Let Them Have Teslas
Tesla Motors has taken the first step toward challenging a year-old Michigan law that bars direct-to-consumer auto sales in the state. I trust you’ll agree with me that the law is a blatant piece of protectionism, designed to help car dealers at the expense of consumers. But that still leaves an important -- and interesting -- question: Is the law not merely dumb, but unconstitutional, too?
The best candidate to support a constitutional challenge to the Michigan law, and to similar ones in a few other states, is the Constitution’s Commerce Clause. On its surface, the Commerce Clause just gives Congress the authority to regulate interstate commerce.
But in the 19th century, the U.S. Supreme Court developed a doctrine known as the “dormant” Commerce Clause. The idea is that when the framers gave Congress the power to regulate commerce between the states, they must have meant simultaneously to stop the states from enacting barriers to trade. You can think of the dormant Commerce Clause doctrine as one that was designed to turn the states into a common market -- like the European Union, but 200 years earlier. Laws that interfere with interstate commerce are therefore supposed to be unconstitutional.
On the surface, you’d think a law prohibiting an out-of-state manufacturer from selling directly to consumers would qualify as a barrier to trade. As it turns out, it’s not so simple.
The Supreme Court’s complicated dormant Commerce Clause jurisprudence tends to ask whether a given law discriminates against out-of-state businesses. If you take that notion literally, the Michigan law doesn’t seem to fail the test: It bans direct-to-consumer car sales not only by out-of-state manufacturers, such as Tesla, but also by in-state manufacturers, of which Michigan still has several (Ford, GM and the like).
The closest precedent decided by the Supreme Court is a 1978 case involving a Maryland law that prohibited oil companies from owning gas stations. Exxon took its constitutional challenge to the Supreme Court -- and lost.
The court noted that the Maryland law was enacted in 1973, at the height of the energy crisis, on evidence that gas stations owned by big oil companies were receiving preferential rates from oil refineries over independently owned gas stations. The facts of that situation might arguably distinguish it from the Michigan law, since there’s no evidence that direct-to-consumer auto sales discriminate against dealers.
But the court didn’t frame its ruling all that narrowly. It said that the fact the state’s law only affected interstate companies -- all the gasoline sold in Maryland came from out of state -- wasn’t sufficient reason to conclude that it was meant to discriminate against them. It pointed out that the law didn’t discriminate against interstate gas-station owners. And it didn’t formally prohibit the sale of anything from out of state or directly raise the price of such goods.
This formalist analysis would seem to apply equally to the Michigan law. Indeed, when Ford challenged a similar Texas dealer-franchise law in 2001, the U.S. Court of Appeals for the Fifth Circuit rejected its argument and upheld the law, applying the Exxon precedent.
In that case, Judge Edith Jones, a conservative stalwart of the Fifth Circuit, concurred separately to point out that while the Exxon case dictated the result, that precedent was “woefully out of step with the Court's more recent cases” on dormant commerce, which condemn “economic protectionism.”
Jones was right. The dormant Commerce Clause should be oriented toward prohibiting barriers to interstate commerce -- and it shouldn’t matter if laws are formally nondiscriminatory, as between in-state and out-of-state actors.
Consider the Supreme Court’s 2005 decision in a highly publicized wine distributors’ case, Granholm v. Heald, which perhaps not coincidentally also involved Michigan, as well as New York. The laws in question allowed in-state winemakers to ship directly to consumers but prohibited out-of-state sellers from doing so. The purpose and effect was to discriminate against producers who wanted to do direct shipping -- not unlike the purpose of the Michigan auto-dealership law.
Similarly, the winners were in-state retailers -- middlemen able to lobby the legislature effectively. The fact that there’s no substantial Michigan wine-producing industry (sorry, Michigan's wine trails) made their lobbying efforts easy.
The Supreme Court struck down the restrictive wine laws. The precedent doesn’t control the auto case, because the alcohol laws facially treated out-of-state and in-state actors differently. And today, several states, including my own Massachusetts, still outlaw any producer from shipping wine directly to a consumer, whether the vineyard is in state or out of state. This law is permissible in the same way the Michigan auto law still is.
It’s time for the Supreme Court to close the loophole. It wouldn’t even have to overrule the Exxon case, just hold that there must be a legitimate, credible, nondiscriminatory public-policy reason for banning direct-to-consumer sales that come from out of state. It could then conclude that there was evidence in favor of small-gas-station owners in 1973 in Maryland but no such evidence today when auto dealers try to keep out Tesla.
Because the dormant Commerce Clause comes from the spirit of the Constitution, not its letter, it makes sense to apply it pragmatically. A law that’s effectively aimed at an out-of-state actor, passed by in-state actors aiming to protect their markets, distorts the free functioning of the U.S. economy. It can too easily be passed by state insiders, who have lobbying advantage over outsiders. Such laws are anachronistic affronts to the free flow of commerce. They should be struck down.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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