FTC Staff Comment Before the New Jersey General Assembly Regarding Assembly Bills 2986, 3096, 3041, and 3216, Which Would Create Limited Exceptions to New Jersey’s Prohibition on Direct-to-Consumer Sales by Manufacturers of Automobiles

UNITED STATES OF AMERICA
Federal Trade Commission
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Competition
Bureau of Economics
May 16, 2014
Assemblyman Paul D. Moriarty
Chair, Consumer Affairs Committee
General Assembly
State of New Jersey
125 West State Street
Trenton, NJ 08625
Dear Assemblyman Moriarty:
Thank you for requesting comments from the Federal Trade Commission (“FTC”) staff1
regarding several bills pending in the New Jersey legislature that relate to the sale of
automobiles. In different ways and to differing degrees, each of these bills would create limited
exceptions to current provisions of New Jersey law that have been interpreted to prohibit
automobile manufacturers from selling new motor vehicles to consumers except through
independent auto dealers. These laws operate as a special protection for these dealers—a
protection that is likely harming both competition and consumers. We therefore appreciate this
opportunity to provide our views as to the probable impact of the proposed legislation on
competition and consumers.
As we discuss below, FTC staff view all of the bills as likely to promote competition and
benefit consumers, relative to a blanket ban on direct manufacturer sales to consumers. Each bill
would permit some manufacturers, under limited circumstances, the flexibility to choose whether
to sell cars directly to consumers, through dealers, or through some combination of the two. In
our view, however, the bills do not go far enough. Rather, the narrow scope of the bills will
largely perpetuate the current law’s protectionism for independent franchised dealers, to the
detriment of New Jersey car buyers. FTC staff believe New Jersey’s consumers would more
fully benefit from a complete repeal of the prohibition on direct sales by all manufacturers, rather
than any limited, selective set of exceptions.2
1 This staff letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics. The letter does not necessarily represent the views of the Federal Trade
Commission or of any individual Commissioner. The Commission, however, has voted to authorize staff to
submit these comments.
2 Our opinion is limited to bills addressing a blanket restriction on manufacturer sales. We do not attempt to
comment or review the myriad additional provisions of New Jersey law that regulate the relationship between
automobile manufacturers and their independent dealers.

2
FTC staff offer no opinion on whether automobile distribution through independent
dealerships is superior or inferior to direct distribution by manufacturers. Rather, staff’s principal
observation is that consumers are the ones best situated to choose for themselves both the cars
they want to buy and how they want to buy them. Automobile manufacturers have the incentive
to respond to consumer preferences and choose the most effective distribution method for their
vehicle brands. Absent supportable public policy considerations, the law should permit
automobile manufacturers to choose their distribution method to be responsive to the desires of
car buyers.
I. 	Interest and Experience of the Federal Trade Commission
The FTC is an independent administrative agency charged with working to protect
consumers by preventing anticompetitive, deceptive, and unfair business practices, enhancing
informed consumer choice and public understanding of the competitive process, and
accomplishing this without unduly burdening legitimate business activity.3 To secure these
goals, the FTC has played a significant role in promoting competition and consumer protection
law and policy through law enforcement, the study of industries and business practices, and
through competition advocacy, which may include specific comments to legislators or regulators
concerned about the likely competitive impact of pending legislative or regulatory measures.4
Competition is at the core of America’s economy, and vigorous competition among
sellers in an open marketplace gives consumers the benefits of lower prices, higher quality
products and services, and greater innovation.5 The goal of our advocacy program is to enhance
understanding of the competitive process and provide a framework for thinking about public
policy issues from a competition and consumer protection perspective. We urge decision makers
to consider (1) the likely competitive impact of proposed legislation or regulations; (2) how they
might affect consumers; (3) what justifications might exist for any restrictions on competition;
and (4) whether less restrictive alternatives would fulfill public policy goals while adequately
protecting consumers. These considerations can be especially important when heavily regulated
industries face new and disruptive products, services, and methods of sale.6
3 Federal Trade Commission Act, 15 U.S.C. § 45.
4 Sections 6(a) and (f) of the FTC Act authorize the FTC “[t]o gather and compile information concerning, and to
investigate from time to time the organization, business, conduct, practices, and management of any person,
partnership, or corporation engaged in or whose business affects commerce,” and “[t]o make public from time to
time such portions of the information obtained by it hereunder as are in the public interest ….” 15 U.S.C. § 46(a),
(f).
5 See Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 695 (1978) (“The assumption that competition is
the best method of allocating resources in a free market recognizes that all elements of a bargain—quality,
service, safety, and durability—and not just the immediate cost, are favorably affected by the free opportunity to
select among alternative offers.”); Standard Oil Co. v. FTC, 340 U.S. 231, 248 (1951) (“The heart of our national
economic policy long has been faith in the value of competition.”).
6 See, e.g., Comment from FTC Staff to Brendan Reilly, Alderman, City Council, City of Chicago (April 21, 2014),
available at http://www ftc.gov/system/files/documents/advocacy documents/ftc-staff-comment-honorable-
brendan-reilly-concerning-chicago-proposed-ordinance-o2014-1367/140421chicagoridesharing.pdf; FTC Staff
Comments Before the District of Columbia Taxicab Commission Concerning Proposed Rulemakings on
Passenger Motor Vehicle Transportation Services (June 7, 2013), available at

3
In carrying out its mission, the Commission has developed considerable expertise in
analyzing markets for the sale of motor vehicles. For example, in 1988 and again earlier this
year, FTC staff submitted advocacy letters opposing limitations imposed by Illinois law on the
hours of operation of auto dealerships.7 The FTC also used its enforcement authority to protect
competition in motor vehicle sales in the late 1980s, when it issued a complaint against several
motor vehicle dealerships in the Detroit area and the Detroit Auto Dealers Association
(“DADA”) for imposing anticompetitive restrictions on hours of operation.8
In 1986, the FTC’s Bureau of Economics issued a report on the effect of state regulations
in retail motor vehicle markets that restrict the establishment of new motor vehicle dealerships
near existing dealers selling cars of the same make.9 The report found that these state laws
harmed consumers because they caused motor vehicle prices to rise. In addition, in 2001, then-
Commissioner Thomas Leary expressed concern about the same kind of decades-old state laws
now at issue in New Jersey--laws that insulate motor vehicle dealers from competition from
automotive manufacturers. While dealers at one time tended to be small businesses, he observed,
in 2001 they were frequently much larger entities, and the once highly concentrated motor
vehicle manufacturing industry had become far more competitive. Commissioner Leary
questioned, therefore, whether this kind of regulatory protection for dealers could still be
justified, especially because it tended to interfere with the development of new and potentially
more efficient methods of motor vehicle distribution, such as e-commerce.10
http://www ftc.gov/sites/default/files/documents/advocacy documents/ftc-staff-comments-district-columbia-
taxicab-commission-concerning-proposed-rulemakings-passenger/130612dctaxicab.pdf.
7 Comment from FTC Staff to James Oberweis, State Senator of Illinois (March 26, 2014), available at
http://www ftc.gov/system/files/documents/advocacy documents/ftc-staff-comment-illinois-state-senate-
regarding-senate-bill-2629-which-would-repeal-certain/140327illinoisautostaffcomment.pdf; Comment from FTC
Staff to James R. Thompson, Governor of Illinois (Dec. 22, 1988), available at
http://www ftc.gov/sites/default/files/documents/advocacy documents/ftc-staff-comment-governor-james-
r.thompson-concerning-s.b.1870-limit-auto-base-rental-charges-alter-allocation-costs-and-risks-damage-or-theft-
and-ban-long/v890008.pdf.
8 These dealers had reached an agreement, orchestrated by the DADA, to limit the number of hours that they would
be open for business. The FTC concluded that the agreement was anticompetitive, a conclusion that was later
affirmed by the U.S. Court of Appeals for the Sixth Circuit. See Detroit Auto. Ass’n v. FTC, 955 F.2d 457 (6th
Cir. 1992).
9 ROBERT P. ROGERS, B UREAU OF E CON., FED. T RADE COMM’N, T HE E FFECT OF STATE E NTRY REGULATION ON
RETAIL AUTOMOBILE M ARKETS (1986) (Bureau of Economics Staff Report), available at
http://www ftc.gov/sites/default/files/documents/reports/effect-state-entry-regulation-retail-automobile-
markets/231955.pdf.
10 Thomas B. Leary, Comm’r, Fed. Trade Comm’n, State Auto Dealer Regulation: One Man’s Preliminary View,
Speech at The International Franchise Association 34th Annual Legal Symposium (May 8, 2001), available at
http://www ftc.gov/public-statements/2001/05/state-auto-dealer-regulation-one-mans-preliminary-view.

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II. 	Discussion and Analysis of the Pending Bills
A. New Jersey’s Ban on Direct Manufacturer Sales
Current New Jersey law has been interpreted by the New Jersey Motor Vehicle
Commission (“NJMVC”) to prohibit automobile manufacturers from selling their products
directly to consumers. These activities, it is maintained, can be carried out only through
independent franchised dealers.11
Such a blanket prohibition on manufacturer sales to consumers is an anomaly within the
larger economy. Most manufacturers and suppliers in other industries compete with each other
on not only the price, quality, and features of their products and services, but also on the cost,
speed, service and efficiency of their sales and distribution systems. These manufacturers make
decisions about how to design their distribution systems based on their own business
considerations and in response to consumer demand. If a manufacturer concludes that using
independent distributors to sell its products will best serve consumers and its own needs, it is free
to contract for those services. On the other hand, if it decides that direct sales work better for its
products, it can pursue sales directly. Many manufacturers choose some combination of direct
sales and sales through independent retailers.12 The competitive process gives the manufacturer
the incentive to pick the distribution option that it believes will be the most responsive to
consumers. Typically, no government intervention is required to augment or alter these
competitive dynamics – to the extent a manufacturer faces robust competition from other
manufacturers, the market polices inefficient, unresponsive, or otherwise inadequate distribution
practices on its own.
Economists have long been interested in why firms choose to sell their products through a
network of independent entities, to “vertically integrate” (engage in retail sales themselves), or to
do some combination of the two.13 A large body of literature has shown that the decision is very
context specific. In some circumstances, such as when local sales and promotional effort is hard
to measure but important for the firm’s success, a firm may conclude that it is desirable to use
11 In New Jersey, with limited exceptions, a “motor vehicle franchisor” cannot directly or indirectly sell or offer to
sell motor vehicles to consumers, other than through a franchised dealer. See N.J.S.A. 56:10-27. In addition, with
limited exceptions, a “motor vehicle franchisor” cannot own or operate, or enter into an agreement with any
person other than a franchised dealer to operate, a retail service facility authorized to perform warranty services
on its vehicles. See N.J.S.A. 56:10-7.4(e). The term “motor vehicle franchisor” is defined to include any entity
engaged in manufacturing, assembling or distributing new motor vehicles, whether or not it has entered into a
franchise agreement with a franchised dealer. See N.J.S.A. 56:10-26(e).
12 Computer manufacturers are one example of this hybrid distribution system, and popular clothing brands are
another, but there are many more.
13 One of the first papers focusing on this “make or buy” decision was Ronald Coase, The Nature of the Firm, 4
E CONOMICA 386 (1937). The literature has since expanded dramatically. Recent surveys touching on both theory
and empirical evidence include Francine Lafontaine & Margaret Slade, Vertical Integration and Firm
Boundaries: The Evidence, 45 J. ECON. L IT. 629-685 (2007); and Timothy Bresnahan & Jonathan Levin, Vertical
Integration and Market Structure, in H ANDBOOK OF O RGANIZATIONAL E CONOMICS 85 (R. Gibbons & D.J.
Roberts, eds., 2012).

5
highly incentivized independent representatives.14 In others, however, reliance on independent
dealers may fail to achieve the best outcome for either the upstream producer or the consuming
public. The vast majority of existing work by economists suggests that allowing firms in
competitive marketplaces to make the decision for themselves leads to better outcomes for
consumers.15
When manufacturers respond to competitive pressure by choosing to vertically integrate,
consumers usually benefit through lower prices and/or higher quality.16 In contrast, when the
government intervenes and outlaws vertical integration, consumers often experience worse
service and higher prices.17 It is not that vertical integration is always superior. Preventing firms
from using independent retail networks, when that is what they want to do, also can have
negative competitive consequences. The common message in both situations is that the
14 A book-length treatment of the theory explaining why can be found in Jean-Jacques Laffont & David Martimort,
T HE T HEORY OF I NCENTIVES: T HE PRINCIPAL-A GENT M ODEL (2009).
15 This conclusion was reached in two separate recent surveys of the literature: Francine Lafontaine & Margaret
Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in H ANDBOOK OF
ANTITRUST E CONOMICS (Paolo Buccirossi, ed., 2008); and James C. Cooper, Luke M. Froeb, Dan O’Brien, &
Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, 23 I NT’ L J. I NDUS. ORG. 639-64 (2005).
16 This is not to suggest that vertical integration can never harm competition, as may be the case where it is used to
impair competition from rival suppliers or customers.
17 Efficient vertical integration by upstream manufacturers can benefit consumers in a variety of ways. First, it can
remove the incentive for a manufacturer as well as a dealer to each mark up the price of the product on its way to
the consumer. This results in lower prices and increased sales to consumers. Discussion and details are available
in Dennis W. Carlton & Jeffrey M. Perloff, M ODERN I NDUSTRIAL O RGANIZATION 523-527 (2 nd ed. 1994).
Second, integration by a manufacturer into distribution can enable manufacturers to better match their products
with the preferences of consumers. For example, though manufacturers have an incentive to increase overall sales
of their products, particular dealers may be most interested in making sales from their inventory, which may cause
consumers to have to visit multiple dealerships to establish what product best fits their needs, resulting in
relatively high search costs. When consumers’ search costs are a large determinant of their purchasing patterns, a
manufacturer can have a strong incentive to make direct sales so that it is simpler for consumers to find what they
want. See Comment from FTC Staff to James Oberweis, State Senator of Illinois 5 (March 26, 2014), available at
http://www ftc.gov/system/files/documents/advocacy documents/ftc-staff-comment-illinois-state-senate-
regarding-senate-bill-2629-which-would-repeal-certain/140327illinoisautostaffcomment.pdf (discussing and
summarizing literature on the impact of search costs). For some empirical evidence on the importance of search
costs in the automotive industry, see Fiona Scott Morton, et al., What Matters in a Price Negotiation: Evidence
from the U.S. Auto Retailing Industry, 9 Q UANTITATIVE M ARKETING & E CON. 365-402 (2011). For a more general
review of the economic theory and evidence connecting search costs to prices, see Michael Baye, et al.,
Information, Search, and Price Dispersion, in H ANDBOOK ON E CONOMICS AND I NFORMATION SYSTEMS 323 (T.
Hendershott, ed., 2005).
Third, past work by economists has shown that vertical integration can aid firms in responding to uncertainty or
evolving business environments by establishing clear lines of authority between its manufacturing and sales
personnel, especially when new firms are attempting to enter an established market. A survey of the theoretical
motivations for vertical integration can be found in Timothy Bresnahan & Jonathan Levin, Vertical Integration
and Market Structure, in H ANDBOOK OF O RGANIZATIONAL E CONOMICS (R. Gibbons & D.J. Roberts, eds., 2012).
Empirical evidence of integration’s impact on firms’ ability to respond to events can be seen in recent studies such
as Sharon Novak & Scott Stern, Complementarity among Vertical Integration Decisions: Evidence from
Automobile Product Development, 55 M ANAGEMENT SCIENCE 311-332 (2009); and Silke Forbes & Mara
Lederman, Does Vertical Integration Affect Firm Performance? Evidence from the Airline Industry, 41 RAND J.
E CON. 765-90 (2012).

6
competitive process effectively aligns the interests of firms and consumers on the issue of
distribution method. In order to make their product as attractive as possible, firms choose the
distribution method that can bring their product to market as efficiently as possible.
Specific evidence to support these views can be found in many industries, including retail
automotive markets and industries like gasoline retailing. Past studies by both academic
researchers and FTC staff have concluded that state-imposed restrictions on automobile
manufacturers’ ability to negotiate with their dealers increased the prices paid by consumers
without leading to notable improvements in service quality.18 Similarly, studies have found a
causal link between laws that inhibit gasoline refiners’ ability to operate or own retail stations,
and higher prices.19 In our view, the well-developed body of research on these issues strongly
suggests that government restrictions on distribution are rarely desirable for consumers. When
they are adopted, at a minimum, such restrictions should be clearly linked to specific policy
objectives that the legislature believes warrant deviation from the beneficial pressures of
competition, and should be no broader than necessary to achieve those objectives.20
Those who support a blanket prohibition on direct manufacturer sales in New Jersey have
made a number of arguments that FTC staff find unpersuasive. Perhaps the central concern
reflected in the current laws regulating the manufacturer-dealer relationship is that government
intervention is required to protect independent dealers from abusive behavior by their suppliers.
But a blanket prohibition of direct manufacturer sales is not a narrowly crafted provision to
protect franchised dealers from abuse in their franchise relationships. Such a prohibition is
categorical, going well beyond the many other statutory provisions of New Jersey law that
protect dealers from such abuse. It extends to every entity engaged in manufacturing, assembling
or distributing new motor vehicles, even a manufacturer that has never entered into a franchise
agreement.
Advocates for existing dealers also argue that manufacturers that sell directly to
consumers will not provide them with adequate service. This argument presupposes that auto
manufacturers in a competitive environment will act contrary to their economic self-interest. If
consumers greatly value post-sale service and would be unlikely to purchase or recommend any
18 In particular, see, E. Woodrow Eckard, Jr., The Effects of State Automobile Dealer Entry Regulation on New Car
Prices, 24 E CON. I NQUIRY 223-42 (1985); and ROBERT P. ROGERS, T HE E FFECT OF S TATE E NTRY REGULATION ON
RETAIL AUTOMOBILE M ARKETS (1986) (FTC Bureau of Economics Staff Report, supra note 9).
19 J.M. Barron & J.R. Umbeck, The Effects of Different Contractual Arrangements: The Case of Retail Gasoline, 27
J.L. & E CON., 313-328 (1984); Michael G. Vita, Regulatory Restrictions on Vertical Integration and Control: The
Competitive Impact of Gasoline Divorcement Policies, 18 J. REG. E CON. 217-33 (2000); and A.A. Blass & Dennis
Carlton, The Choice of Organizational Form in Gasoline Retailing and the Cost of Laws that Limit that Choice,
44 J. LAW & E CON. 511-24 (2001).
20 Our comments here echo prior comments discussing similar issues. FTC Staff Comments Before the District of
Columbia Taxicab Commission Concerning Proposed Rulemakings on Passenger Motor Vehicle Transportation
Services (June 7, 2013), available at http://www ftc.gov/sites/default/files/documents/advocacy documents/ftc-
staff-comments-district-columbia-taxicab-commission-concerning-proposed-rulemakings-
passenger/130612dctaxicab.pdf (discussing taxicab rules and suggesting that “any restrictions on competition that
are implemented should be no broader than necessary to address legitimate subjects of regulation, such as safety
and consumer protection, and narrowly crafted to minimize any potential anticompetitive impact.”)

7
automobile without a reasonable assurance of quality future service, then any manufacturer will
have an incentive to supply such service or would see its sales decline to the benefit of its rivals.
This competitive pressure is a strong motivation for manufacturers to either provide good service
themselves or continue to contract with an independent service provider, such as a dealer, to do
so.
Finally, advocates for a categorical ban on direct sales argue that direct-selling
manufacturers would charge higher prices to consumers. In their view, consumers benefit from
the “intrabrand” competition between dealers of the same brand of vehicle. In other words, rival
dealers in the same area that sell the same make and model of car compete for business and
competition between them can lower prices for car buyers. Manufacturers, they maintain, would
not be subject to the same competitive pressures.
This view is inconsistent with modern economic learning and with the Supreme Court’s
widely accepted observation that strong “interbrand” competition—competition between rival
manufacturers—can suffice as a source of downward pressure on price.21 Manufacturers in a
competitive market face acute pressure to keep prices low to keep buyers from shifting their
purchases to a competing manufacturer’s product. Thus, forcing firms to use inefficient
distribution methods can result in higher prices and other forms of consumer harm. As described
above, this is not merely a theoretical possibility. Statistical evidence shows that states that have
placed strong limitations on gasoline refiners’ ability to operate their own retail outlets tend to
have higher prices than those that allow refiners to use whatever combination of dealer and
company-operated stations they prefer.22
Unlike the purported benefits of a manufacturer sales ban, which are questionable, the
anticompetitive effects of such a ban are immediately visible in the circumstances that have led
to the introduction of the pending bills. Tesla Motors is a relatively new entrant into the business
of motor vehicle manufacturing and sale, with an innovative new product and a distinctive
method of selling it.23 However, it is no longer permitted to operate direct sales outlets in New
21 Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 52 n.19 (1977) (“Interbrand competition is the
competition among the manufacturers of the same generic product […] and is the primary concern of antitrust
law. […] In contrast, intrabrand competition is the competition between the distributors, wholesale or retail, of the
product of a particular manufacturer. […] [W]hen interbrand competition exists, […] it provides a significant
check on the exploitation of intrabrand market power because of the ability of consumers to substitute a different
brand of the same product.”).
22 Michael G. Vita, Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of
Gasoline Divorcement Policies, 18 J. REG. E CON. 217-33 (2000).
23 Tesla has described the reasons for its direct-to-consumer sales model as follows:
We believe that by owning our own sales and service network we can offer a compelling customer experience
while achieving operating efficiencies and capturing sales and service revenues incumbent automobile
manufacturers do not enjoy in the traditional franchised distribution and service model. Our customers deal
directly with our own Tesla-employed sales and service staff, creating what we believe is a differentiated
buying experience from the buying experience consumers have with franchised automobile dealers and service
centers. We believe we will also be able to better control costs of inventory, manage warranty service and
pricing, maintain and strengthen the Tesla brand, and obtain rapid customer feedback. Further, we believe that
by owning our sales network we will avoid the conflict of interest in the traditional dealership structure inherent

8
Jersey. Tesla must engage in inefficient procedures to ensure that any sale to a willing buyer
from New Jersey does not occur within the state. New Jersey residents who wish to purchase
Tesla vehicles must now undertake for themselves some of the purchase-related services that
could be provided by a dealership, such as some steps to register and title their cars in New
Jersey. New Jersey residents are no longer eligible for financing through Tesla, and may be
unable to take advantage of some tax incentives for electric car purchases. As a result, Tesla cars
may become less attractive to New Jersey consumers, weakening Tesla as a competitor and
reducing the pro-competitive impact its entry might otherwise have on rival brands. New Jersey
customers would have to incur additional time and expense to purchase a Tesla car and are
deprived of the option they may prefer—purchasing directly from Tesla in New Jersey.
Beyond the immediate effects for Tesla, a continuing ban on direct sales by
manufacturers will perpetuate the current closed system of motor vehicle sales in New Jersey.
The system limits competition among existing, well-established manufacturers, all of whom
must sell through the established network of independent auto dealers. A direct sales ban deters
experimentation with new and different methods of sales by current auto manufacturers, and also
by other future entrants to the market. New Jersey’s consumers will ultimately pay the price of
such a dictate. The essential mechanism that drives markets—the interaction between the supply
by manufacturers and the demands of consumers—is being curbed. The market is less responsive
to consumer preferences and less innovative in anticipating their evolving needs.
FTC staff offer no opinion on the question of whether Tesla or other manufacturers
would be best served by selling their products directly or through independent distributors. Nor
do we express a view as to whether any particular motor vehicle manufacturer should succeed or
fail. Our principal point is this: absent some legitimate public purpose, consumers would be
better served if the choice of distribution method is left to motor vehicle manufacturers and the
consumers to whom they sell their products.
B. Proposed Bills to Ease a Manufacturer Sales Ban
Your request for the FTC’s views and comments refers to several pending bills in the
New Jersey legislature. None of the various pending bills would remove what has been
interpreted as a categorical manufacturer direct sales ban. Rather, each one would carve out
limited and varying exceptions to the current law’s prohibition. In our view, any effort to loosen
or reduce a blanket prohibition is a step in the right direction for competition and consumers.
However, New Jersey’s consumers would ultimately benefit far more from reforms that
unambiguously permit all manufacturers to choose their methods of sale, including direct sales to
consumers.
Electric Vehicles Exception. Assembly Bill A.2986 (and identical companion bill
S.1898) would amend current law to allow manufacturers of electric motor vehicles to directly
to most incumbent automobile manufacturers where the sale of warranty parts and repairs by a dealer are a key
source of revenue and profit for the dealer but often are an expense for the vehicle manufacturer.
T ESLA M OTORS, I NC ., ANNUAL REPORT ON FORM 10-K (Filed Feb. 26, 2014) at 11.

9
sell, offer to sell, or deal an electric motor vehicle to consumers. The operative language of the
bill would add a new statutory provision stating:
Notwithstanding the provisions of any law, rule or regulation to the contrary, a motor
vehicle franchisor who manufactures electric motor vehicles may directly buy an electric
motor vehicle from a consumer and may directly sell, offer to sell, or deal an electric
motor vehicle directly to a consumer if the franchisor is licensed pursuant to R.S.39:10-
19.
The bill also would add the following definition to N.J.S.A. 56:10-26:
“Electric motor vehicle” means a motor vehicle that uses a battery to store the electrical
energy to power the vehicle’s motor, including a battery electric vehicle, and that is
charged or recharged from an external source of electricity, such as by plugging the
vehicle into an electric power source. An electric motor vehicle shall not include a hybrid
electric vehicle.
The bill addresses a specific narrow category of products, including Tesla products, and
current and future electric vehicles of other manufacturers. It is framed to include not only
automobiles, but all vehicles falling within the definition of “motor vehicles” as defined by
N.J.S.A. 56:10-26, including electric motorcycles. It would relax the existing direct sales
prohibition and would permit electric vehicle manufacturers to exercise direct control over the
sales efforts for their products.
The bill is likely to increase competition and benefit New Jersey consumers. It would
permit manufacturers to have direct control over the sales process and to incentivize efforts by
salespeople to educate potential purchasers about the new technology.24 Permitting direct
manufacturer sales of electric vehicles might help to stimulate future consumer demand for such
products.
Although the bill would likely facilitate innovation in products and distribution methods
within a prescribed range of firms and products, it would leave in place existing law for internal
combustion and hybrid-powered motor vehicles. In other words, a blanket ban would remain in
effect for the products that make up the vast majority of motor vehicle sales in New Jersey today.
For the reasons discussed earlier, we see no public interest justification for continuing any
existing direct sales restriction for this broad category of vehicles. We also note that the rationale
for loosening the restriction for novel technologies might also be applicable for new technology
24 Consumer Reports made a recent study of auto dealerships to gauge sales people’s knowledge of electric cars. It
sent nineteen secret shoppers to eighty-five dealerships in four states, making anonymous visits between
December, 2013 and March, 2014. The secret shoppers asked a number of specific questions about the vehicles.
Consumer Reports discovered several very knowledgeable salespeople at some dealerships, but concluded that
few provided accurate and specific answers about batter life and battery warranties. Many salespeople seemed to
lack a solid understanding of electric-car tax breaks and other incentives, or of charging needs and costs. See
CONSUMER REPORTS.O RG, D EALERS N OT A LWAYS P LUGGED I N ABOUT E LECTRIC C ARS, CONSUMER REPORTS’
STUDY REVEALS (April 22, 2014), available at http://www.consumerreports.org/cro/news/2014/04/dealers-not-
always-plugged-in-about-electric-cars-secret-shopper-study-reveals/index htm.

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beyond just electric motor vehicles.25 Permitting multiple manufacturers of electric vehicles to
experiment in their methods for selling directly to consumers could lead to some degree of
competition in distribution methods in this product category, but the beneficial consumer effects
of the bill will be limited and the existing protectionist laws will largely remain intact.
Temporary Exception for Zero-Emission Vehicles. Assembly Bill A.3096 would amend
existing law to permit manufacturers to make direct sales of zero-emission vehicles, but would
reinstate a direct sales ban in the event sales of these vehicles exceed four percent of overall
vehicle sales in New Jersey. The operative language of the bill would add a new statutory
provision stating:
a. Notwithstanding the provisions of any law, rule or regulation to the contrary, a motor
vehicle franchisor who exclusively manufactures zero emission vehicles may directly buy
from and directly sell, offer to sell, or deal to a consumer a zero emission vehicle if the
franchisor is licensed pursuant to R.S.39:10-19 and the total number of zero emission
vehicles sold is less than four percent of all vehicles sold Statewide in each calendar year.
b. Within 365 days after the number of zero emission vehicles sold in this State in any
calendar year equals four percent or more of all the motor vehicles sold, all
manufacturers of zero emission vehicles in the State shall comply with the provisions of
P.L.1985, c.361 (C.56:10-26 et seq.), and any rules and regulations adopted pursuant
thereto.
The bill also would add the following definition to N.J.S.A. 56:10-26:
“Zero emission vehicle” means a motor vehicle certified as a zero emission vehicle
pursuant to the California Air Resources Board zero emission vehicle standards for the
applicable model year, but shall not include an advanced technology partial zero emission
vehicle, a partial zero emission vehicle, or a hybrid electric vehicle.
Our comments above respecting the “electric motor vehicles” bill are also pertinent with
respect to this bill. It could in theory give flexibility to multiple manufacturers with present or
future products falling within the defined category of “zero-emission vehicles.” It would likely
facilitate competition for new and innovative products, by among other things enabling
manufacturers to directly control sales efforts for their zero-emission vehicle products and
incentivize salespeople to educate potential purchasers about their features. Like Assembly Bill
A.2986, this bill could, therefore, improve competitive conditions in New Jersey to some degree.
However, staff question whether there is a public interest basis either for limiting the
scope of the bill to manufacturers that “exclusively” manufacture zero-emission vehicles, or for
restoring a ban on direct sales if sales of zero-emission vehicles reach the specified threshold of
four percent of vehicle sales in New Jersey. Reinstating a direct sales ban in this way could
25 The bill explicitly would not permit manufacturer direct sales of hybrid vehicles, for example, and it is not clear
that it would permit direct sales of motor vehicles using other innovative technologies like natural gas or fuel
cells.

11
operate as a penalty for successful innovation in product distribution, and could introduce
perverse incentives. As aggregate industry sales grow nearer the threshold, some manufacturers
could be motivated to be less innovative in their sales methods, for fear that they would lose the
flexibility to make direct sales to consumers. Framing the threshold for reinstating a ban in terms
of industry-wide sales also could result in differing treatment of zero-emission vehicle
manufacturers. The industry-wide threshold could reward early entrants with greater autonomy
in designing their distribution methods, but punish later ones, who would no longer be eligible to
use direct distribution, even if they deem it to be the most effective way to promote their
vehicles. And it could deter entry by later-entering firms that do not want to utilize independent
dealers.
In addition to possible practical difficulties in assessing and administering a calculation
of aggregate New Jersey industry sales of zero-emission vehicles,26 the market share threshold
imposed by this bill does not appear to be justified by any identifiable public interest. It would
not protect dealers from abuses in the franchise relationship. Instead, it would establish a hard
limit on the scope of competition once the four percent threshold is met. We also note more
generally that, like the electric vehicles bill, this bill would leave in place a manufacturer direct
sales ban for internal combustion and hybrid-powered motor vehicles—products that make up
the vast majority of current vehicle sales in New Jersey.
Low Volume Exception. Assembly Bill A.3041 would amend current law to allow the
NJMVC to license a manufacturer making sales of no more than 500 vehicles per year to sell
directly, but for no more than five consecutive years. The operative language would add a new
statutory provision stating:
Notwithstanding the provisions of any law, rule or regulation to the contrary, a motor
vehicle franchisor who is a manufacturer may directly buy from and directly sell, offer to
sell, or deal to a consumer a motor vehicle if the franchisor:
a. 	is licensed pursuant to R.S.39:10-19; and
b. 	sells no more than 500 motor vehicles in each calendar year.
The Chief Administrator of the New Jersey Motor Vehicle Commission shall not license
a franchisor as a dealer, pursuant to 46 R.S.39:10-19, for more than five consecutive
years in total.
Unlike the electric vehicles bill and zero-emissions vehicles bill discussed above, this bill
would not relax a direct sales prohibition for a defined category of products across multiple
manufacturers. Instead, it would permit direct distribution by only the smallest of firms, and for a
limited period of time. It would leave intact the existing law for electric cars manufactured by
26 Administering such a bill would seem to require identifying vehicle makes/models within the product category,
monitoring the sales volumes of these products and overall New Jersey vehicle sales, establishing an
administrative procedure to determine whether and when the threshold is reached, and dealing with disruptions
caused by a change in status for previously-licensed direct sales outlets.

12
firms such as General Motors, Toyota and Nissan, all of which sell many more than 500 motor
vehicles each calendar year.
The sales volume of 500 units specified in the bill is miniscule in comparison to the
existing pattern of motor vehicle distribution in New Jersey, where 513,551 new vehicles were
registered in 2012.27 Indeed, it is not apparent that the low sales volumes set in the bill would be
sufficient, as a matter of economics, to justify the establishment of a direct sales mechanism in
New Jersey, so it could have no effect at all. A small new manufacturer that adopts a direct-sales
method would exceed the statutory threshold by selling the same number of new vehicles as the
average single dealership in the United States.28
Even if a higher sales volume were specified in the bill, the approach set out in the bill
presents difficulties from the perspective of competition and consumers. Like the market share
cap in the zero-emission vehicles bill discussed above, the sales volume limitation would operate
as a rigid limit on competition and could introduce perverse incentives. As a manufacturer’s
sales grow nearer the specified volume, it could be motivated to be less competitive and
innovative in its methods of distribution, for fear that it would lose the flexibility to make direct
sales of its products, even as part of a distribution plan mixing direct and dealer sales.
While a bill permitting temporary direct sales by small-volume manufacturers is
preferable to a blanket prohibition of manufacturer direct sales, it is a very small step in
loosening the statutory ban. The low volume levels set in the bill, its inapplicability to existing
manufacturers with competing innovative products, and the disincentives to competition
embodied in the bill’s structure, all make A.3041 unlikely to significantly promote competition
and consumer welfare.
Limited Outlets for Zero-Emission Vehicles. Assembly Bill A.3216 would amend
existing law to permit manufacturers to make direct sales of zero-emission vehicles through a
limited number of outlets. The operative language of the bill would add a new statutory provision
stating:
Notwithstanding the provisions of any law, rule or regulation to the contrary, a motor
vehicle franchisor licensed pursuant to R.S.39:10-19 on or prior to January 1, 2014 and
exclusively manufacturing zero emission vehicles may buy from and sell, offer to sell, or
deal to a consumer a zero emission vehicle, provided that the franchisor owns or operates,
directly or indirectly:
(1) no more than four places of business in the State; and
(2) at least one retail facility for the servicing, including
warranty servicing, of zero emission vehicles sold, offered for sale,
27 See N ATIONAL A UTOMOBILE D EALERS ASS ’N, NADA D ATA, S TATE -OF- THE -I NDUSTRY R EPORT 2013, at 17.
28 Id. at 9 (table of national average number of new vehicles sold per dealership, 2002-2012; range from a low of
563 in 2009 to a high of 819 in 2012).

13
or otherwise distributed in this State. This facility shall be
furnished with all the equipment required to service a zero emission
vehicle.
A franchisor shall not be required to establish or operate a place
of business at a retail facility for the servicing of zero emission
vehicles.
The bill also would add a new statutory provision requiring the reporting of annual sales of zero-
emissions vehicles eligible for New Jersey’s sales tax exemption, and would add the following
definitions to N.J.S.A. 56:10-26:
“Place of business” means a fixed geographical location at which the motor vehicle
franchisor's motor vehicles are offered for sale and sold, but shall not include an office, a
warehouse, a place of storage, a residence or a vehicle.
“Zero emission vehicle” means a motor vehicle certified as a zero emission vehicle
pursuant to the California Air Resources Board zero emission vehicle standards for the
applicable model year, but shall not include an advanced technology partial zero emission
vehicle, a partial zero emission vehicle, or a hybrid.
From the perspective of competition and consumer interests, this bill would be preferable
to continuing a categorical ban on all direct manufacturer sales. It would permit a manufacturer
to engage in the direct sale of zero-emission vehicles through up to four outlets in New Jersey. In
contrast to current law that prohibits a manufacturer from operating its own service facility, it
also requires them to have at least one in the state.
But the bill is extremely narrow in scope. Like A.3096, it would apply only to a
manufacturer that “exclusively” manufactures zero-emission vehicles. It adds the further
requirement that the manufacturer must have been licensed as a dealer on or before January 30,
2014. These qualifications appear to make the bill apply only to Tesla, so its possible
procompetitive effects will be very limited.
Although the bill would not lead to the perverse incentives discussed above in connection
with A.3096’s threshold for revoking the direct sales permission, like A.3041, which would cap
sales at 500 units, it would effectively restrict the supply of Tesla vehicles in New Jersey. Any
competitive benefits to be gained from loosening the current blanket ban on direct manufacturer
sales will be marginal, therefore, and the bill will hinder Tesla’s ability to respond to consumer
demand and changing market circumstances. So far as we can tell, New Jersey law does not
similarly fix the number of outlets available to manufacturers who distribute their products
through independent dealers, and there is no apparent public policy justification to support a
fixed limit on sales outlets for zero-emission vehicle manufacturers such as Tesla.

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III. Conclusion
FTC staff believe that current New Jersey law, interpreted to ban direct manufacturer
sales of motor vehicles, is very likely anticompetitive and harmful to consumers. It cannot be
justified as a way to protect franchised dealers from abuse in their franchise relationships, and
the other arguments that have been offered in its defense appear to be contrary to a significant
body of economic study and FTC experience.
The various bills carve out only limited exceptions to current law. In staff’s view, any
effort to loosen or reduce a blanket prohibition on direct manufacturer sales may prove beneficial
to competition and consumers. However, staff’s view is that the limitations in each of the bills
will diminish their procompetitive potential and appear to lack any public policy rationale. Staff
notes that Assembly Bill A.2986 seems likely to facilitate the broadest range of competitive
benefits among these alternative approaches now pending before the legislature.
However, in lieu of any of the currently pending bills, we urge the legislature instead to
consider abandoning New Jersey’s existing law, interpreted as a blanket ban on direct
manufacturer-to-consumer sales, and instead permit manufacturers and consumers to reengage
the normal competitive process that prevails in most other industries. Such a change would
facilitate the development of new methods of distribution and possibly accelerate the arrival of
new motor vehicle manufacturers, benefitting the motor vehicle buyers of New Jersey.
Respectfully submitted,
Andrew I. Gavil, Director
Office of Policy Planning
Deborah Feinstein, Director
Bureau of Competition
Martin S. Gaynor, Director
Bureau of Economics