Illinois Appellate Court Affirms Direct-To-Consumer Auto Sales

On August 23, 2024, the appellate court in Illinois’ First Appellate district concluded that neither the Illinois Vehicle Code nor the Motor Vehicle Franchise Act prohibits manufacturers from obtaining dealer licenses to sell directly to consumers.

For Illinois auto dealerships, the threat of direct-to-consumer sales has been lingering over their business model since Tesla arrived on the scene in 2009. Shortly thereafter, electric motor vehicle manufacturers Rivian and Lucid also sought to obtain licenses from the Illinois Secretary of State to sell their vehicles directly to consumers.

Legal challenges followed, culminating in success at the trial court for Rivian and Lucid, and now this most recent appeal in Illinois Automobile Dealers Association v. Office of the Illinois Secretary of State, 2024 IL App (1st) 230100 (August 23, 2024). Trade associations for franchise motor vehicle dealerships argued that the Illinois Vehicle Code and the Motor Vehicle Franchise Act limited the sale of new motor vehicles to franchised dealerships, thereby precluding direct sales by manufacturers. Likewise, they argued that granting dealer licenses to Rivian and Lucid represented violations of their Due Process and Equal Protection clause rights under the U.S. Constitution.

On each legal claim brought, the Court sided with Rivian and Lucid, cementing direct-to-consumer automotive sales in Illinois for the foreseeable future.

Statutory Arguments

The court dismissed the Illinois dealers’ statutory arguments regarding the Vehicle Code and the Motor Vehicle Franchise Act.

Rivian and Lucid contended that the plain wording of the Vehicle Code and the Act did not forbid them from acquiring dealer licenses to sell directly to consumers. They argued that the law only restricted them from directly owning or operating a motor vehicle franchise.

Illinois dealers disagree and contend that interpreting the Vehicle Code and the Act together implies that manufacturers are prohibited from selling directly to consumers. The dealers argue that the “mandatory contract requirement” under Vehicle Code § 5-101(b)(6) suggests that the Code prevents manufacturers from obtaining a dealer license because a manufacturer cannot contract with itself. The dealers also cite § 5-101(d)(1), which provides that no person can be licensed as a dealer without an authorized contract with a manufacturer or franchised distributor.

The court held that while Section 5-101(d)(1) prohibits granting a license to a new vehicle dealer absent a contract between the dealer and manufacturer, this provision must be interpreted in light of the purpose of the Code--to prevent fraud via a mandatory license and record keeping process. With this express purpose in mind, the court concluded that the contract requirement demands only that parties other than the manufacturer obtain a dealer license to sell new motor vehicles.

Constitutional Arguments

The dealer associations argued in Illinois Automobile Dealers Association v. Office of the Illinois Secretary of State that the granting of dealer licenses to Rivian and Lucid amounted to a procedural Due Process violation by creating a bypass system for obtaining a dealer license and damaging their interest in the established franchise system.

The court disagreed, concluding that dealers are not required by statute to operate as franchises; this business method is voluntary, and no protectable property interest arises from it. The court further held that even if the dealers had such a property interest in their existing franchise arrangements, their licenses remain intact and freedom from such competition is not a constitutionally protected interest.

The dealerships also asserted Equal Protection claims on the grounds that they are similarly situated with Rivian and Lucid, but are treated differently. The court disagreed with this comparison and affirmed the lower court’s ruling that the dealers failed to state a claim on this cause of action.

Takeaway for Automotive Dealers

The decision in Illinois Automobile Dealers Association v. Office of the Illinois Secretary of State affirms that direct-to-consumer automobile sales are here to stay in Illinois.

Dealers can protect themselves by retaining legal counsel with knowledge and experience in the auto industry. If you have questions about this decision or any issues currently impacting your dealership, contact Attorney Sarah Reusche at sreusche@lavellelaw.com or (847) 241-1795 for a free consultation.