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Changing the Rules on How Cars Are Sold

November 18, 2021

Car buying has evolved since the creation of state automotive franchise and dealer laws. The internet has brought virtually every consumer buying experience online, yet new vehicle sales are still largely a brick-and-mortar operation because of state franchise laws. These laws were passed in the mid-twentieth century in response to perceived disparities in bargaining power between dealers and automakers, and placed significant restrictions on the latter, particularly with respect to direct-to-consumer sales. While the age of mom-and-pop car dealerships has come and gone, the dealer protection laws that were passed to protect those small dealerships largely remain in place.

As digital retail continues to drive consumer demand for an omnichannel car-buying experience, state automotive franchise and dealer laws (and limitations on direct sales by automakers) must evolve to allow for increased flexibility and accessibility for both car buyers and automakers seeking to bring cars to market.

  • Data shows that consumers have been trending toward digital shopping in the automotive industry for at least a decade. COVID-19 has further accelerated this trend by moving traditionally in-person interactions, such as setting up auto financing solutions, to online platforms.While used-vehicle sales have dramatically shifted to online transactions, new-car transactions still remain the province of in-person sales at dealerships as a result of state law requirements. This remains the case despite the fact that studies indicate a decided preference of car buyers for the ability to select, purchase, and finance online or in a hybrid fashion.
  • While automakers have been able to tangentially capitalize on the digital trends by experimenting with digital shopping experiences (e.g., allowing customers to digitally search inventory and filter for desired features, colors, trim levels, etc.), they remain significantly constrained by state franchise laws that restrict direct-to-consumer sales.
  • Some states prohibit automakers from engaging in direct sales to consumers entirely, while other states only allow for the direct sale of electric vehicles to consumers; yet others prohibit automakers from operating a dealership.
  • Outdated notions of unequal bargaining power, the importance of dealers to local industries, and the prevention of opportunistic conduct by automakers are often used as justifications for these laws despite evolutions in the automotive industry. As a result, these laws provide dealers with a source of leverage and entrenchment.
  • Limited exceptions have been made for direct-to-consumer sales of electric vehicles where permitted by statutes that allow direct-to-consumer sales by new automakers (but not ones that have sold vehicles through dealers) or because of successful lobbying of legislatures and challenges of state administrators to change the law or create limited exemptions for new electric vehicle manufacturers.
  • There is momentum in the direction of a more open and holistic approach to permitting consumers to purchase vehicles in a more accessible and flexible manner.The Federal Trade Commission dedicated a workshop to an exploration of state automotive distribution and its impact on competition and consumer protection interests—22 states now permit some form of direct sales, albeit many with significant limitations and constraints. Many state legislatures are currently considering bills that will allow direct sales by a limited pool of automakers, but a more adaptable approach designed to serve the interests of their consumer constituents remains the appropriate target for their consideration.

For more information, please see the New Market Entry and the Anachronistic US Distribution System: What the Future Portends presentation, part of the Morgan Lewis Automotive Hour Webinar series.