Tesla, the electric vehicle automaker, recently lost a round in the Supreme Court of Utah. Tesla set up a wholly-owned subsidiary called “Tesla UT” that was to hold a license to sell Tesla’s cars to the public. The Utah Supreme Court, in a narrow but unanimous decision, held that the arrangement between Tesla and Tesla UT amounted to an illegal automobile franchise under Utah law.

The case turned on a relatively straightforward point of Utah law. To wit, in Utah, automobile manufacturers are prohibited from having a subsidiary obtain a license to sell that manufacturer’s cars. In other words, the statute is written such that an entity independent from the manufacturer must hold the license.

Tesla first tried to argue that Tesla UT was not a franchise under Utah auto dealer laws. The Court handily rejected that claim based upon use of trademarks, a community of interests and purpose of the laws. First, despite an explicit disclaimer, the Court concluded that Tesla had in fact licensed Tesla UT to utilize its trademarks. Second, the Court found that there was a community of interests between Tesla and Tesla UT. Specifically, the Court found that they have a joint interest in the sale of Tesla cars. Finally, Tesla argued that the “purpose” of the Utah dealer laws–according to Tesla, the protection of independent franchisees–was not present because Tesla UT is wholly-owned by Tesla. The Court concluded that protection of franchisees was only one purpose of the law and found Tesla’s arguments to the contrary unavailing.

Tesla also advanced constitutional arguments, chief among them that Utah’s automobile dealership laws violated equal protection and due process. The Court rejected the constitutional arguments because it found that the Utah legislature could have a reasonable, rational basis of the enactment of the dealership laws. Importantly, the Court said that Utah’s legislators, in their wisdom, had rationally decided to split the responsibilities between manufacturers and dealers. The Court saw no irrationality with a conclusion that the legislature could decide that locally-owned dealers would likely be more responsive to their customers than a far-off manufacturer.

Whatever you think of Tesla’s efforts to re-imagine how cars are sold in the United States, it is a fascinating story that continues to be told all over the country. Most interesting to me is that old standards of franchise law–things like trademarks and communities of interests–continue to play a key role in the analysis even when the product being sold is a new and 21st century as automobiles that have an “insanity” mode!

[View source.]