Tesla fighting Michigan sales law as Model 3 rolls out

Lansing — The first batch of Tesla Model 3 sedans are beginning to hit the streets, but the Michigan market remains stuck in neutral as the California automaker fights state regulations prohibiting it from selling directly to consumers here.

With “no prospect of a settlement” in sight, a blockbuster lawsuit challenging Michigan’s auto dealership law is set to stretch well into 2018, according to a recent court filing.

Tesla argues the Michigan law requiring new car sales through a franchised dealership discriminates against out-of-state interests and is an unconstitutional infringement on its ability to pursue its preferred sales model here. It’s a case with national implications as the upstart electric automaker battles traditional sales models in various states.

“Any type of lawsuit like this — whether you win or lose — establishes a precedent,” said David Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor. “It’s hard to change the direction of that. It’s a big deal.”

The high-stakes lawsuit also seeks to uncover private communications between lobbyists and lawmakers, who revised Michigan’s law in 2014 in what Tesla alleges was a “protectionist” move to maintain an “existing monopoly” for auto dealers.

But the reality is “less sensational,” according to Attorney General Bill Schuette’s office, which is defending the state against the suit. Michigan has “long barred” automakers from owning or operating dealerships, his office said in court documents, citing a 1981 law against vertical integration.

Revisions to the law in 2014 were “minor and were neither protectionist nor anti-Tesla,” the state said in a filing.

“All other car manufacturers desiring to sell in Michigan operate under this same requirement. But Tesla wants special treatment and refuses to bend to Michigan’s law; indeed, Tesla insists that Michigan should bend to Tesla’s innovative business plan and practices rather than Tesla altering its practices to comply with Michigan law.”

Michigan consumers can still buy a Tesla, but the process is complicated. While the automaker operates a “gallery” showroom at Nordstrom in Troy’s Somerset Collection, customers cannot purchase and pick up cars there.

Instead, they can order cars through Tesla’s website and have them delivered to a retail store or service center in Ohio, Illinois or other states where the cars are sold. There’s a long waiting list for the Model 3, which starts at $35,000 before incentives.

Full disclosure

Michigan lobbyists and lawmakers tied to the Tesla lawsuit are aggressively fighting subpoenas seeking to uncover their communications before and after the 2014 amended law.

Judge Janice Neff on Monday referred to a magistrate a proposed Tesla order that would require state Sen. Joe Hune, R-Hamburg, and Rep. Jason Sheppard, R-Temperance, to turn over relevant emails. The documents would be “for attorneys’ eyes only” under a protective order signed in March.

Lawyers for Hune and Sheppard had argued their clients have legislative privilege in federal court and called the subpoenas an overly broad attempt “to harass legislators who will not buckle to Tesla’s demands” that Michigan change its law. The new proposed order limits the time frame of the subpoena requests.

Hune, whose wife is a registered lobbyist for a firm that represents auto dealers, backed substitute language for the 2014 amendment. Sheppard did not take office until the following year, and he is fighting the proposed order that could require him to turn over documents from January 2015 through the end of 2016.

Tesla claims it subpoenaed Sheppard because of his June 2016 statements to the company that it will “not be allowed to operate in Michigan because Michigan dealers and manufacturers do not want Tesla in the state.”

Kurt Berryman, a lobbyist and director of legislative affairs for the Auto Dealers of Michigan, argues he has already suffered “cognizable harm” because of a Tesla subpoena that has “chilled” his free speech rights.

In a series of affidavits, Berryman told the court he would likely face further “harassment” if his legislative communications were exposed, citing combative emails and phone calls auto dealer associations received after the 2014 amendment.

“You sound like you suck a lot of communist (expletive) because you’re lazy, incompetent, self-serving pieces of (expletive) who don’t believe in free market competition,” a caller said in one voicemail. “Have a crappy day.”

Indeed, Berryman claims he has been harassed since auto websites Jalopnik and Electrek reported on his fears last month. Unsympathetic online commenters responded to the stories by circulating his email address and a photo from his Facebook page showing his 2-year-old daughter posing in front of a Tesla.

“Especially love the picture of your daughter standing in front of the Teslas you are working so hard to get banned,” a critic said in a subsequent email Berryman shared with the court. “Wonder if she will grow up and realize how much of a (expletive) her dad was trying to stifle the EV revolution.”

If not court, the Capitol?

The complicated legal battle appears far from resolution. Both sides are expected to provide a list of expert witnesses next month, and the pre-trial “discovery” phase of the case is expected to last through late February 2018. Final requests for a pre-motion conference are expected by March 26 and a trial date has not yet been set.

Tesla’s legal fight is one front in its larger war for survival and sustainability, Cole said. The automaker is also facing questions over quality control, production scale and a looming sales cap that could disqualify its customers from a $7,500 federal tax credit for electric vehicles they now enjoy.

“This is an unfolding drama,” Cole said. “It’s going to be extremely interesting. The value of Tesla is all based on hype and not substance.”

With the lawsuit tied up in court, the legislative battle has been slow going as well.

Gov. Rick Snyder, in signing the 2014 amended law, disputed claims it was an attempt to block direct retail vehicle sales by Tesla. Instead, citing an attorney general opinion he requested, Snyder said direct sales were already prohibited under existing law.

But the governor also encouraged legislators to have “a healthy, open discussion” about whether Michigan’s current business model should be changed, suggesting they “consider, first and foremost, what is best for Michigan consumers.”

Three years later, that discussion has not yet occurred — at least not publicly.

Legislation introduced last year by Rep. Aaron Miller, R-Sturgis, would have allowed Tesla or other automakers to sell directly to retailers rather than through franchised dealerships. But the legislation went nowhere in Lansing, where it was referred to the House Commerce and Trade Committee but did not receive a single public hearing before the two-year session ended in late December.

Tesla advocates argue the increasingly conservative state House may be more persuaded by free-market arguments than in past sessions, and a new proposal could be introduced as soon as this fall.

“For me it’s simply common sense,” said Miller, who expects another legislative push. “Refusing any company’s style with protectionist laws is just not the right thing to do. I don’t care if it’s Tesla, a small startup. ... Someone who wants to sell jeans or baseballs directly should not have this sort of barrier to be in the marketplace.”

Auto dealers, who have fought to maintain existing sales rules in Michigan, are a powerful force in state politics. A related political action committee has donated more than $1 million to state office holders since 2011, including all but two active legislators, according to the Michigan Campaign Finance Network.

Tesla is also lobbying in Lansing as it fights dealership laws here and in other states. CEO Elon Musk reportedly discussed direct-to-consumer sales with the heads of at least three states last month at a National Governors Association meeting in Rhode Island. Snyder did not attend the conference.