Dealership or No Deal: New Jersey’s Ban on Direct Automobile Sales Prohibits Tesla from Selling Without Use of Dealerships

Carla Zappi
Monday, September 1, 2014

I. Introduction           

            Earlier this year, New Jersey Division of Motor Vehicles (hereinafter referred to as “NJDMV”) adopted a rule that virtually prohibits Tesla Motor Company from selling cars in New Jersey.[1]  The rule reaffirmed pre-existing law that new vehicles could only be sold through dealer franchisees.[2]  This move has sparked an outcry from environmentalists, free-market supporters, and consumer groups alike.  It has called for a closer look at the current laws governing New Jersey car sales.[3]

            Tesla Motor Company (hereinafter referred to as “Tesla”), a manufacturer of electric vehicles, owns and operates show rooms that sell directly to consumers, thus cutting out the traditional dealerships.[4]  Tesla vehicles can also be purchased over the Internet.[5]  Prior to this rule, Tesla was licensed to sell vehicles at two locations within shopping malls in the state.[6]  The company also operates separate centers and makes house calls to customers for servicing its vehicles.   

II. Current Law in New Jersey

            The current law prohibits a motor vehicle franchisor[7] from either owning or operating a franchisee, or from selling vehicles directly or indirectly to a consumer.[8]  The rules adopted by the NJDMV in March clarify the previous statutes in place as well as reaffirm the requirement that to be considered as an applicant for a license to run a dealership, the applicant must in no way be affiliated with the manufacturing of vehicles.[9]  Additionally, the new rules impose minimum size and display requirements for the structure of dealerships.[10]  The new requirements call for an enclosed structure with space to display at least two motor vehicles.[11]

            It seems these state franchise laws promote the traditional business model wherein manufacturers produce vehicles and distribute them to licensed dealerships to be sold to consumers.   Moreover, these vehicles are sold in show rooms along with financing plans, warranties, and vehicle maintenance services.  Further, the state franchise laws protect car dealerships from manufacturers’ imbalanced bargaining power, which once served to manage safety and price controls for consumers.[12]   Although these powerful laws are still in place, critics now claim these laws only preserve dealerships’ profitability at the expense of creating barriers to market entry and raising costs for consumers.[13]

III. The Effect of New Rules and Policy Rationale

            By requiring a car to be sold through a dealership, the new NJDMV rules effectively ended Tesla’s ability to legally sell vehicles in New Jersey.  Tesla, as a manufacturer, does not sell cars to dealerships, instead it chooses to operate its own showrooms and sell directly to consumers.  However, as aforementioned, New Jersey state law expressly prohibits this method.  Additionally, Tesla is directly affected by the rules imposing size requirements on sales locations and service centers because Tesla chooses to operate out of shopping malls, separate vehicle maintenance centers, and they make house calls to service vehicles.

            State officials, deny that the new rules are an effort targeted at harming Tesla’s sales, rather they contend the new rules were meant to strengthen laws that are already in place.[14]    The laws in place are found in the New Jersey “Franchise Practices Act.”[15] Therein, as set forth in the New Jersey Motor Vehicle Code, the law serves to “protect franchisees in their relationships with franchisors . . . also to establish a fair system for the sale of new motor vehicles.”[16]

IV. Contradictory Responses

            A strong supporter of New Jersey’s current legislation is the New Jersey Coalition for Automotive Retailers (hereinafter referred to as “NJ CAR”).[17]  NJ CAR contends that these protections are necessary for the following reasons: to increase competition among manufacturers, provide better services to consumers, and control highway safety.[18]

            On the other hand, Tesla contends that because of the new technology carried by its product it is crucial to the company’s success to sell directly to consumers.[19]  The company’s CEO, Elon Musk, believes that a typical dealership will run into two conflicts of interest selling electric vehicles.[20]  First, the vast majority of vehicles sold will continue to be gasoline-powered cars and will be in direct conflict with electric vehicles on the same lot.[21] Second, dealerships make a large percentage of profits off of servicing the vehicles they sell, yet Tesla vehicles require very minimal servicing and repairs, therefore it would not be in a dealership’s best interest to convince customers to purchase Tesla products.[22]  In response to the consumer protection and safety arguments, Tesla cites evidence of its highly rated consumer satisfaction.[23]  Lastly, Tesla has shown that it can cut costs selling products directly to consumers.[24]

V. Proposed Legislation and the FTC’s Position

            New Jersey lawmakers have proposed several bills that would carve out exceptions in the current law.[25] These exceptions would allow Tesla (and future companies) to sell cars without a dealership.[26]  The proposed bills include: Electric Vehicles ExceptionTemporary Exception for Zero-Emission VehiclesLow Volume Exception, and Limited Outlets for Zero-Emission Vehicles.[27]  Assemblyman Paul Moriarty requested comments on the proposals from the Federal Trade Commission (hereinafter referred to as the “FTC”).

            In a letter to the lawmaker, the FTC concluded that the current ban on direct sales is “very likely anticompetitive and harmful to consumers.”[28]  It characterized the proposed legislation as a pro-competitive and likely to increase innovation.  However, the FTC stressed that the extremely narrow scope of the proposals would have minimal effects, unless the current ban on direct sales is abdandoned.[29]

            In June 2014, the state assembly almost unanimously passed a bill that carved out an exception to the rule requiring cars to be sold exclusively through dealerships.[30]  The bill would allow any company selling zero-emissions vehicles to sell directly to consumers.[31]  To stay within the preconditions of the bill, the company would be allowed to operate no more than four sales locations in the state and must maintain at least one servicing center for its vehicles.[32]  Before Tesla can resume sales at its New Jersey locations, the bill must be passed by the Senate and then signed into law by the governor.

VI. Conclusion: Weighing the Implications  

            At one time, the automotive industry required legislative safeguards to ensure that manufacturers did not partake in unfair practices.  However, few other industries are offered the same level of protection from manufacturers to retailers as the car industry is offered.[33]  The continued protections provided to franchise business models, is difficult to reconcile with the potential benefits that can be produced by allowing companies such as Tesla to enter the New Jersey market. 

           In addition to the consumer choice and industry competition concerns, the limits imposed on companies, such as Tesla, raises concern of allowing clean energy products to succeed in the state.  With the increasing realities of climate change upon us, lawmakers should be stepping up efforts to support products that can potentially reduce carbon emissions.  While one company will not solve the world’s environmental problems, negative treatment by powerful lobbyists and lawmakers discourages future innovation.

          Although there is no clear answer as to which sales model is preferable, it should be a question for the New Jersey consumers to explore.  While in some respects regulation can protect an industry, banning a particular type of sales model directly and indirectly has the following implications: raises prices, deters innovation, and gives existing competitors an unfair, artificial leading edge in the industry. 


*Carla Zappi is a May 2015 J.D. candidate at Rutgers School of Law—Camden.  She may be contacted by email at carzappi@gmail.com.

[1] New Jersey Register, 46 N.J.R. 631-33 (Mar. 12, 2014).

[2] N.J. STAT. ANN. § 56:10-7.4(e).

[3] Elon Musk, To the People of New Jersey, TESLA BLOG (Mar. 14, 2014), http://www.teslamotors.com/blog/people-new-jersey.

[4] Elon Musk, The Tesla Approach to Distributing and Servicing Cars, TESLA BLOG (Oct. 22, 2012), http://www.teslamotors.com/blog/tesla-approach-distributing-and-servicin....

[5] Musk, supra note 3.

[6] Tesla Motors Team, Defending Innovation and Consumer Choice in New Jersey, TESLA BLOG (Mar. 11, 2014), http://www.teslamotors.com/blog/defending-innovation-and-consumer-choice....

[7] N.J. STAT. ANN. § 56:10-26(e) defines “motor vehicles franchisor” as “any person engaged in the business of manufacturing, assembling or distributing new motor vehicles, or importing” vehicles.

[8] N.J. STAT. ANN. §§ 56:10-27 to -28.

[9] New Jersey Register, 46 N.J.R. 633.

[10] New Jersey Register, 46 N.J.R. 632, 634.

[11] Id.

[12] Musk, supra note 3.

[13] Id.

[14] Matthew Rocco, Tesla to Appeal N.J. Ban on Direct Sales, FOX BUSINESS (Apr. 3, 2014), http://www.foxbusiness.com/industries/2014/04/03/tesla-to-appeal-nj-ban-... Daryl Isherwood, Motor Vehicle Commission passes “anti-Tesla” rule, NJ.COM (Mar. 11, 2014 5:06 PM) http://www.nj.com/politics/index.ssf/2014/03/motor_vehicle_commission_passes_anti-tesla_rule_1.html (last updated Mar. 19, 2014 2:54 PM).

[15] N.J. STAT. ANN. § 56:10-1 et seq.

[16] New Jersey Register, 46 N.J.R. 631(a) (Apr. 7, 2014).

[17] New Jersey Register, 46 N.J.R. 631(a).

[18] Tom Johnson, Tesla Appeals MVC Ruling that Stops it from Selling Cars Directly to Drivers, NJ SPOTLIGHT (Apr. 3, 2014), http://www.njspotlight.com/stories/14/04/02/tesla-appeals-mvc-ruling-tha....

[19] Tesla Motors Team, supra note 6. See also Musk, supra note 4.

[20] Musk, supra note 3.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Letter from Andrew I. Gavil, et al., Office of Policy Planning, Federal Trade Commission to Assemblyman Paul D. Moriarty, Chair, Consumer Affairs Committee, at 14 (May 16, 2014), http://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-c....

[26] Id.

[27] Id. at 8-12.

[28] Id. at 14.

[29] Id. at 1.

[30] Matt Friedman, Bill to Allow Direct Tesla Sales in NJ Makes Progress, NJ.COM (last updated Jun. 16, 2014 4:44 PM) http://www.nj.com/politics/index.ssf/2014/06/bill_to_allow_direct_tesla_....

[31] Id.

[32] Id.

[33] Letter from Andrew I. Gavil, et al., supra note 25, at 4.