments who would take a different view of the constitutionality of his policies, but in the end it was not necessary.)

Four former Chrysler dealers could reopen under U.S. appeals court ruling

Four former Chrysler dealers could reopen under U.S. appeals court ruling according to Automotive News. This comes as the result of a decision of the 6th Circuit Court of Appeals, which held earlier in January that the federal law which created the arbitration process in which the dealers won against the manufacturer prevailed over state laws that would on their face allow nearby competitors to challenge the reopenings.

Dealer Protection Code - Dead in the Water

The much-vaunted code of conduct to which the Commission encouraged the two sides of the industry to agree after removing the dealer protection measures from the 2010 block exemption, has finally been knocked on the head by ACEA. Auto Retail Network reports the Association’s Legal Director Marc Greven, stating at CECRA’s European Car Dealer Conference in Brussels in late September that the organisation did not plan to agree to a code.

That is not to say that there will never be a code, just that ACEA does not consider that its job includes agreeing one. Mr Greven said it was a contractual matter between manufacturers and their dealers. But if that is the case, what was the draft code promulgated by ACEA JAMA supposed to be for? CECRA never liked that much, and of course the manufacturers never liked the dealers’ proposals either. Has the ACEA/JAMA code also been dropped?

The Commission announced last December that if the two sides did not agree, it would impose a solution, and it set the end of this year as a deadline – coinciding with the conclusion of work on the CARS 2020 Project (see Motor Law, volume 13 number 11 and this posting). That looked encouraging, for those who like the idea of a code, but it appears that it failed to take into account that the Commission was up for a replacement in the interim, and as we are seeing now new Commissioners are being appointed as the old ones make their exits. Commissioner Almumia’s parting speech is reported elsewhere in this issue. So along the line, the Commission’s commitment went from a statement of intent to see this through, to reserving the right to introduce legislation on unfair trading practices. Since when, incidentally, did the Commission have to reserve the right to do something within its powers?

Carlo Pettinelli, currently Director of Industrial Innovation and Mobility Industries in DG Enterprise & Industry, did however assure the CECRA Conference that the subject was still firmly in the minds of the people responsible. So action before the year end can still be expected.

Commission rejects Federauto's complaint against VW

The European Commission has rejected a complain lodged by the Italian dealer organisation, Federauto, concerning SEAT dealer agreements. The complaint alleged that competition rules had been broken because teh manufacturer (Volkswagen Group Italia) had unilaterally reduced the dealers' margin from 15.85 per cent to 12.85 per cent, and had converted part of the margin from fixed to variable. The case is number AT.40050: it is not easy to find on the Commission website (a Google search found it for me) and anyway it is 10 pages of Italian, which might be more useful to you than it is to me. It is however helpfully reported by our good friends at Van Bael and Bellis: here is a link to the article on the Mondaq service, for which you might have to register. It is also in that firm's competition law newsletter, the relevant edition of which you can download from here.
Federauto argued that this violated the rationale underlying Art 3 of Regulation 1400 as well as being contrary to the vertical restraints block exemption regulation (Regulation 330/2010). Not a great start to be basing your case on the law's rationale rather than its clear words, and always a bad idea to rely on positive obligations created by a block exemption, because generally there aren't any. If you read the argument as being that because of the failure to comply with the conditions for exemption set out in the Regulation(s) the agreement was in breach of Article 101 of the Treaty, that sounds a bit better: but it still doesn't get you to where you want to be, because you then have to convince the Commission that there is a breach Article 101 somewhere.
The Commission was not convinced. There was no evidence of a restriction of competition, such as would breach Article 101(1). The clauses in the dealership contracts concerning margins were not hardcore restrictions. The new margins did not amount to retail price maintenance because dealers remained free to fund their own discounts on sales to consumers.
The complaint also touched on another, very sensitive, area: Federauto complained that VWGI did not have a code of conduct regulating relationships with dealers. The Commission's Supplemental Guidelines on Vertical Restraints in Agreements for the Sale and Repair of Motor Vehicles tells us, of course, that the existence of such a code is a relevant factor in assessing a supplier's conduct in individual cases concerning pressure on dealers to achieve anti-competitive outcomes. However, there was no evidence that such pressure had been exerted and the Commission stated that mere failure to have a code did not amount to a breach. Nothing very surprising there.
The complaint could be seen as a last-ditch attempt to restore dealer protection principles to the block exemption regime, following their removal in the latest iteration of the Regulation. If that is what it was, the best that can be said is "nice try". Dealer protection is never going to be restored by asking the Commission to read something into the Regulation that clearly isn't there: it is going to come from the Commission imposing a code of conduct on the manufacturers, or adopting legislation like the commercial agents' directive.

USA: Nissan dealer's sales affected by local Chevrolet plant

Ah, if only we had laws like the ones in the USA that protect dealers. What little we had under the block exemption disappeared at the end of May. Sims v Nissan 2013-Ohio-2662 is a case in the Ohio Supreme Court involving a Nissan dealer in Warren, Ohio. There is a GM plant in Lordstown, about six miles away. The Ohio Supreme Court agreed with the dealer's argument that Chevrolet's unusual popularity in his market makes Nissan's sales expectations for him unrealistic.

There was a time, not so long ago, when a European dealer would have been able to invoke the dispute resolution procedures required by the block exemption to get such a problem sorted, by an arbitrator or expert third party. No longer. The Code of Good Practice issued by ACEA states that dealers will have the right to refer disputes to an independent expert or arbitrator, but what provides the basis for a dispute that can be referred? The dealer would have to argue that the target was set so high that it amounted to an unlawful restriction on competition - perhaps it would prevent the dealer in question taking in additional franchises. But it's pretty nebulous.

And while it might sound like an unfair commercial practice, the Unfair Commercial Practices Directive (Directive 2005/29/EC), which sounds as if it might be the right instrument to look to for redress, only applies to B2C transactions, not B2B which is what dealer agreements are. It is occasionally mentioned as a possible source of dealer protection, but for this simple reason it doesn't look very useful. But there is a green paper under discussion at present in Brussels, on unfair commercial practices, which was originally launched with a view to looking at practices in the food retailing sector. However, 34 per cent of responses (of which there were 746 altogether) came from the motor trade, and the NFDA is now pushing for the Commission to reintroduce some dealer protection measures. The consultation is being carried out by the Commission's Directorate General for Internal market and Services, and as so often happens it is quite possible that you'll get a different answer from them than from DG Competition - whose agenda, of course, is quite different. The UK government's response to the Commission's consultation is here.

USA: Federal Statute Precluding Enforcement of Arbitration Clauses in Motor Vehicle Franchise Contracts Inapplicable to Snowmobile, ATV Dealer Agreements

Mandatory arbitration clauses are common in franchise agreements, including motor vehicle franchise agreements. Whether a manufacturer can enforce such a provision requires an analysis of competing state and federal statutes and a determination of whether the vehicles sold fall within the statutory definition of a “motor vehicle.” In an opinion addressing the various statutory regimes, a federal district court in New York held the Motor Vehicle Franchise Contract Arbitration Fairness Act, 15 U.S.C. 1226 did not limit a franchisor’s effort to arbitrate a dispute concerning dealer agreements for snowmobiles and all-terrain vehicles (ATVs). At the same time, the court held that the Fairness Act did serve to block arbitration of claims regarding the same dealer’s motorcycle franchise.

Champion Auto Sales, LLC v. Polaris Sales Inc., 2013 U.S. Dist. Lexis 65219 (E.D.N.Y. Mar. 27, 2013). 

Full casenote on Day Pinkney LLP's website here. 

USA: No cure opportunity has to be given if dealer's breach cannot be cured

Many state motor vehicle dealer statutes require that dealers have a chance to cure contractual breaches before being terminated. Does a statutorily-mandated cure provision require a motor vehicle franchisor to provide a dealer with an opportunity to cure a breach that, absent the statute, would be incurable? The New York Franchised Motor Vehicle Act requires that a franchisor provide a dealer with a "reasonable time" to cure a material breach of contract that forms the basis for a termination. It does not, however, expressly address the interplay of the statutory cure period with common law principles applicable to incurable breaches. In Giuffre, the court concluded that the Dealer Act does not require a motor vehicle franchisor to provide a dealer with an opportunity to cure breaches that were incurable under New York common law.

Giuffre Hyundai, LTD v. Hyundai Motor America, No. 13-cv-0520, 2013 U.S. Dist. LEXIS 67795 (May 10, 2013)

Read the full casenote on Day Pitney's website, here.