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Tesla Motors Ut, Inc. v. Utah Tax Commission

Supreme Court of Utah

April 3, 2017

Tesla Motors UT, Inc., Petitioner,
v.
Utah Tax Commission; Utah Motor Vehicle Enforcement Division, Respondents.

         On Petition for Review of Final Agency Action

          George Riley, Anne E. Huffsmith, Elysa Q. Wan, San Francisco, pro hac vice, Francis M. Wikstrom, Michael P. Petrogeorge, Salt Lake City, for petitioner

          Sean D. Reyes, Att'y Gen., Tyler R. Green, Solic. Gen., Stanford Purser, Deputy Solic. Gen, Gale K. Francis, Laron J. Lind, Asst. Att'ys Gen., Salt Lake City, for respondents

          Michael D. Black, Dick J. Baldwin for amicus curiae Utah Auto Dealers Association d/b/a New Car Dealers of Utah

          Associate Chief Justice Lee authored the opinion of the Court, in which Chief Justice Durrant, Justice Durham, Justice Himonas, and Justice Pearce joined.

          OPINION

          LEE ASSOCIATE CHIEF JUSTICE.

         ¶1 This case comes to us on a petition for review of a final decision of the Utah Tax Commission. In the proceedings below, the commission affirmed the administrator of the Utah Motor Vehicle Enforcement Division's decision to deny an application for a license to sell new motor vehicles. The license application in question was submitted by Tesla Motors UT, Inc., a wholly owned subsidiary of Tesla, Inc., a motor vehicle manufacturer. In denying Tesla UT's application, the Division determined that the application implicates both the Motor Vehicle Business Regulation Act (Licensing Act), Utah Code § 41-3-101, and the New Automobile Franchise Act, id. § 13-14-101.

         ¶2 The threshold question presented is whether those statutes together prohibit a wholly owned subsidiary of a motor vehicle manufacturer from obtaining a license to sell the manufacturer's new motor vehicles in stores in Utah. We hold that they do. We interpret the statutes to prohibit a motor vehicle manufacturer from owning part of any separate entity that sells the manufacturer's new motor vehicles in this state. We also uphold the statutory scheme against Tesla UT's constitutional attack. And we accordingly affirm the Tax Commission's decision affirming the denial of Tesla UT's application for a new motor vehicle license.

         ¶3 This is a narrow, legal decision. We are not opining on broad policy questions presented at some length by Tesla UT in its briefing-on whether Utahns would be better off with direct access to the innovative vehicles offered by Tesla, or whether Tesla's "direct sales" marketing scheme improves the car-buying experience. These questions are not ours to answer, as we interpret the governing statutes to control this case and find no constitutional barrier to their implementation.

         ¶4 We likewise stop short of deciding whether Tesla itself (the manufacturer) is barred from obtaining its own license to sell new motor vehicles. Tesla UT alludes to that question repeatedly in its briefing. But that question is not at issue because Tesla never submitted its own application and is not a party to this case. For reasons presumably important to Tesla, the automobile manufacturer chose to create a subsidiary entity and directed the subsidiary to submit a license application. For that reason, we are ruling only on Tesla UT's right to obtain a new vehicle dealer license as the wholly owned subsidiary of Tesla. We express no opinion on whether a motor vehicle manufacturer is barred from securing its own license to sell its own motor vehicles.

         I. BACKGROUND

         ¶5 On February 12, 2015, Tesla UT applied for a license to sell new Tesla vehicles at a physical store in Salt Lake City. The application was denied by the Motor Vehicle Enforcement Division on the ground that Tesla UT did not have a "franchise" to sell Tesla vehicles as required by the Licensing Act. Tesla UT responded by entering into a "dealer agreement" with Tesla. The agreement authorized Tesla UT to sell new Tesla vehicles. But the agreement also purported to avoid creating a franchisor-franchisee relationship under the Franchise Act and prohibited Tesla UT from using Tesla's trademark and trade name.

         ¶6 With the dealer agreement in hand, Tesla UT reapplied for a new vehicle dealer license. Again the administrator denied the application. He determined that Tesla UT either failed to have a franchise as required by section 41-3-210(g) of the Licensing Act or had an impermissible subsidiary relationship with its franchisor as prohibited by section 13-14-201(1)(u) of the Franchise Act.

         ¶7 Tesla UT appealed to the Utah Tax Commission, challenging the Division's interpretation of the governing statutes and also asserting a series of constitutional claims. The Tax Commission affirmed. It concluded that the Division had correctly interpreted and applied the statutes, while declining to rule on any of Tesla UT's constitutional claims (given that it lacks jurisdiction to do so. See Appellant's Brief, Addendum E, at 17 (citing Nebeker v. Utah State Tax Comm'n, 2001 UT 74, ¶ 18, 34 P.3d 180)). The Tax Commission's decision was rooted in section 201(1)(u) of the Franchise Act. In the commission's view, the Tesla entities were at odds with section 201(1)(u) of the Franchise Act because Tesla UT was Tesla's "franchisee" and a new vehicle dealer and Tesla was a "franchisor" that had an ownership interest in the new vehicle dealer.

         ¶8 Tesla UT now petitions this court for review of the Tax

         Commission's decision, challenging the decision on statutory and constitutional grounds. Tesla UT's claims raise questions of law, which we review de novo. See Hughes Gen. Contractors, Inc. v. Utah Labor Comm'n, 2014 UT 3, ¶ 25, 322 P.3d 712.

         II. STATUTORY CLAIMS

         ¶9 Tesla UT's statutory claims implicate the Licensing Act and the Franchise Act. The Licensing Act governs the issuance of a "new motor vehicle dealer's license." Utah Code § 41-3-202(1)(a). Such a license confers the right to "offer for sale, sell, or exchange new motor vehicles." Id. By statute, the Motor Vehicle Division's administrator has the authority to decide whether an applicant is "qualified" to receive such a license. Id. § 41-3-209(1). In exercising that authority, the administrator is governed by the terms of the Licensing Act. The Act, among other things, spells out grounds that constitute "[r]easonable cause" for the denial of a license application. Id. § 41-3-209(2)(c). And those grounds include "a violation of any state or federal law involving motor vehicles." Id. § 41-3-209(2)(c)(vii).

         ¶10 The Licensing Act itself sets forth certain restrictions on the use of a "license issued under this chapter." Id. § 41-3-210(1). One of those restrictions is a proviso that a license holder may not "engage in a business respecting the selling or exchanging of new or new and used motor vehicles for which he is not licensed, including selling or exchanging a new motor vehicle for which the licensee does not have a franchise." Id. § 41-3-210(1)(g).

         ¶11 The above provisions formed the basis for the initial denial of Tesla UT's license application. In denying the first application, the administrator concluded that Tesla UT was in "violation" of a state law "involving motor vehicles" because Tesla UT proposed to sell new motor vehicles for which it did not have a "franchise, " as required under section 210(1)(g). Tesla UT responded by entering into a "dealer agreement" with Tesla. And Tesla UT then submitted a new application for a new motor vehicle license.

         ¶12 That is where the Franchise Act came into play. In enacting the Franchise Act, the legislature found that "[t]he distribution and sales of new motor vehicles through franchise arrangements in the state vitally affects the general economy of the state, the public interest, and the public welfare." Id. § 13-14-101(2)(a). And in furtherance of those interests, the legislature deemed it "necessary to establish statutory guidelines regulating the relationship between franchisors and franchisees in the motor vehicle industry." Id. § 13-14-101(c). One of the restrictions set forth by statute is a prohibition on a "franchisor" "directly or indirectly" "own[ing] an interest in a new motor vehicle dealer or dealership." Id. § 13-14-201(1)(u).

         ¶13 This provision formed the basis of the denial of Tesla UT's second application for a new motor vehicle license. In denying that application, the administrator noted that if Tesla UT had a franchise with Tesla, then it ran afoul of the prohibition on a franchisor "own[ing] an interest in a new motor vehicle dealer or dealership." Id. Alternatively, if there was no franchise relationship between Tesla UT and Tesla, the administrator stated that Tesla UT would fall back into trouble under the Licensing Act-on the ground that it lacked the "franchise" required by Utah Code section 41-3-210(g).

         ¶14 The Tax Commission's decision embraced the administrator's understanding of the two acts. It noted Tesla UT's position that its dealership agreement with Tesla "provides it adequate authorization to sell Tesla vehicles and meets the requirements of being a franchise under" the Licensing Act. But it concluded that Tesla UT was not qualified to receive a license because Tesla was a "franchisor" under the Franchise Act and held an ownership interest in Tesla UT as a "new motor vehicle dealer" that was prohibited by section 13-14-201(1)(u) of that statute.

         ¶15 These conclusions reflect the "dilemma of franchise terms" identified by the Attorney General's office in a filing opposing the Tesla UT application. In the Attorney General's office's view, Tesla UT was caught between the rock of the Licensing Act and the hard place of the Franchise Act: Either Tesla UT lacked the "franchise" with Tesla required by the Licensing Act, id. § 41-3-210(1)(g), or its "franchise" put it at odds with the Franchise Act's prohibition on a franchisor's ownership of an "interest" in a new motor vehicle dealer, id. § 13-14-201(1)(u).

         ¶16 The tension between the Licensing Act and the Franchise Act is at the forefront of the parties' briefing in this case. Tesla UT insists that its dealer agreement satisfies the "franchise" requirement of the Licensing Act but did not amount to a "franchise" under the Franchise Act. It also argues, in the alternative, that the Motor Vehicle Division had no statutory authority to consider any alleged violation of the Franchise Act in evaluating Tesla UT's eligibility for a new motor vehicle license.

         ¶17 The Tax Commission, on the other hand, seeks to conflate the two statutory notions of "franchise." Its principal position on appeal is that the dealer agreement established a "franchise" under the Franchise Act and that Tesla's ownership of Tesla UT as a subsidiary runs afoul of the Franchise Act. The commission also defends the Motor Vehicle Division administrator's statutory authority to take violations of the Franchise Act into account in ruling on an applicant's qualification to secure a license. And it argues, in the alternative, that if Tesla UT does not have a "franchise" under the Franchise Act then it must necessarily be in violation of the Licensing Act's requirement that a license holder have a "franchise" for the sale of new motor vehicles. See id. § 41-3-210(1)(g).

         ¶18 We reject the Tax Commission's conception of a unitary notion of "franchise" under the Licensing Act and the Franchise Act but nonetheless affirm the decision denying Tesla UT's application. First, we conclude that Tesla UT's relationship with Tesla amounts to a "franchise" under the Licensing Act. Second, we explain that the notion of "franchise" under the Franchise Act is different, but hold that Tesla UT's arrangement with Tesla also qualifies as a "franchise" under that statute. Finally, we reject Tesla UT's assertion that the Motor Vehicle Division lacks statutory authority to consider a violation of the Franchise Act in deciding whether an applicant is qualified to receive a license.

         A. Licensing Act

         ¶19 The Licensing Act prohibits the holder of a license from "engag[ing] in a business respecting the selling or exchanging of new . . . motor vehicles for which he is not licensed, including selling or exchanging a new motor vehicle for which the licensee does not have a franchise." Utah Code § 41-3-210(1)(g). Tesla UT's initial application for a license was denied on the ground that it lacked the ...


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