Overshadowed by the outbreak of the COVID-19 pandemic, Tesla in early March quietly racked up another win that will allow it to continue the direct sale of new motor vehicles to consumers in Virginia. On March 3, 2020, the Virginia Court of Appeals ruled that the Virginia Automobile Dealer Association (VADA) lacked standing to appeal a determination by the Virginia Department of Motor Vehicles (DMV) that Tesla was eligible to operate a dealership in the Richmond "community or trade area" under Virginia law.
Like many states, Virginia law prohibits manufacturers from owning or operating motor vehicle dealerships. In 2016, Tesla submitted a request to the DMV for a hearing to determine whether Tesla met a statutory exception that permits a manufacturer to own or operate a dealership if the DMV determines "that there is no dealer independent of the manufacturer . . . available in the community or trade area to own and operate the franchise in a manner consistent with the public interest." Tesla argued that no dealers were "available" because its direct sales business model could not accommodate wholesale prices and dealer markups.
A DMV hearing officer granted VADA's request to intervene and, after conducting evidentiary hearings over the course of three days, recommended that Telsa's request be denied. Notwithstanding that recommendation, the DMV commissioner found that although eleven dealers expressed interest in opening a Tesla dealership, only five presented any evidence at the hearing. Because each of those five dealers admitted that they had not performed any economic analysis to establish whether such a dealership would be profitable, the commissioner determined that there were no dealers "available," and even if the five dealers were "available," none of them could own and operate a Tesla dealership in "the public interest" because Tesla would not offer wholesale pricing on new cars to a prospective dealership. VADA appealed the decision to the Circuit Court of Richmond, which in a June 2019 order upheld the commissioner's decision as a valid exercise of agency discretion but expressed misgivings that "Tesla's business model artificially creates a situation where it seems no independent dealer could be profitable."
The Appeals Court in its March 3 ruling did not address the lower court's criticism of the commissioner's decision, instead finding that VADA lacked standing to appeal the commissioner's decision because VADA was not a "party aggrieved by and claiming unlawfulness of a case decision." The Appeals Court also held that VADA lacked "representational standing" because "Virginia recognizes representational standing only when it is specifically authorized by the legislature," and VADA had pointed to no statute authorizing it to pursue action against Tesla on behalf of dealers. The Appeals Court vacated the lower court decision, leaving the DMV commissioner's decision intact.
Tesla has been racking up litigation and legislative victories in 2020 in favor of its direct-to-consumer business model. In January 2020, Tesla and Michigan ended more than three years of hotly contested litigation over a 2014 amendment to that state's dealer statute barring Tesla from engaging in the direct sale or service of vehicles in that state, with a settlement that effectively allows Tesla to work around that prohibition. And in March 2020, Colorado amended its dealer statute to broaden the ability of Tesla and other manufacturers who make only electric vehicles to engage in direct sales and service of those vehicles in that state.
At the same time, Tesla's recent activity demonstrates that there are limits to the ability of dealer associations to enact and enforce protectionist (and frequently anticompetitive) changes in law. The Michigan litigation arose after the Michigan Automobile Dealers Association in 2014 sought and obtained an amendment to that state's dealer statute barring Tesla from engaging in the direct sale or service of vehicles in that state. The Appeals Court decision in Virginia shows that state dealer associations may not be able to obtain standing to pursue litigation on behalf of dealers based on the bare assertion that the association has suffered injury.
Originally published July 2, 2020.
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