Emerging Issue: Franchise Laws

“Liquor wars” were waged in Missouri and Kansas bringing another level to the conversation of franchises. Dunkin’ Donuts, Subway and 7-Eleven store owners have squared off with the powerful International Franchisors Association in Maine. Electric car manufacturer Tesla has bested the state Automobile Dealers Associations in state court dust-ups in Massachusetts and New York, but Tesla is still challenging the auto dealers in the legislature in Texas, North Carolina, Ohio and three other states. Automobile dealers are attempting to close loopholes that allow the young all-electric automobile manufacturer to operate.

The issue in each jurisdiction involves state franchise law: typically, the relationship between a manufacturer or franchisor and their retailers. In the battles involving alcohol, wholesalers are important players as well. Following the repeal of prohibition, most states adopted a three-tiered-system for alcohol sales where manufacturers sell to wholesalers who are franchisees. Wholesalers sell to retailers, typically bars, restaurants, liquor outlets and convenience stores.

Franchise law battles in state legislatures have increased this year and are expected to gradually increase in number and intensity. Here are just two examples of the battles being waged across the state involving automobiles and alcohol.

Tesla, the car manufacturer, is seen as an interloper threatening decades of law that has regulated the relationship between automobile manufacturers and dealerships. State law typically prohibits a manufacturer from selling directly to the public, but upstarts like Tesla have opened showrooms in several states and are selling directly to consumers. In one instance, Tesla was sued in Massachusetts for opening a store in a local mall. They got the suit dismissed and later were granted a license to sell by local selectmen in a Boston suburb.

However, in Virginia, DMV Commissioner Richard Holcomb turned down Tesla’s request for a license, saying he was not presented with clear evidence that there is not an independent dealer available to operate a franchise in a manner consistent with the public interest. Tesla says its business model demands direct sales. They argue that it is “the best way to accelerate the adoption of electric vehicle technology and to interact with consumers in a friendly, open and no-pressure environment.” Tesla is now taking on a bill in North Carolina, SB 327, which would explicitly ban Tesla’s unique business model. There are a total of 116 automobile franchise bills this year being considered in 38 states.

The three-tier-system governing alcohol is under attack. The explosion of craft or small, local brewers and vintners has led to a plethora of bills being introduced that are designed to allow the direct shipping of beer and wine, thus cutting out the wholesaler. Legislation like Texas SB 515, which was sent to Republican Gov. Rick Perry on May 25 and is awaiting his action, would allow brewpubs to sell their products directly to customers for off premise consumption. There are bills, like West Virginia HB 2949 which would have made it illegal for a vintner or wine supplier to deliver wine to a distributor without first having an equitable franchise agreement that would strengthen the wholesalers’ control of the market. The conversation among legislators, manufacturers, distributors, and retailers is obviously not ending anytime soon. Over 450 alcohol-related franchise bills were pending this year in 46 states and DC.

 

Bob Sherman  Partner, KSE Partners
Bob Sherman heads KSE’s FOCUS practice, a research and political intelligence arm that serves dozens of clients nationwide. FOCUS makes clients smart about their legislative and regulatory issues nationwide, state by state, without ever leaving their office.Sherman is a national expert in Internet policy, ranging from privacy to taxation.

Leif Johnson Vice President, KSE FOCUS
Leif Johnson runs KSE’s Washington, D.C. office and helps manage KSE FOCUS, the firm’s multi-state monitoring and analysis practice. Johnson is also a key player on KSE’s strategic counsel team helping corporate and trade association clients sharpen their state government affairs operations.