Distribution of Vehicles in the US and the Impact of State Law

January 10, 2020

Despite the ubiquitous use of the internet by consumers and their ability to choose whether to buy products directly from manufacturers in all other consumer product sectors, state laws that govern nearly every facet of the relationship between manufacturers and dealers restrict purchasing options for consumers (and sales and distribution options for most manufacturers). Most states expressly prohibit manufacturers from selling cars and trucks directly to consumers; others achieve a similar end by requiring that manufacturers that sell any of their vehicles through dealers cannot engage in any form of direct consumer sales. These laws largely came into effect in the mid-20th century because of concerns regarding the perceived disparity in economic power between the large automobile manufacturers and the much smaller retail dealerships – rationales that do not reflect those or other market realities in 2020.

Driven by electric vehicle manufacturers and other potential new market entrants that are attempting to disrupt the sales and distribution system in place for decades, change may be in the air – but those efforts face material challenges. Structuring (or restructuring) a US automotive distribution network or system must take into account both the direct sales constraints and a vast array of state  laws and regulations designed to both require and restrict the relationship between manufacturers and dealers including:       

  • Laws that govern sales incentive programs offered by manufacturers, warranty work reimbursement, and impose vague prohibitions against “unfair” or “unreasonable” treatment of dealers.
  • Laws that govern the termination of a dealer relationship and in many cases prohibit termination or failure to renew a dealer without “cause” notwithstanding the actual terms of the manufacturer-dealer agreement.
  • These state dealer statutes, along with the federal Automobile Dealers Day in Court Act (ADDICA), often spawn litigation in which dealers seek injunctions and recovery of attorney fees and costs from manufacturers. These time-consuming and costly cases often seek to reinforce the constraints that the Federal Trade Commission (FTC), among others, has recognized that these state laws impose on competition and consumer choice.

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