Skip to main content

Insider Dealing: Car Dealer Protectionism Run Amuck


Imagine you wanted to open a restaurant. Imagine you were allowed to cook the food yourself, but you were prohibited by law from serving it to customers yourself; instead, you were forced to hire a waiter. Next, imagine that the waiter wasn’t pulling his weight, but you weren’t allowed to fire him unless you could prove you had good cause, and the people you had to prove it to were the waiters friends, who also happened to be employed as waiters. Finally, imagine that you had to get permission from the waiter before you could hire another waiter. If he refused, you could appeal his decision… to that same group of his waiter friends. Each of these imaginary scenarios is a close analogy to the very real laws that hinder the distribution of new cars. 

Car manufacturers are not allowed to sell directly to consumers. They can make the vehicle, but then must hire dealers (a.k.a. waiters) to interact with consumers. These state-mandated middlemen will surely want a cut of each sale, making the price consumers pay higher than it might otherwise be. 

Car dealers have powerful protections to keep themselves inserted firmly between makers and consumers. Once a dealer selects a franchisee to represent a particular area, the manufacturer must show good cause to revoke the franchise, even if the contract term has expired. It also includes the dealer’s heirs and whomever he wants to sell to. The manufacturer must have a good reason to remove a franchisee or to reject his chosen successor. And the people who second-guess the manufacturer’s decision are a commission of other car dealers in Oklahoma, who are protected by those same laws, and have a financial interest in making sure they are broadly enforced. 

Dealers also enjoy exclusive territories. If a manufacturer wants to put a new dealership within 15 miles of an existing dealer of the same line-make, they must give notice to the existing dealer, who has the opportunity to object. When the dealer objects, the manufacturer can appeal. The appeal goes before the same commission composed of car dealers - still with a vested interest in making sure there aren’t too many dealers in the state. But here, instead of looking out for a fellow dealer in the hopes that someday he might do the same for them, the commissioners have an interest in keeping the number of dealers small. The scope of this conflict of interest will depend somewhat on where the commissioner/dealer is in relation to the proposed dealer and how closely they compete. For instance, a BMW dealer in Tulsa probably isn’t too worried about a Dodge dealer in Lawton. But there is still enormous potential for a commissioner to have a direct financial interest in keeping a new dealer out of his market. What happened to the idea that you can’t be the judge in your own case? 

One more scenario: Imagine that when you go to buy a building for your restaurant, you are not allowed to hire a real estate agent. Even though you are a professional chef whose skills are in the culinary arts, not the art of the deal, you are legally prohibited from hiring a professional with expertise in buying real estate. Your only options are to negotiate yourself or bring in a friend willing to help you out for free. 

This too is akin to what happens with car dealers. But this time it’s not the manufacturer on the other side of the table; it’s the buyer. It is illegal to accept payment to arrange a transaction involving a new car on behalf of someone else. And it’s not some slap on the wrist: the first offense is a misdemeanor that carries up to a $1000 fine and one year in jail, but if you’re convicted again, it’s a felony - for nothing more than helping someone arrange to buy a car. 

There may not be a clearer example of naked protectionism in the laws of Oklahoma than the protection afforded to car dealers.  But what is the legislature so afraid of? If their dealers are really so valuable, won’t people keep buying from them? And if people don’t want to buy from a dealer, why should the State of Oklahoma make them?

Mike Davis is Research Fellow at 1889 Institute. He can be reached at mdavis@1889institute.org.


Popular posts from this blog

1889 Institute's Statement Regarding School Closures

The 1889 Institute, an Oklahoma think tank, has released the following statement regarding Joy Hofmeister’s proposal to keep schools closed for the remainder of the school year. We at the 1889 Institute consider Joy Hofmeister’s proposal to close Oklahoma’s schools for the rest of the school year a gross overreaction to the coronavirus situation. Even in the best of times and circumstances, suddenly shifting every student in the state from traditional classrooms to online distance learning will have negative educational consequences. This in addition to the economic burden on two-earner families forced to completely reorder their lives with schools closed. We believe many of our leaders have overreacted to worst-case scenarios presented by well-intended health experts with no training or sense of proportion in weighing the collateral damage of shutting down our economy versus targeting resources to protect the truly vulnerable. We say reopen the schools and stop the madness. ...

Can Government Force You to Close Your Business?

1889 Institute takes no position on whether any or all of these measures are warranted or necessary, or whether their economic fallout would inflict more human suffering than they prevent. We are simply evaluating whether they are legal.   With the unprecedented (in the last 100 years at least) reaction surrounding the outbreak of Covid-19, questions that few living legal scholars have considered are suddenly relevant.   Can a quarantine be ordered?   Can a mass quarantine, lockdown, or “cordon sanitaire” be ordered? Can businesses be ordered to change their behavior?   Can businesses be ordered to close? Can state governments order these measures? Can local governments order these measures? My legal brief addresses these issues from a statutory point of view; it is clear that state law gives the governor and mayors broad authority in a state of emergency. They must, of course, do so in a neutral way that they reasonably believe will help preve...

Lack of Action from Oklahoma’s Occupational Licensing Advisory Commission

Apparently, if you’re a legislator in Oklahoma and want to look like you’re doing something about an issue while not actually doing anything at all, you pass a bill to create a commission to study the issue. At least, that’s how the Oklahoma Occupational Licensing Advisory Commission (LAC) has operated so far. According to a study I did while at the Goldwater Institute, Oklahoma ranked as the 24 th most-licensed state. A study by the Institute for Justice ranked Oklahoma 35 th in how broadly and onerous its licensing laws are. But these, and similar studies, are really just counts of how many occupations states license, so they leave out a lot of nuance. The Institute for Justice’s report does add some nuance, reporting that by its standard of measure, Oklahoma ranks 18 th in how burdensome are its licensing laws. That is an important piece of information. On the one hand, according to the Institute for Justice, Oklahoma’s licensing laws cover fewer occupations than in ma...

A Plan to Put Teachers in Charge, Give Parents Choices, and Benefit Children

How much confidence would you have in a law firm that was managed and run by legal secretaries and paralegals? Probably not a lot. Legal support staff constitute a vital part of their firms. A good paralegal can free an attorney to focus on the things only she can do. A bad paralegal can be worse than no paralegal at all. But even the best paralegal lacks the training and experience to formulate and execute a litigation strategy. You don’t want a paraprofessional running the show - their proper role is in support of the professional. So why aren’t teachers running our schools?   The prevailing education model in this country is puzzling when compared to other industries. But it’s been this way so long it’s difficult to imagine anything else. We group children by age, not by knowledge or ability. We send them to schools based on address, not teaching methodology. Parents, except for the wealthy, have very little say over which school their children can attend. And teachers, the prac...