A Legal Ruling in Efforts to Avoid Using an Independent Franchised Dealer Network
On December 6, 2018, the Connecticut Superior Court affirmed an earlier administrative law judge’s ruling that Tesla’s “Gallery” locations were operating in violation of Connecticut law. Connecticut law prohibits a manufacturer from selling direct to a retail customer and, instead, requires that vehicles be sold through franchised automobile dealers. Connecticut law also requires that an independent franchised dealer license be obtained in order to engage in the business of selling or offering to sell new vehicles.
As a result of the law in Connecticut, Tesla does not operate dealerships in the state but instead established Gallery outlets. The evidence in the case revealed that the Gallery staff was responsible for showing customers all the vehicle attributes, offering test drives, assisting with configuring options on the vehicle and discussing financing and leasing options. The evidence was that the Gallery sales staff directed customers to complete the purchase transaction off-site by contacting Tesla’s home office in California (via an internet order or phone call). The evidence also showed that the sales staff received commission payments for every Gallery customer who ultimately purchased a Tesla vehicle.
The Connecticut Auto Retailers Association challenged the Gallery operation for violating the requirement to obtain a dealer license in order to engage in the business of selling or offering to sell new vehicles to the public. The Connecticut Auto Retailers Association was represented by Bass Sox Mercer. Tesla argued that because the vehicle purchase paperwork is not consummated at the Gallery location, Tesla is not engaged in selling or offering vehicles for sale. The court found that the term “engage in” selling or offering to sell included beginning the process of selling a vehicle. Because Tesla’s Gallery operations were all intended to result in a sale of a Tesla to the customer, Tesla was indeed engaging in the business of selling or offering Tesla vehicles for sale.
Tesla also argued that prohibiting its Gallery locations from conducting business violated its right to freedom of commercial speech as well as its due process rights. Regarding a right to commercial speech, the court found that engaging in the business of selling or offering to sell Tesla vehicles without a license did not create a right to commercial speech. Instead, Tesla was free to continue to advertise the sale of its vehicles in Connecticut through traditional means. Tesla argued that its due process right is violated by Connecticut law as it is not clear what action rises to the level of selling or offering to sell a vehicle. The court rejected this argument stating that the statute was clear and reminding Tesla that it could always seek an opinion from the State Attorney General if it has any question concerning the legality of its actions.
The Connecticut Superior Court’s ruling has a positive impact well beyond Connecticut’s boundaries.
This decision sets precedent for all states which prohibit, or are considering a prohibition on, a manufacturer from selling direct to retail customers. In those states, one can be assured that a manufacturer cannot skirt the prohibition by establishing a location which looks and acts like an independent dealership except for execution of the final vehicle purchase paperwork.
The court’s decision also assists other states in better defining what it means to sell or offer to sell vehicles and who is required to operate with a dealer license. Finally, and most importantly, this decision will serve to strengthen the motor vehicle laws across the country in anticipation of larger and more aggressive vehicle manufacturers looking to sell their products direct to consumers in the United States.
