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Louis Chronowski on the issue of auto direct sales

By Steve Thorpe
Legal News

The Federal Trade Commission recently urged Michigan lawmakers to loosen restrictions that prohibit auto manufacturers from selling new vehicles directly to consumers, supporting an exception to the ban to allow makers of a certain type of enclosed motorcycle to deal directly with consumers.

Heavy resistance from dealer organizations is expected. Louis Chronowski of Dykema focuses his practice on commercial litigation with more than 15 years’ experience representing companies in a variety of areas. Chronowski has represented motor vehicle manufacturers, franchisors, sporting goods manufacturers, health care product manufacturers and financial institutions.

Thorpe: What is the current law in Michigan on manufacturer direct sales?

Chronowski: Section 445.1574 of the Michigan Compiled Laws provides:
 
445.1574 Prohibited conduct by manufacturer

(1) A manufacturer shall not do any of the following:

(i) Sell any new motor vehicle directly to a retail customer other than through franchised dealers, unless the retail customer is a nonprofit organization or a federal, state, or local government or agency. This subdivision does not prohibit a manufacturer from providing information to a consumer for the purpose of marketing or facilitating the sale of new motor vehicles or from establishing a program to sell or offer to sold new motor vehicles through franchised new motor vehicle dealers that sell and service new motor vehicles produced by the manufacturer.

Interestingly, this law was modified in late 2014 to specifically target Tesla and close a loophole that Tesla exploited in Massachusetts. A Massachusetts Supreme Court case held last year that Tesla essentially sell direct to consumers because no dealer (or dealer association) had standing to challenge Tesla as the Massachusetts law was drafted. Also of note is that Governor Snyder was quoted after signing the law as saying: “We should always be willing to re-examine our business and regulatory practices with an eye toward improving the customer experience for our citizens and doing things in a more efficient and less costly fashion.” Despite signing the law, Snyder echoes the FTC position. Nonetheless, he signed the law.

Thorpe: An offbeat vehicle sparked this latest debate. Tell us about that and why it was controversial.

Chronowski:
This law is controversial because it carves out a narrow exception to Michigan law to allow for the direct sale of autocycles. Autocycles are essentially a three-wheel motorcycle with an enclosed cabin. Presumably, the manufacturers of autocycles, like Elio, recognize that initiating a dealer network is a costly proposition that threatens the viability of a new company. Tesla recognized this too. The autocycle, for all intents and purposes, looks like a car and functions like a car. I believe that the Michigan auto dealers association and lobby will work aggressively to stop this law. If the door is cracked open for the autocycle, dealers will fear a slippery slope for the allowance of other direct sales. This bill is ironic on the heels of the law passed last year.

Thorpe: In part, the document from the FTC says, “FTC staff believe that current law, interpreted to ban direct manufacturer sales of motor vehicles, is very likely anticompetitive and harmful to consumers.” Why is the agency just “discovering “ this issue?

Chronowski:
The FTC is a political being. I believe that the FTC understands that Tesla is popular and a “green” initiative that is being hindered by protectionist laws favoring dealers. I understand that purchasing motor vehicles from dealers adds thousands of dollars to the cost of vehicles, as compared to if direct sales were allowed. The dealer model has its advantages, but it comes at a cost to consumers. I view it as something similar to how travel agents were de-emphasized in favor of Internet travel bookings. The key to this is how much consumers will fight this issue and convince their respective state legislators that their interests should trump the dealers.

Thorpe: Tell us about Senate Bill 268.

Chronowski:
The gist of Senate Bill 268 is the addition of subsection 4 which provides: (4) THE MANUFACTURER OF NEW OR USED AUTOCYCLES MAY ENGAGE THE DIRECT RETAIL SALE, PURCHASE, OR EXCHANGE OF, OR DEAL IN, OR MAKE REPAIRS TO THOSE AUTOCYCLES. AS USED IN THIS SUBSECTION, “REPAIRS” INCLUDES GENERAL REPAIRS, WARRANTY WORK OR REPAIRS, OR FOR RECALL WORK OR REPAIRS.

Thorpe: What would be the immediate consequences if the law was passed?

Chronowski:
If the law is passed and signed into law, the consequences will, in the short term, narrowly apply to the manufacturers of the autocycle. I presume Tesla and other manufacturers who want to engage in direct sales will use this as impetus to get broader relief to support their own direct sales. However, the dealer lobbies will fight this hard.

Thorpe: How do you see this legal issue evolving in the future?

Chronowski:
Unless consumers demand change, it is hard to see this type of law getting broader treatment. Dealers are well-capitalized and have powerful lobbies. The 2014 law passed in Michigan had unanimous support in the Michigan senate and one dissenting vote in the house. Even a state like Michigan that has a strong interest in promoting vehicle manufacturer interests has strong dealer forces in action.