Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism

I. INTRODUCTIONPublic choice theory has long proclaimed that business interests can capture regulatory processes to generate economic rents at the expense of consumers.1 Such political exploitation may go unnoticed and unchallenged for long time periods because, though the rents are captured by a relatively small number of individuals or firms, the costs are widely diffused over a large number of consumers.2 The triggering event to expose and mobilize opposition to the regulatory capture may not arise until a new technology seeks to challenge the incumbent technology, thus creating a motivated champion to expose and oppose the regulatory capture and advocate for regulatory liberalization.That moment has arrived in the automobile industry. Since the 1950s, the distribution of automobiles has been pervasively regulated by a patchwork of state laws promulgated at the insistence of dealers for the ostensible purpose of preventing unfair exploitation by franchising car manufacturers.3 Among other things, the dealer laws in many states prohibit a manufacturer from opening its own showrooms or service centers-from dealing directly with consumers.4 At the time these direct distribution prohibitions were enacted, the Big Three auto manufacturers (Ford, General Motors, and Chrysler) completely dominated the U.S. car market, and the dealers argued that they were unable to contractually protect themselves against a franchising manufacturer unfairly undermining its own franchised dealers at retail.5 Though the U.S. auto market has become considerably more competitive since the direct distribution prohibitions were enacted, hence diminishing any power the manufacturers might have to impose draconian contractual terms, the laws have persisted largely without modification.The challenge to the status quo has come from the abrupt market entry of a redoubtable technological challenger to the internal combustion status quo. In 2012, Palo Alto, California-based Tesla Motors began selling all-electric vehicles. Tesla, the offspring of entrepreneur Elon Musk-who also created the online payment service PayPal and the space exploration company SpaceX-quickly won accolades for its disruptive technology. Consumer Reports went so far as to call the Tesla Model S the best performing car of any kind it had ever tested.6 Yet Tesla's greatest market entry challenge has not been solving the technological problems of creating a battery than can run for nearly the fuel range of a typical car or the battery swapping and supercharging infrastructure necessary to grant Tesla drivers recharging access comparable to filling stations. Rather, its greatest challenge has been to obtain the legal right to distribute its cars directly to consumers and to provide aftermarket service to Tesla owners. Across the country, the car dealers' lobby-often with the support of the legacy car companies-has invoked either the old dealer laws or obtained legislative extensions of them to block Tesla's progress. Tesla is fighting a multi-state, multi-front battle in state legislatures, regulatory commissions, and courts just for the right to distribute and service its products.The Tesla story is important on its own terms because of its implications for innovation in the automotive industry, the dissemination of environmentally friendly technologies, and energy independence. But it is also emblematic of a broader problem of economic regulation and frail legal response-the lack of robust legal tools for the courts to tackle protectionist or otherwise anti-consumer regulations designed solely to benefit concentrated economic interests. In the post-Lochner era, courts have been reluctant to subject protectionist state regulatory schemes to intrusive judicial review under any legal framework-whether antitrust law, the Dormant Commerce Clause, Substantive Due Process, or Equal Protection. Only recently have a few federal courts begun to show some willingness to invalidate the most egregiously anti-competitive state regulatory schemes as instances of naked economic protectionism that fail even rational basis review. …