June 16, 1987

Mr. John R. Hale Commissioner CreditUnion Department 914 EastAndersonLane Austin,Texas 78752 OpinionNo.JM-721

Re: Constitutionalityof House Bill Nos. 1953 and 1531. which regulate the sale ofmotor vehicles

Dear CommissionerHale:

You inquire about the constitutionalityof certain statutes and proposed amendments applying to the sale of motor vehicles. You are particularly concerned about pro+sions which prohibit sales ofmotor vehicles from locationsother thana permanent sales location. Briefs submitted to us state that rental car agencieshave in the past sold used cars in Texas at temporary "off-site" sales. These sales are also called "fleet" sales. Such salesare usually sponsoredby credit unions thatmake financingavailable tomemberswho purchasevehicles. Credit unions in the past have also sponsored off-site sales of new cars, held at sites which are not permanent auto dealer locations. The proposed legislationyou inquireaboutwill preventboth kinds of sales -- the off-site sales of new cars and of used rental cars. You specifically ask about House Bill No. 1531. which amends article 4413(36). V.T.C.S., and House Bill No. 1953, which amends article 6686,V.T.C.S.
Article 4413(36), V.T.C.S., the Texas Motor Vehicle Commission Code, regulates the distribution and sale of new motor vehicles in this state. V.T.C.S. art. 4413(36), 951.01, 1.02. It provides that no one may act as a dealer of new motor vehicleswithout obtaining a license from theMotor Vehicle Commissioner. Dealersmay carry on the business of a dealership at more than one location, if the separate location is expressly authorized by the dealer's franchise and license. V.T.C.S. art. 4413(36). 14.02(c)(l). Lxensees may not participate in a "new motor vehicle show or exhibition at which new motor vehicles are offered for sale" unless the Motor Vehicle Commission has granted its approval. Id. House Bill No. 1531, pending before the 70th Legislature, wouldprohibit the sale of any new motor vehicle, except a motor home. at a show or exhibition. House BillNo. 1531, 70thLeg., (1987) (proposingamendment to section

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4.02(c)(2) of article 4413(36)). Thus, the off-site sale of a gloup of new carswouldbe prohibited ifHouse Bill No. 1531 is enacted.
Article 6686, V.T.C.S., permits dealers in motor vehicles to apply for a general distinguishing number and a master dealer's licenseplate, icstead of registeringvehicles individually. An automobile dealer must have "a currently valid general distinguishing number" assigned by the Department of Highways and Public Transportation, and may not reassign a certificate of title or other evidence of ownershipwithout one. V.T.C.S. art. 6686(a)(l-A). These requirements apply to dealers in new **or** used cars.
To apply for a general distinguishingnumber, an individualmust file a sworn application with the department showing. among other things:
(A) that the location for which the applicant

seeks the issuance of a general distinguishing number is an established and permanent place of business situated on real property owned, or leasedby him under a written lease for a term of not less than one'year, on which the applicant maintains a permanent furnished office for the sale of vehicles of the type specified in his application.

. . . (B) that the applicant intends to remain in business for at least one year at the sp.+cifieh location.

. . . V.T.C.S. art. 6686(a)(l-A)(vi)(A), (B) (enacted by Acts 1985, 69th Leg., ch. 465, at 1633).

House Bill No. 1953, enacted by the regular session of the 70th Legislature,requires a separategeneraldistinguishingnumber for any location from which the person engages in business. H.B. No. 1953, 70th Leg. (1987) (mending V.T.C.S. art. 6686(a)(l) (iii), (v)). In addition, the dealer's sworn application for a general distinguishing number wotildhave to state that the applicant intends to remain engaged inbusiness as a dealer for at least one year at the speciflrd

1. A brief submitted in connectionwith this requestargues that the presentversion of section 4.02(c)(2),as interpretedby theTexas Motor Vehicle Commission, allows participation in bona fide trade shows and exhibitions only where a sale of vehicles is an incidental purpose. Thus, "parking lot sales" which have as their primary purpose the sale of vehiclesmay not be authorizedby the statute.

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location and that he or his employee will be there to engage in business during reasonable and lawful business hours. Id. (amending - V.T.C.S. art. 6686(vi)(B)).
These provisions on location will prevent both fleet sales of rental cars and off-site sales of new cars. You question the constitutional validity of legislation which restricts the sale of vehicles by dealers that do not operate from a permanent location. You first ask whether either or both of the bills couldbe construed as an attemptby the legislature to pass a special law regulating the automobiletradeby effectivelyprohibiting somepersons from engaging in that trade. This question raises issuesunder the equalprotection clause and the due process ciause of the FourteenthAmendxpentto the United StatesConstitution.
The legislation distinguishes between persons who offer motor vehicles for sale from a permanent business location virtuailjjevery business day and those who wish to offer motor vehicles for sale occasionallyfrom a locationonly temporarilydevoted to thatpurpose. There is no fundamental right to engage in the business of selling mqtor vehicles; therefore,the legislatureneeds only a rationalbasis. for treatingpersonsdifferentlyaccording to theirparticularmode of selling motor vehicles. See City of New Orleans v. Dukes, 427 U.S. 297 (1976). Under the rational relationship test, a statutewill be sustained-if the legislarurecould have reasonably concluded that the challenged classificationwould promote 'a legitimate state purpose. See, e.g., Exxon Corp. v. Eagerton, 462 U.S. 176, 195 (1983);Allied StoresV. Bowers, 358U.S. 522, 530 (1959).
Article 4413(36). V.T.C.S., includes the following purpose clause:
The distributionand sale of newmotor vehicles

in this State vitally affects the general economy of the State and the public interest and welfare of its citizens. :r:is the policy of this State and the purpose of this Act to exercise the State's police power to insure a sound system of distributing and selling new motor vehicles through licensing and regulating the manufacturrrs,distributors,and franchiseddealers of those vehicles to pruvide for compliance with manufacturer'swarranties, and to prevent frauds, unfair practices, discriminations, impositions, and other abuses of our cicieens.

V.T.C.S. art. 4413(36). 01.02.

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A brief submitted to us indicates that the proposed legislation will serve to protect purchases by prohibiting car sales by **un** licensed, onfranchised "fly-by-night" dealers. Such dealers cannot repair motor vehicles. They have no capital investment in the facility from vhich they sell. Therefore, they cannot provide the services necessary to keep the vehicles they sell in good condition. The proposed legislationprotects consumers from sales methods which might leave them in possession of a defective vehicle without any practicalmethod of holding the dealer accountable.
Another brief argues that House Bill No. 1953 is anti-consumer, because credit union members are satisfiedwith "off-site" sales. It also argues that consumers are sufficientlyprotected under existing law. because the vehicles have warranties and complete service records. In the event of problems, the consumer may seek recourse under the Deceptive Trade Practices Act. The consumer savesmoney on the price of his purchased vehicle, and the car rental rates offered by the rental companies reflect the savings they realize by selling theirused vehicles.
The view that House Bill No. 1953 is anti-consumer is supported by a letter from the Chicago Regional Office of the Federal Trade Commission on similar Illinois legislation. A letter to the minority whip of the IllinoisHouse of Representativescommentedon legislation which would have prohibited fleet sales by rental car agencies. Letter fromJohnN. Peterson,Acting Director, ChicagoRegional Office of the FederalTrade Commission to JohnW. Hallock, Jr.Minority Giip, Illinois House of Representatives,Nov. 13. 1986. The letter stated that the bill was contrary to the public interest because it would unnecessarily restrain competitiou in the used car market. Its principal effect would be to increase costs to consumers in the used
car market. Existing licensing requirements appeared sufficient to address concernsabout unscrupulousdealers. Id. - Acts of the legislatureare presumedvalid. AnnistonMfg. Co. v. Davis, 301 U.S. 337 (1937). When someone alleges that a statute involves a classification denying the equal protection laws, he has the burden of proving that it is essentiallyarbitrary. Minnesota v. CloverLeaf CreameryCo., 449U.S. 456 (1981).

An Attorney General Opinion cannot evaluate the factualbases of statements for and against the proposed legislation. The arguments and information provided to us do not, on their face, refute any possibility that there is a rational basis for these bills. We must conclude that the legislature reasonably believed that the proposed restrictionson motorvehicle saleswould protectTexas consumers from fraud and unfair practices by "fly-by-night"dealers. We cannot say that the proposed enactmentsviolate the equalprotection clause. Cf. Calvert v. McLemore, 358 S.W.2d 551 (Tex. 1962) (statuteviolating

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article VIII, section 2. of the Texas Constitution which requires reasonablebasis for classifyingand exemptingpersons engaged in same occupationfor occupation tax).

An economic regulation challengedunder the FourteenthAmendment on substantivedue process groundswill notbe overturnedif

there is an evil at hand for correction,and

. . . it might be thought that the particular legislativemeasurewas a rationalway to correct it.
Williamsonv. Lee Optical of Oklahoma, 348 U.S. 483, 488 (1955). The court will not strike down state business regulatiousmerely because "theymay be unwise, improvident,or out of harmonywith a particular schoolof thought." Id. - Article I, section 19, of the Texas Constitution also provides for due process of law:

No citizen of this State shall be deprived of life. liberty,property,privileges or immunities, or in anymanner disfranchised,except by the due course of the law of the land.

We note that the opinions from other states, and the commentariesof scholars, tend toplace statutoryprovisions like the one athand in a very critical light, at least insofar as the guarantees against the deprivation of liberty without due process of law in various state constitutionsare found to extendmeaningfulprotection to substantive interests in economic freedom. Our research suggests thata number of state judiciarieswould examineRouse Bill Nos. 1953and 1531 strictly for real evidence of the actual relationshipof themeans embodied in the prohibitions in the statute to the actual and purported purposes of theprohibitions. If the courts of Texas should choose to follow a similar approach to interpreting the liberty interests in the due process clause of the Texas Constitution, then we surmise that it might be difficult for this statute to pass constitutionalmuster. See, e.g., DefianceMilk Products Company v. Du Mond, 132N.E. 2d 829 (N.Y. 1956); In re Certificate of Need for Aston Park Hospital, Inc., 193 S.E.2d 729 (N.C. 1973);Paulsen, "The Persistence of Substantive Due Process in the States," 34 Minn. L. Rev. 91 (195G); Comment, "Rediscovering Means Analysis in State Economic Substantive Due Process," 34 Ala. L. Rev. 161 (1983); Note, "State Economic Substantive Due Process: A Proposed Approach," 88 Yale L.J. 1487 (1978).

You next ask whether this legislation would burden interstate commerce in violation of the federal constitution. U.S. Const. art. I. 48. We assume that some of the new and usedmotor vehicles sold in

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Texasmove in interstatecommerce, including some of thevehicles sold in "off-site" sales and "fleet" sales, and that the Texas regulations of the sale ofmotor vehicleswould affect interstatecommerce.
In Exxon Corporation v. Governor of Maryland, 437 U.S. 117 (i978),the SupremeCourt considereda Maryland statuteproviding that a producer or refiner of petroleum products (1)may not operate any retail service station within the state and (2) must extend all temporary price reductions uniformly to all service stations it supplies. Although the burden of these provisions fell only on certain interstate companies, the court rejected arguments that they violated the commerce clause. It found that theseprovisions did not favor local production, prohibit the flow of interstate goods, or distinguishbetween in-stateand out-of-stateproduction. Id. at 125. - The court stated that

interstate commerce is not subjected to an impermissible burden simplybecause an otherwise valid regulation causes some business to shift from one interstatesupplier toanother.
Id. at 127. We believe the court's reasoning in Exxon Corporationv. Governor of Maryland supports a finding that the statutes and bills you inquireabout do not violate the federal commerce clause.

You finally ask whether the Texas provisions violate state or federalantitrustprovisions.
The'Texas Free Enterprise and Antitrust Act of 1983 defines ss unlawfulvarious practices that lessen competition,such asmonopolies and conspiracies in restraint of trade. Bus. 6 Coma. Code E015.01, 15.05. Rowever, nothing in the sectiondefiningunlawfulpractices

shallbe construed to prohibit activities that are exempt from the operationof the federalantitrust laws, 15 U.S.C. Section 1 et seq. Furthermore, nothing in this section shall apply to actions required or affirmativelyapproved by any statute of this state or of the United States or by a regulatory agency of this state or of the United States duly acting under any constitutional or statutory authority vesting the agency with such power.
Bus. 6 Comm. Code §15.05(g). Thus, the conduct required by the proposed statutesdoes not violate the state antitrust law. --.

We finally consider whether the proposed legislation conflicts with the Sherman Act, 15 U.S.C. 01 et seq. In Parker v. Brown, 317 ?

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U.S. 341 (1943), the Supreme Court established the "state action" exemption from the federal antitrust laws. The state, in exercising its sovereignpowers, is exempted from the restraints of the federal antitrust laws.
The standards for applying the Parker v. Brown doctrine, as articulatedby the federalcourts,are as follows:

1. The alleged anticompetitive activity must be mandatedby the state acting as sovereign;
2. The challenged restraint must be clearly articulated and affirmatively expressed as state policy9and thepolicymustbe actively supervised by the state itself.
3. Some decisions indicate that the importance of the state's regulatory interest is also to be considered.
Annot., 70L. Ed.2d 973 (1983).

In New Motor Vehicle Board v. Orrin W. Fox Co., 439 U.S. 96 (1978) the Supreme Court considered whether California statutes governing the establishment or relocation of new-car dealerships violated the Sherman Act. The statutes required that an automobile manufacturer thatwanted to add dealerships to the market area of its existing franchisesmust notify the existing franchisees as well as theNew Motor Vehicle Board. If an existing franchise filed a protest with the board, the manufacturer could not open the proposed dealershipuntil theboardheard the protest and determined itsmerits.

An automobilemanufacturerand theproposed franchiseessought to declare the statutes invalidas violating the ShermanAct, among other grounds. They argued that

by delaying the establishment of automobile dealerships whenever competing dealers protest, the state scheme gives effect to privately initiatedrestraintson trade.
Id. at 109. was The court stated that the California regulatory scheme

a system of regulation, clearly articulated and affirmatively expressed, designed to displace unfettered business freedom in the matter of the establishmentend .relocation of automobiledealerships. The regulation is therefore outside the

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reach of the antitrust laws under the 'state action' exemption.
Id. The court also countered the argument that the legislation conflictedwith the ShermanAct because it allowed the auto dealers to invoke statepower to restraincompetition. QuotingExxon Corporation
v. Governor of Maryland, the court observed that therewas a conflict between the statute and the central policy of the Sherman Act, but that
this sort of conflict cannot itself constitute a

sufficient reason for invalidating the

. . . statute. For if an adverse effect on competition were, in and of itself, enough to render a state statute invalid, the States' power to engage in economic regulation would be effectively destroyed.
439 U.S. at 111 (quoting Exxon Corporation v. Governor of Maryland, 437 U.S. at 133). In our opinion, the proposed enactments do not violate either-the state or the federalantitrust laws.

SUMMARY

House Bill Nos. 1531 and 1953 of the 70th Legislature restrict the locations from which new and used cars may be sold. These proposed restrictions do not on their face violate the equal protection clause, the due process clause, or the commerce clause of the United States Constitution. Nor do they violate the Texas Antitrust and Free Enterprise Act of 1983, Tex. Bus. & Comm. Code 0515.01et seq., nor the Sherman Act, 15 U.S.C. 91 et seq. Scholarly authorities and cases from other states on due process requirementsof state constitutions,if adoptedby the Texas Supreme Court, suggest that these bills would violate article I, section 19 of the Trxas Constitution.

JACKHIGHTOWER First AssistantAttorney General

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### ,rMARY KELLER

ExecutiveAssistantAttorney General
JUDGE ZOLLIE STEAKLEY SpecialAssistantAttorneyGeneral

RICK GILPIN Chairman,OpinionCommittee Preparedby SusanL. Garrison and Donald Bustion AssistantAttorneysGeneral

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