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In a case where Internet retailing and commercial regulations clashed, the 5th U.S. Circuit Court of Appeals ruled that a Texas law prohibiting car manufacturers from selling autos within the state is constitutional — even when the vehicles are sold over the Internet. The court’s Aug. 27 decision in Ford Motor Co. v. Texas Department of Transportation has been closely watched by business litigators because of the implications the opinion may have on the future of business on the Internet. Through Ford’s Web site, www.fordpreowned.com, customers were able to view an online selection of preleased cars. A customer could arrange to have a preleased car sent to a licensed dealer. The consumer could then purchase the vehicle, using the licensed dealer as an intermediary, according to the opinion. Two years ago, the Texas Department of Transportation’s Motor Vehicle Division lodged an administrative complaint against Ford with the Texas Motor Vehicle Board over the company’s plan to sell used cars in Texas over the Internet. Under �4.01 (a) of the Texas Motor Vehicle Code, only licensed dealers are allowed to sell cars in Texas. The code also prevents auto manufacturers from owning dealerships and acting in the capacity of a dealer. Ford challenged the complaint, filing suit in U.S. District Court in Austin, Texas. Last year, U.S. District Judge Sam Sparks held that � 4.01(a) is constitutional in prohibiting anyone from acting as a dealer without a license. Sparks also concluded that the use of the Internet as the medium for the sale is insignificant. In a 3-0 panel decision, the 5th Circuit affirmed a summary judgment against Ford and rejected the company’s claims. Ford had alleged that the Motor Vehicle Code violates the equal protection clause of the Constitution; the code is constitutionally vague; and the code violates the company’s free-speech rights. In the opinion written by Judge Fortunato “Pete” Benavides, the court found that the Texas law is not protectionist by preventing out-of-state auto manufacturers from operating in Texas. “[The Motor Vehicle Code] does not discriminate among in-state and out-of-state manufacturers,” Benavides wrote. “Nor does it discriminate among in-state and out-of-state dealers by raising the costs of doing business in the local market, stripping away the economic advantages for an out-of-state participant, or giving advantages to local participants.” Benavides was joined in the opinion by Judges Edith H. Jones and Harold R. DeMoss Jr. OTHER ALTERNATIVES The state’s purpose for preventing manufacturers from selling cars is part of the state government’s police power to protect citizens by licensing dealers who comply with warranties, preventing fraud and other abuses of Texas citizens, the 5th Circuit said. Ford argued that the Motor Vehicle Code violated the federal commerce clause, which gives Congress the power to regulate commerce among states. The company also argued that the state law was protectionist and conflicted with federal law regulating commerce. Attorneys for the state countered by arguing that the U.S. Supreme Court’s 1978 opinion in Exxon Corp v. Maryland rejected the identical protectionism arguments presented by Ford. In Exxon, the high court stated that “the burden of a state regulation fall[ing] on some interstate companies does not, by itself, establish a claim of discrimination against interstate commerce.” Judge Jones concurred with the decision, yet was troubled by the court’s reliance on Exxon, which she said is “woefully out of step” with the Supreme Court’s more recent opinions on interstate commerce. “Texas’ outright prohibition on retail competition from out-of-state auto manufacturers is about as negative toward interstate commerce as legislative action can get,” Jones wrote. David Ivey, a partner in Houston’s Baker & Hostetler who represents Ford, did not return a call for comment. Gregory Coleman, Texas’ former solicitor general, says the decision is important for Texas commerce and the Internet. “The 5th Circuit’s judgment demonstrates that traditional state regulation of marketing activities does not become unconstitutional simply because the participants bring the Internet into the picture,” Coleman says. “Other marketing alternatives, including ones that use the benefits of the Internet, are available to Ford and its dealers.” Karen Coffey, general counsel for the Texas Automobile Dealers Association, which represents about 1,200 auto dealers in Texas, applauds the decision. “The issue here was whether the manufacturer could sell cars to consumers,” Coffey says. “I think Ford used the Internet as a rabbit trail, hoping the consumer would use that rabbit trail.” Although 90 percent of her association’s members have Web sites, Coffey doesn’t view the Internet as a significant source of auto sales. “I think the Internet is a means for advertising and getting information out,” Coffey says. “I don’t think it’s necessarily going to be a big change in the way people do business.” But Doug Cawley, a partner in the intellectual property litigation section of Dallas’ Hughes & Luce, disagrees. He says the decision may have a great impact on Internet sales and states’ attempts to regulate commerce. “This case is a perfect example of the tensions that the Internet can cause within various distribution sectors,” Cawley says. “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.” Cawley adds, “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.”

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