Reforming Michigan Vehicle Direct Sales Laws

Michigan stands at a crossroads with respect to the way that electrical vehicles (“EVs”) are sold and serviced. For many decades, Michigan—like many other states—mandated that cars could be sold and serviced only through independent, franchised dealers and prohibited car manufacturers from selling or servicing directly. Historically, those laws were put in place to protect dealers from the superior bargaining power, and sometimes unfair practices, of the Big Three car companies—General Motors (“GM”), Ford, and Chrysler. With the advent of EV technology, it became clear that these decades-old restrictions on direct sales and servicing needed to be reconsidered. Tesla, the first large-scale EV company to market, made the case that direct sales and service were critical to EV market penetration and the success of its business model. From about 2014 forward, many states began to loosen their prohibitions on direct distribution to allow Tesla to operate. Michigan, however, went in the opposite direction. A 2014 amendment to the Motor Vehicle Franchise Act (“MVFA”), passed under questionable circumstances, was intended to shut the door on any possibility that Tesla could engage in direct sales or service in Michigan. While many other states were moving forward, Michigan moved back. Tesla filed a constitutional challenge to the 2014 amendment in federal court in the Western District of Michigan. The court made clear that it would allow the case to proceed to trial. In early 2020, Attorney General Nessel announced a settlement with Tesla that interpreted the State’s dealer law to permit Tesla to engage in any aspect of marketing a vehicle—opening showrooms, giving test drives, receiving trade-ins, setting up the sales transaction—so long as the actual sales transaction was orchestrated out of state. It also interpreted the Michigan statute to permit Tesla to open service centers, so long as it did so through a subsidiary. In effect, this interpretation of Michigan law allowed Tesla to sell and service its cars in Michigan, subject to jumping a few formal hurdles. By 2020, the EV sales issue was not just Tesla’s. Not only were most of the legacy car companies beginning to roll out EVs, but a host of new EV start-ups—Rivian, Lordstown, Lucid, Bollinger, Nikola, and others—were preparing to reach the market. These new EV start-ups join Tesla in arguing urgently for the need to sell and service their vehicles directly in order to achieve critical mass and insist that traditional dealer distribution will not work for their business model. Because they are similarly situated to Tesla, at present these companies can arguably take advantage of the Tesla settlement and operate in Michigan as Tesla does. Unfortunately, the car dealers’ lobby—which was behind the 2014 legislation—is unhappy with any prospect of direct sales. In the fall of 2020, the dealers pushed a bill—H.B. 6233—in the Michigan legislature to “close the Tesla loophole.” The original version of the bill, passed in committee, would have preserved the Tesla settlement, but prohibited other EV start-ups from direct sales and service. The version of the bill changed through floor amendment and that ultimately passed in the House went even further—it eviscerated the Tesla settlement and denied direct sales or service to any car company, including Tesla. Fortunately, the Senate did not take up the bill, and it died with the last legislative session. It’s time for Michigan to adopt reform legislation to bring clarity to the question of EV sales and to permit car companies to reach their customers directly.