A lawsuit challenges a Texas law that bars direct company sales

By WSJ Editorial Board – November 13, 2022

Protectionism can flourish anywhere, and Republican-led states are not immune. Exhibit A is Texas, where state regulators have made it impossible to sell cars without using car dealers as a middleman. Now a federal lawsuit challenging the dealer cartel could make it easier for car buyers to go straight to the company.

The direct-sales business model isn’t new to car buyers. Tesla has been doing it for a decade, and many consumers prefer to deal directly with a car maker and pay a uniform sticker price instead of enduring the village market-style haggling of nearly all car dealership experiences. “What can I do to get you in this car today?” and all that.

But car dealers are still a powerful lobby, even if their numbers have fallen as cars have become more reliable. According to the National Conference of State Legislatures last year, at least 17 states have dealer protection laws that prohibit manufacturers from selling directly to the consumer, and another nine states have laws limiting the practice to already established locations.

Like many burdensome state licensing regimes, Texas law on motor vehicle sales requires a license called a “general distinguishing number” to sell cars. To block manufacturers from operating their own dealerships and getting their own licenses, the state then specifically bars car makers from owning, operating, controlling or otherwise acting as dealers to sell what they make.

For electric vehicle makers, the restrictions are especially onerous because manufacturers want to include engagement to educate consumers about the new technology. Like Tesla, EV maker Lucid wants to sell its cars directly to consumers, cutting out pass-through costs and other headaches.

In Lucid Group USA v. Johnston, the EV maker argues that Texas’s ban on direct sales is a “restraint of trade” that reduces competition in the market and violates the Constitution’s due process and equal protection clauses.

No doubt the Texas laws are bizarre. According to the lawsuit, Texas law “allows auto manufacturers like Lucid to lease and rent vehicles to Texans from within the state, sell previously leased or rented vehicles to Texans from within the state, and even sell new vehicles directly to Texans from out-of-state dealerships.” But Lucid can’t do a direct sale.

The effect of the Texas law is to reduce the overall number of EVs on the road, send more new vehicle sales out of state, and decrease convenience for consumers. The law also lets vehicle sales evade state consumer-protection laws. A 2021 open letter from more than 70 academics across the political spectrum noted that the original concerns that prompted dealer protection laws (namely, protecting small franchisees) no longer apply and the “advent of EV technology has created an urgent need to permit direct distribution.”

American car makers have struggled with the dealer cartel for ages. When GM launched its “employee discounts for everyone” sale in 2005, it had the effect of weakening dealers’ power to influence customers’ view of GM. Getting rid of haggling sold more cars. Buyers liked the idea, and the company has brought the sales back periodically.

Car dealers don’t want to give up a system that allows them to charge some customers more than others. But more competition and greater transparency would improve the car market by increasing the confidence of consumers that they are getting a square deal.