Will Georgia Reject Liberty for Tesla (and Consumers)?

Protecting Economic Liberty

???????

The nation's automobile dealers are at it again, attempting to thwart basic economic freedoms in a manner that protects themselves, and their manufacturers, from fair competition.  The battleground this time is Georgia, where the state's automobile dealers' association has filed a petition seeking to bar Tesla from selling automobiles in the Peach State to willing purchasers from outlets owned by Tesla.  The petition claims that Tesla, which holds an automobile dealership license in Georgia, has violated the state's Automotive Franchising Law by selling automobiles to willing consumers from a single Tesla-owned retail store.  That law makes it unlawful for any automobile manufacturer to:

"own, operate, or control, directly or indirectly, more than a 45 percent interest in a dealer or dealership in this state[.]"

Just last week, Tesla filed a motion to dismiss the dealers' anti-liberty complaint. (See here, for a report about Tesla's filing).  Hopefully the Georgia courts will look north for guidance on how to rule on Tesla's motion.  Earlier this fall, the Supreme Judicial Court of Massachusetts struck a blow for economic liberty and the welfare of consumers, by rejected a similar petition by automobile dealers demanding coercive economic protection.  See Massachusetts State Automobile Dealers' Association et al. v. Tesla Motors, MA, Inc. and Tesla Motors, Inc.   As in Georgia, the plaintiffs, an association of automobile dealers and an individual dealer, claimed that Tesla's direct sales to willing consumers violated Massachusetts' own statute governing automotive franchising, General Law Chapter 93B, entitled: "Regulation of Business Practices Between Motor Vehicle Manufacturers, Distributors and Dealers."

Section 3 of chapter 93B prohibits what it calls "Unfair Methods of Competition and Unfair or Deceptive Acts of Practices."  Section 4 in turn defines various practices that violate Section 3. Section 4(c)(10) provides that it shall be a violation of Section 3 for:

"a manufacturer, distributor or franchiser representative to . . . own or operate, either directly or indirectly through any subsidiary, parent company or firm, a motor vehicle dealership located in the commonwealth of the same line [or]  make as any of the vehicles manufactured, assembled or distributed by the manufacturer or distributor.”

Tesla obviously manufactures automobiles, and it distributes such vehicles in Massachusetts via Tesla Motors of Massachusetts, a wholly-owned subsidiary.  Nonetheless, the Supreme Judicial Court concluded that the legislature did not mean to protect the state's dealers from competition by unrelated manufacturers.  Instead, the court said: "93B is aimed primarily at protecting motor vehicle dealers from injury caused by the unfair business practices of manufacturers and distributors with which they are associated, generally in a franchise relationship."  In other words, if a manufacturer, say Ford, relies on independent dealers to distribute its vehicles, it may not then open its own dealerships that compete with such dealers.  On the other hand, a manufacturer such as Tesla that only engages in self-distribution is perfectly free to do so, even if the resulting sales reduce the profits of established manufacturers and their dealers.  As the court put things later in the opinion:

Chapter 93B "was intended and understood only to prohibit manufacturer-owned dealerships when, unlike Tesla, the manufacturer already had an affiliated dealer or dealers in Massachusetts."

While the court couched its ultimate holding as resting upon the plaintiff's lack of standing, the opinion's rationale also suggests that Tesla's self-distribution does not violate the statute in the first place.  If so, then a party that did have standing to challenge a purported violation would nonetheless lose any challenge to Tesla's practice on the merits.

Of course, the ruling by the Supreme Judicial Court is not binding on Georgia courts interpreting their own statutes.  Moreover, the operative language of the Georgia statute is somewhat different from that of the Massachusetts statute.  Still, both statutes govern the franchising relationship between manufacturers and existing independent dealers.  Moreover, both statutes ban numerous practices that manufacturers might employ to the detriment of such independent dealers.  Read as a whole, then, neither statute seems designed to govern manufacturers that, like Tesla, have no independent dealers whatsoever.  Perhaps the Georgia courts will recognize this apparent function of the statute and reiterate the Massachusetts approach.  Failure to do so would place red-state Georgia in the embarrassing position of rejecting a form of economic liberty recognized in blue-state Massachusetts, an a potentially ironic twist given credible rankings finding that Massachusetts otherwise lags far behind Georgia when it comes to protecting basic economic freedoms.

Even if courts in both states embrace a pro-liberty position, the respective state legislatures are still perfectly free to amend their statutes so as to abridge basic economic liberty by banning self-distribution by firms like Tesla.  Indeed, less than a year ago, and as reported here, a member of the Massachusetts legislature introduced a bill intended to "clarify" Chapter 93B. The bill included the following language that would have banned Tesla's strategy of self-distribution.

"The blanket prohibition on manufacturer ownership applies notwithstanding whether a manufacturer has used independently owned or operated dealerships to distribute its vehicles."

Hopefully both legislatures will resist any temptation to alter their statutes in this way.  As previously explained on this blog, free societies respect the rights of entrepreneurs to distribute products as they see fit, so long as the method chosen does not impose inefficient harms on third parties.    Like some other manufacturers, Tesla has chosen to rely upon complete vertical integration, a practice that can reduce the transaction costs that sometimes result from reliance upon independent dealers. While such dealers can provide valuable services, some consumers choose to forgo such services and purchase directly from the manufacturer.  Proponents of legislation imposing blanket bans on such vertical integration by automobile manufacturers have offered no plausible account of how integration by modestly-sized firms such as Tesla can produce economic harm. (See here, discussing and refuting arguments in favor of such a ban.)  Thus, some commentators have properly concluded that statutes banning Tesla's self-distribution "reduce competition in [the state's] automobile market for the benefit of its auto dealers and to the detriment of its consumers."  As a result, they conclude, such statutes amount to "protectionism for auto dealers, pure and simple." Such protectionism, of course, also raises barriers to entry for firms such as Telsa, who apparently believe that self-distribution is less costly than reliance upon independent dealers.  A state anxious to maximize the liberty and welfare of its citizens will reject such coercive protectionism.

New Jersey v. Economic Liberty

Praised Vertical Integration; Won Nobel Prize 

Thinks It Knows Better

A free society allows its citizens to engage in voluntary commercial exchange, so long as such exchange does not impose economic harm on unconsenting third parties.    Unfortunately the State of New Jersey takes a different view.  Last month the Garden State's Motor Vehicle Commission announced that Tesla Motors may only sell its cars in New Jersey via franchised automobile dealers.  (See this story in the New Jersey Star-Ledger describing the new rule).  The rule effectively bans Tesla's strategy of forward vertical integration.  Pursuant to this strategy, the firm operates two company-owned show rooms in the state, thereby "eliminating the middleman" and taking direct responsibility for explaining the virtues, limitations and prices of its products   Such vertical integration is a widespread practice, to say the very least. 

For the first several decades of the 20th Century, economists were hostile to most vertical integration, preferring the more fragmented market structure endorsed by New Jersey.  Indeed, as previously explained on this blog,

"[Early in the 20th Century] economists identified two, and only two, possible reasons for complete vertical integration. First, such integration could create technological efficiencies and thus reduce production costs. Second, integration could foreclose rivals from important sources of inputs, thereby creating or fortifying the integrating party's market power.  Thus, when economists, or, for that matter, antitrust courts or enforcement agencies, could not identify any efficiency purposes for such integration, they naturally inferred that the conduct was anticompetitive."

However, as Ronald Coase (pictured above) explained long ago, such vertical integration can produce other, non-technological benefits as well.  In particular, such integration can eliminate the costs of relying upon more decentralized markets, that is, "transacting," to conduct economic activity.  Such "transaction costs" can take many forms, including the risk that one's trading partner will engage in opportunistic behavior.  Indeed, Tesla recently asserted that franchised automobile dealers have a vested interest in promoting the sales of gasoline-powered automobiles over electric powered vehicles like Tesla's, with the result that reliance upon a system of franchised retailers will result in under-promotion of Teslas.

To be sure, franchised dealers can provide valuable services to consumers both before and after the purchase of a new or used automobile.   It is thus no surprise that many consumers prefer to purchase automobiles from such dealers instead of from other individuals or from Tesla.  However, such services are not free.  Instead, dealers quite properly pass along the costs of such services to consumers by marking up the price of the vehicle sold.   Apparently Tesla and some consumers believe that these additional services are not worth the additional price, leading both to embrace a different method of distribution.

As previously explained on this blog when discussing a (failed) effort in North Carolina to impose similar limits, free societies respect the rights of entrepreneurs and consumers to make such choices absent any apparent harm to third parties.  Moreover, given Telsa' tiny share of the automobile market there is no plausible risk that such integration is an anticompetitive tactic designed to gain or maintain market power.  It thus makes sense to interpret Tesla's innovative approach to marketing as an effort to minimize the cost distribution, a result that would enhance Tesla's welfare and the welfare of the consumers it serves.    Tesla's appraisal of the relative costs and benefits of relying upon its own show rooms instead of independent dealers may turn out to be incorrect, but free societies leave such decisions to firms and consumers, without coercive paternalistic intervention by state legislatures.  (See also this excellent discussion by Daniel Crane, on the Truth on the Market Blog last summer, that makes some similar points.)

Nonetheless, some continue to claim that such interference with basic economic freedoms serves legitimate purposes.  For instance, a recent story in CNN Money cites unnamed "advocates of the law" saying it aims "to encourage price competition and ensure customers have access to warranty and recall services."    Last week, 70 economists and law professors, including this blogger, signed a letter condemning the ban on Tesla's direct distribution.  The letter expressly considers the various rationales that proponents of the legislation have proffered and concludes, quite properly, that:

"We have not heard a single argument for a direct distribution ban that makes any sense.  To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies."

I should add that banning Tesla's preferred method of distribution may also protect other manufacturers of automobiles, by forcing Tesla to employ a more expensive and less effective method of distribution and thus discouraging procompetitive entry into the New Jersey market.  If so,  the ban may produce even more harm than initially supposed. 

Hopefully New Jersey will rethink  this unjustified interference with basic economic liberty.

Do Tesla Buyers Need a Nanny (State)?

From Tarheel State to Nanny State?

As previously explained on this blog, government exists to protect and enhance the individual right to exercise one's faculties, including the faculty of creating and possessing property.  Moreover, this right necessarily includes the right to cooperate with others, including by market transactions embodied in private contracts.  By creating background rules of contract, property and tort law, for instance, the state can enhance the exercise of such faculties.  Such an institutional framework can facilitate the emergence of a thriving market economy based on specialization and continuous voluntary market transactions that presumably increase the welfare of parties to them.

The North Carolina Senate apparently has a different view of the appropriate role of the State.  Earlier this month that body passed a bill that, instead of protecting and enhancing the exercise of individual faculties, would coercively infringe those faculties in two different ways.  In particular, Senate Bill 327 would ban automobile manufacturers from communicating directly with customers for the purpose of selling automobiles to them.  The bill would also ban any such sale, whenever the seller sells five or more cars in any 12 month period.  According to published reports, threat of competition from Tesla Motors, which has taken the innovative approach of declining to sell cars to independent dealers or otherwise sell from a fixed location, prompted the North Carolina Automobile Dealers Association to support the bill.  (This article provides some additional detail about the controversy.)

Innocuously titled "An Act to Clarify the Motor Vehicle Dealers' and Manufacturers' Licensing Law," the bill would, if enacted into law, prohibit both certain communications between manufacturers and consumers and sales over the internet as follows:

First, North Carolina Law already requires all "Motor Vehicle Dealers" to be licensed by the state.

Second, North Carolina Law prohibits all such dealers from selling automobiles except at "an established showroom." 

Third, the bill expands the definition of "Motor Vehicle Dealer" to include any person that, "use[es] a computer" or "other communications facilities, hardware or equipment" located within North Carolina to "engage in the business of selling automobiles," and "transmitting applications, contracts, or orders" for motor vehicles purchased by consumers in the state, unless that person sells fewer than 5 such vehicles in any 12 month period.

Taken together, these provisions would ban any company from using the internet or, for that matter, old fashioned telephone calls, to sell five or more automobiles annually to willing purchasers on terms mutually agreeable to both parties.  Any such seller would constitute a "Motor Vehicle Dealer" selling automobiles from somewhere other than an "established showroom," contrary to North Carolina Law.

There are, of course, very good reasons that many consumers might rely upon independent dealers when shopping for a new or used car.   For instance, consumers might rely upon dealers to provide expertise and information that consumers lack or could only obtain at great expense.  Consumers might also rely upon a dealer's hard-earned reputation for trustworthiness when selecting a car that the dealer recommends.  Manufacturers, too, may, wish to rely upon independent dealers to distribute their products.  After all, such dealers possess the sort of local knowledge that a distant manufacturer might lack.  Moreover, because they are independent and take title to products they sell, dealers possess powerful incentives to discover and employ effective promotional strategies.  (See pp. 586-607 of this article for a detailed analysis of why manufacturers choose to rely upon independent dealers to distribute their goods.) 

However, reliance upon dealers, especially those that must have an "established showroom," entails costs as well, costs that consumers  must ultimately bear, given that the price of a product includes the cost of distribution.  It is thus no surprise that some consumers wish to purchase automobiles directly from the manufacturer, thereby avoiding the extra costs of reliance upon dealerships.  Nor is it surprising that a firm like Tesla might wish to avoid the expense associated with established dealers by dealing directly with consumers.

As previously explained on this blog, free societies enforce voluntary agreements between parties that are capable of understanding their own interests, so long as these agreements do not cause harm to third parties or result from force or fraud.  Application of this straightforward principle requires rejection of the sort of coercive interference with individual freedom that the Senate bill entails.  Sales arranged over the internet do not harm third parties, and North Carolina Law no doubt provides adequate remedies to individuals who are defrauded via internet sales or, for that matter, by local dealers.  Thus, the Senate Bill appears to be a form of economic protectionism that will enrich dealers  at the expense of consumers.  Such legislation will also protect manufacturers that rely upon a dealer system of distribution, by making market entry by Tesla and other new manufacturers more difficult.

Hopefully the North Carolina House of Representatives will decline to pass the Senate bill, thereby protecting the state's consumers from such coercive interference with their basic economic liberties.  If local dealerships really do provide the sort of services that justify their costs, then consumers will, despite Tesla'e entry, continue to flock to such dealers in droves, gladly paying the prices necessary to support the operation of such dealerships.  If not, then  such dealerships should go the way of other outmoded economic activities.  In short, consumers should be allowed to choose whether Tesla's innovative approach makes economic sense.   Government should not pick economic winners and losers.  The alternative exemplified by Senate Bill 327 is a form of Nanny Statism that stultifies society's dynamism and thwarts wealth creation and economic growth.