Motor Dealers And Protectionism

Commenter rpt asks “Have you studied motor vehicle dealer restrictions?” Indeed, I have (and discuss them in chapter 7 of my book). Restrictions on auto dealerships are often explicitly designed to protect established businesses against economic competition.

Take, for example, Illinois. That state’s Motor Vehicle Franchise Act establishes a government committee that decides whether to allow new car dealerships to open, and gives them a long list of criteria to consider in making that decision. These criteria are explicitly anti-competitive: factor 10 requires the board to consider “the effect of an additional franchise…upon the existing motor vehicle dealers [selling] the same [ types of cars] in the relevant market area.” Factor 2 requires the bureaucrats to consider “the retail sales and service business transacted by the objecting motor vehicle dealer or dealers…during the 5 year period immediately preceding.” Factors 3 and 4 require the board to weigh “the investment necessarily made and obligations incurred by the objecting motor vehicle dealer” and “the permanency of the investment of the objecting motor vehicle dealer.” Factor 7 explicitly declares that “good cause” for the board to allow a new business “shall not be shown solely by a desire for further market penetration” — in other words, the desire of a car company to succeed in the market is not enough reason to let it open a new dealership.

This law was challenged in the Illinois Supreme Court in 2006. As I wrote in Pacific Legal Foundation’s friend of the court brief, this law was simply a “naked preference,” by which established businesses were exploiting government power, not to protect the general public, but to insulate themselves against competition. “[W]hen government limits one person’s liberty merely to give a benefit to another person, then the government has exceeded its authority under the Due Process Clause. As this Court put it in Giebelhausen v. Daley, 407 Ill. 25 (1950), ‘Each person subject to the laws has a right that he shall be governed by general, public rules. Laws and regulations entirely arbitrary in their character, singling out particular persons not distinguished from others in the community by any reason applicable to such persons, are not of that class.’”

Sadly, the Illinois Supreme Court upheld the statute under the rational basis test. But as dissenting Justice Lloyd Karmeier wrote, “this Act is clearly nothing more than a protectionist measure favoring existing motor vehicle dealerships, and it should be acknowledged as such. In my opinion, there is no rational basis to justify a distinction between the class the statute benefits and the class outside its scope. In short, it is special legislation.”