Tesla Is The Clear Winner in the Battle With Michigan

After three years of litigation, two appeals to the Sixth Circuit, and with a February 4, 2020 trial date looming, electric automobile manufacturer Tesla and the State of Michigan, on January 22, 2020, settled their dispute over a state law that prohibits Tesla from engaging in direct sales of vehicles in Michigan or the servicing of those vehicles. Although the litigation ended in a draw, Michigan consumers are now able to buy Tesla vehicles and have them serviced in that state. Longer term, the case provides a roadmap for Tesla and other manufacturers seeking alternatives to the traditional dealer network distribution model, and is a blow to efforts by dealer groups to enact state laws to block alternative methods of distribution.

At issue in the case, captioned Tesla, Inc. v. Benson et al., US District Court for the Western District of Michigan, Case No. 16-CV-1158, was Tesla’s constitutional challenge to Michigan’s so-called “Anti-Tesla” law, enacted in 2014, that barred manufacturers from owning or operating a motor vehicle dealer or repair facility. M.C.L. § 445.1574(1). Michigan is among a number of states that have enacted laws banning manufacturers from engaging in the direct sale and servicing of vehicles to consumers; these prohibitions—many of which were enacted to protect pre-existing dealer networks from manufacturers adopting dual distribution models—have in recent years been used to block new market entrants like Tesla who, from inception, sought to vertically integrate manufacturing and distribution. Tesla filed suit in 2016, arguing that the 2014 state law was protectionist and violated the US Constitution on due process, equal protection, and commerce clause grounds. Much of the ensuing litigation in the case focused on Tesla’s attempts to subpoena documents from Michigan’s dealers and dealer association regarding their lobbying efforts to get the Anti-Tesla law passed.

On January 22, 2020, Tesla and the Michigan Attorney General filed a joint stipulation of dismissal agreeing that:

• A Tesla subsidiary (not Tesla directly) can own a repair facility in Michigan, including for warranty repairs.
• Tesla employees can perform warranty, recall, service, or repair work in Michigan so long as not at a facility directly owned by Tesla.
• Tesla can operate galleries in the State of Michigan to educate customers about Tesla vehicles and facilitate transactions out-of-state so long as Tesla does not transfer legal title to vehicles in Michigan.

In a short press release issued the same day, the Michigan Attorney General announced that the stipulation acknowledges that Tesla may “operate under existing Michigan law” and that “any Michigan resident may lawfully buy a Tesla and have it serviced in Michigan.”

The settlement represents a significant win for Tesla. Although the Michigan law remains on the books, state officials will not take steps to prevent Tesla from adopting workarounds that will allow it to operate in Michigan. First, the repair of Tesla vehicles owned by Michigan consumers at a Tesla subsidiary, rather than Tesla itself, represents a minor burden to the manufacturer. Second, Tesla can operate galleries in Michigan like it does in a number of other states as part of its online sales platform, Tesla’s preferred method of selling cars. Also, while the sale of the vehicle technically takes place out of state, adding some “red tape” to the process, Michigan consumers will be able to retitle the car immediately in Michigan.

The settlement also represents a significant win for any other manufacturer who chooses not to opt into the traditional dealer network distribution model. Although technically the settlement applies only to Tesla, Michigan authorities would be hard-pressed to argue that another automobile manufacturer—at least one without a pre-existing dealer network—who adopted the same workarounds as Tesla was acting in violation of Michigan law. And finally, Tesla has laid the foundation for challenges to protectionist statutes in other states, whether it is Tesla or another manufacturer who brings that challenge.

The settlement may have longer-term implications for the industry, as well. Although Tesla currently is the only vertically integrated manufacturer selling vehicles in the United States, other market entrants are likely to appear in the coming years, and these new entrants will need to decide how they want to reach consumers. The same day Tesla and Michigan settled their dispute, Karma—a self-described “incubator of emerging technology”—announced that it was joining the Alliance for Automotive Innovation (the entity resulting from the recent combination of The Association of Global Automakers and the Alliance of Automobile Manufacturers). Already under extraordinary competitive pressure to make unprecedented investments in emerging electric and autonomous vehicle technologies, manufacturers will also need to determine how best to bring products incorporating those technologies to market.

Lou Chronowski is a partner in Seyfarth Shaw’s Franchise and Distribution Practice Group and routinely represents automobile manufacturers in disputes with dealers. Seyfarth Shaw did not participate as counsel in this case.