FTC Criticizes Franchise Laws…in Automobile Industry

“Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated.”

So concluded the Federal Trade Commission in a recent blog post criticizing franchise laws in the automobile industry. Tesla Motors, a leading manufacturer of high-end electric cars, implemented a sales model to allow it to sell cars direct to consumers. This has upset auto dealerships who have complained that Tesla’s efforts violated state franchise laws that require automobile manufacturers to sell their cars through local, independent auto dealerships.

Last week, the FTC weighed in, and criticized such laws as “bad policy” that protects middlemen and harms consumers. “We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are — expressions of a lack of confidence in the competitive process that can only make consumers worse off.”

Numerous states have protectionist franchise laws that govern supplier-distributor relationships in the alcohol beverage industry. Such franchise laws vary in their scope from state to state, but generally restrict producers from terminating distributors absent “good cause.” In practice, “good cause” has been narrowly defined by state regulatory agencies and courts, making it difficult for producers to terminate even for well-founded business reasons. Some states impose severe penalties for terminating or restructuring distribution arrangements absent “good cause,” including significant fines and potential suspension or revocation of the wineries’ state permits.

One has to wonder if the FTC’s recent statement on automobile dealership franchise laws could have any repercussions in the alcohol beverage industry.

For more information on franchise laws or wine law in general, please contact John Trinidad at [email protected].