TSLA Tesla Inc

By Mike Ramsey 

Tesla Motors Inc. hopes to capture mainstream auto buyers with its Model 3, an electric car it plans to unveil this week at a price about the same as the average gasoline-powered vehicle, but it may need a federal court ruling to succeed.

The Palo Alto, Calif., auto maker's direct-to-consumer sales are prohibited by law in six states that represent about 18% of the U.S. new-car market. Barring a change of heart by those states, Tesla is preparing to make a federal case out of the direct-sales bans.

The auto maker's legal staff has been studying a 2013 federal appeals court ruling in New Orleans that determined St. Joseph Abbey could sell monk-made coffins to customers without having a funeral director's license. The case emerged amid a casket shortage after Hurricane Katrina. The abbey had tried to sell coffins, only to find state laws restricted such sales to those licensed by the Louisiana Board of Funeral Directors.

For now, Tesla is banking on a combination of new legislation, pending dealer applications and other factors to open doors to selling directly in Arizona, Michigan, Texas, Connecticut, Utah and West Virginia. But the company said it is ready to argue in federal court using the coffin case if necessary.

"It is widely accepted that laws that have a protectionist motivation or effect are not proper," Todd Maron, the auto maker's chief counsel, said in an interview. "Tesla is committed to not being foreclosed from operating in the states it desires to operate in, and all options are on the table."

The ruling in favor of the monks, upheld by the Fifth Circuit Court of Appeals, could give Tesla the precedent it needs to join an "economic liberty" issue currently in dispute between circuit courts in the U.S., Northwestern University law professor John McGinnis said. The Second Circuit Court of Appeals, for instance, has upheld laws that require licensing to sell certain products even if there isn't a clear reason for it other than protecting existing businesses from new competition.

Tesla has long battled states over franchise laws that insulate dealers from direct competition from auto makers. Laws protecting independent dealers were installed in the 1950s to prevent the arbitrary closing of stores by manufacturers, and in recent years these rules have been used by dealer lobbyists and some auto makers to argue that all stores need to be independently owned.

Tesla doesn't have independent dealers and instead sells through its own stores and through the Internet. To date, its sales have been a fraction of the volumes that major auto makers sell, but it aims to boost annual sales nearly 10 fold to 500,000 by 2020. Being able to widely sell the Model 3--expected to be priced at about $35,000 before tax credits--is an important step in taking on brands as ubiquitous as Chevrolet.

Mr. Maron's legal team has been researching legal options as Tesla wages state-by-state battles with dealer associations that have pushed legislation to restrict direct sales of the Model S and Model X, which commonly sell for above $100,000. Recently, Tesla beat back an effort in Indiana that would have halted its sales operation there by the end of 2017.

In Michigan, Tesla last year filed for a dealer license. Because the state made a law in 2014 prohibiting direct sales to consumers by auto makers, the state could determine the license shouldn't be granted. Michigan's attorney general's office declined to comment.

Louisiana's coffin cases could come in handy if Michigan sides with dealers. And Tesla's use of it as a precedent could breathe life into the economic liberty fight that to date has involved smaller issues, such as selling gravestones or providing flowers to a funeral home.

"Until now, these decisions have been in niche areas of the economy," Mr. McGinnis, the professor, said. "With Tesla behind it, it would go into something as economically important as the structure of the industry for retailing cars."

Auto dealers are battle-tested and have notched a series of victories along the way. Earlier this year, the Second Circuit Court of Appeals refused to hear a case brought by auto makers that wanted to change laws using a similar constitutional challenge and involving warranty reimbursement levels.

Tesla could find powerful allies. The Federal Trade Commission has repeatedly said franchise laws are anti-competitive. Other organizations agree.

"There is no legitimate competitive interest in having consumers purchase cars through an independent dealership," Greg Reed, an attorney with Washington D.C.-based Institute for Justice, a libertarian-leaning law firm, said. He calls Michigan's laws "anti-competitive protectionism."

Write to Mike Ramsey at mike.ramsey@wsj.com

(END) Dow Jones Newswires

March 28, 2016 14:32 ET (18:32 GMT)

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