Cruising Beyond Car Dealer Dominance

Abstract

The automotive industry plays a pivotal role in both the American economy and daily life. This Article contends that the industry’s power dynamics detrimentally affect consumer welfare and posits that the law has a central role in mitigating this effect. Critiquing U.S. state laws governing franchised automotive dealers, it argues that these laws represent heavy sectoral economic legislation that unnecessarily intervenes in what should be a contractual relationship between manufacturers and dealers. Specifically, the Article identifies the regulation of warranty reimbursement in the manufacturer-dealer relationship as a significant factor skewing the industry's power balance and adversely affecting consumers. Thus, the Article advocates for the abandonment of mandated warranty reimbursement laws in favor of restoring the primacy of contract law in this domain.

An in-depth review reveals that there is more to this dealer-friendly protectionist legislation than initially meets the eye. Contrary to many other issues that divide Americans nowadays, both blue (e.g., California) and red (e.g., Florida and Texas) large state economies share a commitment to a high degree of pro-dealer regulatory intervention. Reviewing this regulation, the Article demonstrates that courts are generally reluctant to subject dealer-friendly legislation to judicial review under constitutional doctrines such as the Commerce Clause or Contracts Clause. The unfortunate result of this legal landscape allows franchised dealers to derive substantial inefficient and unfair benefits from their position as exclusive sellers of vehicles and the sole providers of warranty services.

Against these drawbacks and failures, the Article proposes that abolishing mandated warranty reimbursement could yield benefits not only for consumers but also for manufacturers and the best-performing dealers. It suggests that history has come full circle: the relative strength of dealers as franchisees of manufacturers justifies subjecting those relationships back again to contract law supplemented by the federal Automobile Dealers Day in Court Act (ADDCA). Reflecting on recent market changes and Tesla’s challenge to legacy manufacturers, the Article argues that franchised dealers should be re-envisioned as modern service centers, sparking competition. The broader implications of such a shift could redefine consumer expectations and dealer responsibilities, setting a new standard for consumer protection and industry innovation in the automotive sector.

Keywords: franchised dealers, car manufacturers, consumer welfare, sectoral economic legislation, judicial review, the Commerce Clause, the Contracts Clause, car warranties, warranty reimbursement, long-term business relationships, contract law