In the latest chapter of what has become quite a saga, Tesla Motors Inc (NASDAQ:TSLA) has filed a lawsuit against the state of Michigan. That’s because the state has so far made it legally impossible for the electric vehicle manufacturer to sell its automobiles right in the heart of the country’s traditional (read: “combustion-powered”) car industry.
![Tesla Motors TSLA stock art](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
That news won’t come as a surprise to owners of Tesla stock, who have seen the company struggle with protectionist attitudes and laws before. But Michigan’s regulators’ persistent war against TSLA has become surprisingly ugly, and unfair.
Tesla stock holders have a good reason to cry foul.
Common Sense Takes a Backseat
Just to answer the question you may be asking yourself, yes, I’m the same guy who more often than not criticizes Tesla stock. I’m not against the idea of electric vehicles. I’d even be the first to concede CEO Elon Musk should be credited with the mainstreaming of EVs. My issues have been and are …
- Reckless spending of other people’s money
- Competition
- A history of overpromising and under-delivering
My end-goal has always been the presentation of the whole truth, for better or worse, and letting investors decide if they want to own TSLA stock or not.
Well, the truth is, whether or not the state of Michigan is willing to acknowledge it, it is proactively seeking to keep Tesla Motors from finding a foothold in the state.
The crux of the argument is Michigan’s insistence that TSLA can only sell cars through licensed, franchised dealers, and Tesla Motors’ insistence that it doesn’t sell trough dealers. It only sells directly to consumers, skipping the middleman.
But to fully appreciate the impasse, however, one has to understand the basis for the law.
It’s a throwback to a different time. The laws were initially intended to prevent automobile manufacturers from selling directly to consumers as a means of preventing them from undercutting dealers’ prices. The rules even prevent automaker ownership of dealerships, just to ensure there’s no potential for undue influence. (Indeed, Tesla tried to open a dealership in the state, but that application was recently rejected for that very reason.)
From that perspective, the law seems reasonable … even admirable.
On the other hand, the law is moot for Tesla Motors. It doesn’t use any franchised dealers, and likely never will. Consumers can only buy a Tesla vehicle directly from the company. There are no dealers to undercut.
Pattern of Protectionism
Some would argue that while unfortunate, the law is the law. If the law in Michigan isn’t changed, Tesla Motors must learn to live with it or work around it. But it’s interesting that that law was changed in Michigan in 2014 … to explicitly “clarify” the carmaker/dealership rules.
Called the Public Act 354 of 2014, the law passed in Michigan in October 2014 specifically prohibited any automaker from “(selling) any new motor vehicle directly to a retail customer other than through franchised dealers, unless the retail customer is a nonprofit organization or a federal, state, or local government or agency.”
The curious part? That addendum was only added to Michigan’s books after Tesla Motors began marketing its vehicles in that state.
Gov. Rick Snyder said of the new law, “(Automakers) will be required, just as they are now, to sell through a franchised dealer, and not directly to consumers. HB 5606 does nothing to change this fact. At most, it clarifies the existing requirement in Michigan law.”
Maybe. But it’s a rarity for a bill to be enacted when it doesn’t actually change anything. Lawmakers generally don’t vote on anything just to clarify previously written laws.
If that’s not suggestive to the public that Michigan is protecting its iconic automobile makers and suppliers, this might be: At a meeting in June between Tesla Motors, the state’s other car makers, legislators and dealers, one of the legislators allegedly said, “The Michigan dealers do not want you here. The local manufacturers do not want you here. So you’re not going to be here.”
Given all the events to date, it’s not tough to believe that statement was made.
Bottom Line for Tesla Motors
This isn’t the first time Tesla has hit this state-level wall. But this is the biggest such state-level wall the company has hit so far.
It also might be the source of a key pivot point for the issue.
Unlike previous legal fights, Tesla Motors is taking a different approach to this one. This time, Tesla is seeking to call the law unconstitutional. And good news for the future of Tesla stock — the rules to seem to outright prevent commerce from being done, which is a big legal no-no. Of course, anything can and will happen in a courtroom. Common sense and fairness don’t always prevail.
Still, Tesla has a good argument.
Regardless of the outcome of the lawsuit, shame on Michigan for making it as difficult as possible for Tesla Motors to business in that state, proactively shielding its key industries not by enforcing laws that require fair play, but by twisting the laws (and not updating the laws) to reflect changes in the marketplace.
While I’m no fan of Tesla stock as an investment, the company has every right to conduct business in that state as it sees fit … particularly when the purpose of existing-but-flimsy laws clearly don’t apply.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.