The Fifth Circuit Court of Appeals reluctantly affirmed a district court's ruling in a case, Ford v. Texas Department of Transportation, closely watched because of the implications it may have for future business on the Internet. The case involved a protectionist Texas statute that prevents auto manufacturers from selling cars in Texas. While the Court affirmed that the statute was constitutional, one of the three affirming judges, Judge Edith Jones, a possible future Bush nominee for a vacancy on the U.S. Supreme Court, condemned current legal precedent that constrained the court into making its decision, wrote that the Texas statute clearly harmed consumers, and invited the Supreme Court to review the case.
The case began when Ford, taking advantage of the efficiencies of the Internet and in an effort to directly connect with consumers, began marketing used cars within Texas via the Internet. However, Texas law prohibited businesses from selling cars in Texas without a dealer's license. A companion law prevents auto manufacturers from obtaining a dealer's license. Consequently, the Texas Motor Vehicle Division of the Texas Department of Transportation filed an administrative complaint against Ford for selling cars without a license. Ford, subsequently, filed suit against the Texas DOT in district court alleging that the statute violated Ford's constitutional rights including the dormant Commerce Clause, the speech clause of the First Amendment, and the Equal Protection and Due Process clauses of the 14th Amendment, and was unconstitutionally vague. The district court ruled against Ford on every allegation.
The Fifth Circuit affirmed the district court's ruling, citing the Exxon v.Maryland, 437 US 117 (1978), as authority. The dormant Commerce Clause is a judicial concept that is meant to prevent states from regulating in a way the materially affects interstate commerce. The Exxon case holds that restraints of trade that restrained vertical integration did not burden interstate commerce and were thus, not violative of the dormant Commerce Clause. The Fifth Circuit stated that the Texas statute did not discriminate based on Ford's contact with the State, but rather on Ford's status as a manufacturer. Additionally, the Court reasoned that the Statute did not protect in-state dealers from competition with out-of-state dealers seeking to enter the state to conduct business, but rather protected dealers
from competition with manufacturers. In a concurring opinion, Judge Jones wrote that Exxon constrained the Court's decision. Writing that the Exxon case "seems woefully out of step with the [Supreme] Court's more recent cases," Judge Jones wrote that "Texas's outright prohibition on retail competition from out-of-state auto manufacturers is about as negative toward interstate commerce as legislative action can get...It should be obvious that the flow of interstate goods is diminished when barriers to entry totally prevent fair competition by a class of potential distributors: the favored local distributors' price and service incentives become less keenly competitive, prices rise, and overall sales will decline from the free-market equilibrium point."
"This case is a perfect example of the tensions that the Internet can cause within various distribution sectors," stated Hughes & Luce partner Doug Cawley. "Laws that were originally designed in the early part of the century to protect consumers from unscrupulous car dealers have been turned on their head and become protectionist statutes aimed at protecting dealers from competition with manufacturers. Because of the efficiencies that the Internet can bring to a market, these types of conflicts will only continue to arise until the Supreme Court directly addresses the issue." This case can be found at http://laws.lp.findlaw.com/5th/050750cv0.html.
Click the link below to register for the 14th annual Hughes & Luce Labor and Employment seminar:
http://www.hughesluce.com/guest/laborlaw.asp
Click the link below for a searchable archive of e-Alerts from Hughes & Luce:
http://www.commercebynet.com/e-alert.asp Pass this e-Alert along to a colleague.
Sign-up for future IT e-Alerts here: http://www.hughesluce.com/guest/alert.htm The Hughes & Luce, LLP e-Alert covers significant developments in Intellectual Property Law, Patents, Trademarks, Copyrights, Information Technology, New Media, Internet Law, Electronic Commerce and Outsourcing. The information contained in the e-Alert is designed to inform you of recent and newsworthy developments in these areas. It is intended to provide general information only and is not a legal opinion or legal advice. You should consult with an attorney about specific concerns in this area.