Untitled Texas Attorney General Opinion

June 16, 1987

Mr. John R. Hale Opinion No. JM-721

Commissioner

Credit Union Department Re: Constitutionality of House Bill

914 East Anderson Lane Nos. 1953 and 1531. which regulate

Austin, Texas 78752 the sale of motor vehicles

Dear Commissioner Hale:

You inquire about the constitutionality of certain statutes and

proposed amendments applying to the sale of motor vehicles. You are

particularly concerned about pro+sions which prohibit sales of motor

vehicles from locations other than a permanent sales location. Briefs

submitted to us state that rental car agencies have in the past sold

used cars in Texas at temporary "off-site" sales. These sales are

also called "fleet" sales. Such sales are usually sponsored by credit

unions that make financing available to members who purchase vehicles.

Credit unions in the past have also sponsored off-site sales of new

cars, held at sites which are not permanent auto dealer locations.

The proposed legislation you inquire about will prevent both kinds of

sales -- the off-site sales of new cars and of used rental cars. You

specifically ask about House Bill No. 1531. which amends article

4413(36). V.T.C.S., and House Bill No. 1953, which amends article

6686, V.T.C.S.

Article 4413(36), V.T.C.S., the Texas Motor Vehicle Commission

Code, regulates the distribution and sale of new motor vehicles in

this state. V.T.C.S. art. 4413(36), 951.01, 1.02. It provides that

no one may act as a dealer of new motor vehicles without obtaining a

license from the Motor Vehicle Commissioner. Dealers may carry on the

business of a dealership at more than one location, if the separate

location is expressly authorized by the dealer's franchise and

license. V.T.C.S. art. 4413(36). 14.02(c)(l). Lxensees may not

participate in a "new motor vehicle show or exhibition at which new

motor vehicles are offered for sale" unless the Motor Vehicle

Commission has granted its approval. Id. House Bill No. 1531,

pending before the 70th Legislature, wouldprohibit the sale of any

new motor vehicle, except a motor home. at a show or exhibition.

House Bill No. 1531, 70th Leg., (1987) (proposing amendment to section

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Mr. John R. Hale - Page 2 (JM-721)

4.02(c)(2) of article 4413(36)). Thus, the off-site sale of a gloup

of new cars would be prohibited if House Bill No. 1531 is enacted.

Article 6686, V.T.C.S., permits dealers in motor vehicles to

apply for a general distinguishing number and a master dealer's

license plate, icstead of registering vehicles individually. An auto-

mobile dealer must have "a currently valid general distinguishing

number" assigned by the Department of Highways and Public Transpor-

tation, and may not reassign a certificate of title or other evidence

of ownership without one. V.T.C.S. art. 6686(a)(l-A). These require-

ments apply to dealers in new or used cars.

To apply for a general distinguishing number, an individual must

file a sworn application with the department showing. among other

things:

(A) that the location for which the applicant

seeks the issuance of a general distinguishing

number is an established and permanent place of

business situated on real property owned, or

leased by him under a written lease for a term of

not less than one'year, on which the applicant

maintains a permanent furnished office for the

sale of vehicles of the type specified in his

application. . . .

(B) that the applicant intends to remain in

business for at least one year at the sp.+cifieh

location. . . .

V.T.C.S. art. 6686(a)(l-A)(vi)(A), (B) (enacted by Acts 1985, 69th

Leg., ch. 465, at 1633).

House Bill No. 1953, enacted by the regular session of the 70th

Legislature, requires a separate general distinguishing number for any

location from which the person engages in business. H.B. No. 1953,

70th Leg. (1987) (mending V.T.C.S. art. 6686(a)(l) (iii), (v)). In

addition, the dealer's sworn application for a general distinguishing

number wotild have to state that the applicant intends to remain

engaged in business as a dealer for at least one year at the speciflrd

1. A brief submitted in connection with this request argues that

the present version of section 4.02(c)(2), as interpreted by the Texas

Motor Vehicle Commission, allows participation in bona fide trade

shows and exhibitions only where a sale of vehicles is an incidental

purpose. Thus, "parking lot sales" which have as their primary

purpose the sale of vehicles may not be authorized by the statute.

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Mr. John R. Hale - Page 3 (JM-721)

location and that he or his employee will be there to engage in

business during reasonable and lawful business hours. -

Id. (amending

V.T.C.S. art. 6686(vi)(B)).

These provisions on location will prevent both fleet sales of

rental cars and off-site sales of new cars. You question the

constitutional validity of legislation which restricts the sale of

vehicles by dealers that do not operate from a permanent location.

You first ask whether either or both of the bills could be construed

as an attempt by the legislature to pass a special law regulating the

automobile trade by effectively prohibiting some persons from engaging

in that trade. This question raises issues under the equal protection

clause and the due process ciause of the Fourteenth Amendxpentto the

United States Constitution.

The legislation distinguishes between persons who offer motor

vehicles for sale from a permanent business location virtuailjjevery

business day and those who wish to offer motor vehicles for sale

occasionally from a location only temporarily devoted to that purpose.

There is no fundamental right to engage in the business of selling

mqtor vehicles; therefore, the legislature needs only a rational basis.

for treating persons differently according to their particular mode of

selling motor vehicles. See City of New Orleans v. Dukes, 427 U.S.

297 (1976). Under the rational relationship test, a statute will be

sustained-if the legislarure could have reasonably concluded that the

challenged classification would promote 'a legitimate state purpose.

See, e.g., Exxon Corp. v. Eagerton, 462 U.S. 176, 195 (1983); Allied

Stores V. Bowers, 358 U.S. 522, 530 (1959).

Article 4413(36). V.T.C.S., includes the following purpose

clause:

The distribution and sale of new motor vehicles

in this State vitally affects the general economy

of the State and the public interest and welfare

of its citizens. :r: is the policy of this State

and the purpose of this Act to exercise the

State's police power to insure a sound system

of distributing and selling new motor vehicles

through licensing and regulating the manu-

facturrrs, distributors, and franchised dealers of

those vehicles to pruvide for compliance with

manufacturer's warranties, and to prevent frauds,

unfair practices, discriminations, impositions,

and other abuses of our cicieens.

V.T.C.S. art. 4413(36). 01.02.

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A brief submitted to us indicates that the proposed legislation

will serve to protect purchases by prohibiting car sales by un-

licensed, onfranchised "fly-by-night" dealers. Such dealers cannot

repair motor vehicles. They have no capital investment in the

facility from vhich they sell. Therefore, they cannot provide the

services necessary to keep the vehicles they sell in good condition.

The proposed legislation protects consumers from sales methods which

might leave them in possession of a defective vehicle without any

practical method of holding the dealer accountable.

Another brief argues that House Bill No. 1953 is anti-consumer,

because credit union members are satisfied with "off-site" sales. It

also argues that consumers are sufficiently protected under existing

law. because the vehicles have warranties and complete service

records. In the event of problems, the consumer may seek recourse

under the Deceptive Trade Practices Act. The consumer saves money on

the price of his purchased vehicle, and the car rental rates offered

by the rental companies reflect the savings they realize by selling

their used vehicles.

The view that House Bill No. 1953 is anti-consumer is supported

by a letter from the Chicago Regional Office of the Federal Trade

Commission on similar Illinois legislation. A letter to the minority

whip of the Illinois House of Representatives commented on legislation

which would have prohibited fleet sales by rental car agencies.

Letter from John N. Peterson, Acting Director, Chicago Regional Office

of the Federal Trade Commission to John W. Hallock, Jr. Minority Giip,

Illinois House of Representatives, Nov. 13. 1986. The letter stated

that the bill was contrary to the public interest because it would

unnecessarily restrain competitiou in the used car market. Its

principal effect would be to increase costs to consumers in the used

car market. Existing licensing requirements appeared sufficient to

address concerns about unscrupulous dealers. -Id.

Acts of the legislature are presumed valid. Anniston Mfg. Co. v.

Davis, 301 U.S. 337 (1937). When someone alleges that a statute

involves a classification denying the equal protection laws, he has

the burden of proving that it is essentially arbitrary. Minnesota v.

Clover Leaf Creamery Co., 449 U.S. 456 (1981).

An Attorney General Opinion cannot evaluate the factual bases of

statements for and against the proposed legislation. The arguments

and information provided to us do not, on their face, refute any

possibility that there is a rational basis for these bills. We must

conclude that the legislature reasonably believed that the proposed

restrictions on motor vehicle sales would protect Texas consumers from

fraud and unfair practices by "fly-by-night" dealers. We cannot say

that the proposed enactments violate the equal protection clause. Cf.

Calvert v. McLemore, 358 S.W.2d 551 (Tex. 1962) (statute violating

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Mr. John R. Hale - Page 5 (JM-721)

article VIII, section 2. of the Texas Constitution which requires

reasonable basis for classifying and exempting persons engaged in same

occupation for occupation tax).

An economic regulation challenged under the Fourteenth Amendment

on substantive due process grounds will not be overturned if

there is an evil at hand for correction, and . . .

it might be thought that the particular legisla-

tive measure was a rational way to correct it.

Williamson v. Lee Optical of Oklahoma, 348 U.S. 483, 488 (1955). The

court will not strike down state business regulatious merely because

"they may be unwise, improvident, or out of harmony with a particular

school of thought." -Id.

Article I, section 19, of the Texas Constitution also provides

for due process of law:

No citizen of this State shall be deprived of

life. liberty, property, privileges or immunities,

or in any manner disfranchised, except by the due

course of the law of the land.

We note that the opinions from other states, and the commentaries of

scholars, tend to place statutory provisions like the one at hand in a

very critical light, at least insofar as the guarantees against the

deprivation of liberty without due process of law in various state

constitutions are found to extend meaningful protection to substantive

interests in economic freedom. Our research suggests that a number of

state judiciaries would examine Rouse Bill Nos. 1953 and 1531 strictly

for real evidence of the actual relationship of the means embodied in

the prohibitions in the statute to the actual and purported purposes

of the prohibitions. If the courts of Texas should choose to follow a

similar approach to interpreting the liberty interests in the due

process clause of the Texas Constitution, then we surmise that it

might be difficult for this statute to pass constitutional muster.

See, e.g., Defiance Milk Products Company v. Du Mond, 132 N.E. 2d 829

(N.Y. 1956); In re Certificate of Need for Aston Park Hospital, Inc.,

193 S.E.2d 729 (N.C. 1973); Paulsen, "The Persistence of Substantive

Due Process in the States," 34 Minn. L. Rev. 91 (195G); Comment,

"Rediscovering Means Analysis in State Economic Substantive Due

Process," 34 Ala. L. Rev. 161 (1983); Note, "State Economic

Substantive Due Process: A Proposed Approach," 88 Yale L.J. 1487

(1978).

You next ask whether this legislation would burden interstate

commerce in violation of the federal constitution. U.S. Const. art.

I. 48. We assume that some of the new and used motor vehicles sold in

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Texas move in interstate commerce, including some of the vehicles sold

in "off-site" sales and "fleet" sales, and that the Texas regulations

of the sale of motor vehicles would affect interstate commerce.

In Exxon Corporation v. Governor of Maryland, 437 U.S. 117

(i978), the Supreme Court considered a Maryland statute providing that

a producer or refiner of petroleum products (1) may not operate any

retail service station within the state and (2) must extend all

temporary price reductions uniformly to all service stations it

supplies. Although the burden of these provisions fell only on

certain interstate companies, the court rejected arguments that they

violated the commerce clause. It found that these provisions did not

favor local production, prohibit the flow of interstate goods, or

distinguish between in-state and out-of-state production. -Id. at 125.

The court stated that

interstate commerce is not subjected to an imper-

missible burden simply because an otherwise valid

regulation causes some business to shift from one

interstate supplier to another.

Id. at 127. We believe the court's reasoning in Exxon Corporation v.

Governor of Maryland supports a finding that the statutes and bills

you inquire about do not violate the federal commerce clause. --.

You finally ask whether the Texas provisions violate state or

federal antitrust provisions.

The' Texas Free Enterprise and Antitrust Act of 1983 defines ss

unlawful various practices that lessen competition, such as monopolies

and conspiracies in restraint of trade. Bus. 6 Coma. Code E015.01,

15.05. Rowever, nothing in the section defining unlawful practices

shall be construed to prohibit activities that are

exempt from the operation of the federal antitrust

laws, 15 U.S.C. Section 1 et seq. Furthermore,

nothing in this section shall apply to actions

required or affirmatively approved by any statute

of this state or of the United States or by a

regulatory agency of this state or of the United

States duly acting under any constitutional or

statutory authority vesting the agency with such

power.

Bus. 6 Comm. Code §15.05(g). Thus, the conduct required by the

proposed statutes does not violate the state antitrust law.

We finally consider whether the proposed legislation conflicts

with the Sherman Act, 15 U.S.C. 01 et seq. In Parker v. Brown, 317

?

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U.S. 341 (1943), the Supreme Court established the "state action"

exemption from the federal antitrust laws. The state, in exercising

its sovereign powers, is exempted from the restraints of the federal

antitrust laws.

The standards for applying the Parker v. Brown doctrine, as

articulated by the federal courts, are as follows:

1. The alleged anticompetitive activity must

be mandated by the state acting as sovereign;

2. The challenged restraint must be clearly

articulated and affirmatively expressed as state

policy 9 and the policy must be actively supervised

by the state itself.

3. Some decisions indicate that the importance

of the state's regulatory interest is also to be

considered.

Annot., 70 L. Ed.2d 973 (1983).

In New Motor Vehicle Board v. Orrin W. Fox Co., 439 U.S. 96

(1978) the Supreme Court considered whether California statutes

governing the establishment or relocation of new-car dealerships

violated the Sherman Act. The statutes required that an automobile

manufacturer that wanted to add dealerships to the market area of its

existing franchises must notify the existing franchisees as well as

the New Motor Vehicle Board. If an existing franchise filed a protest

with the board, the manufacturer could not open the proposed dealer-

ship until the board heard the protest and determined its merits.

An automobile manufacturer and the proposed franchisees sought to

declare the statutes invalid as violating the Sherman Act, among other

grounds. They argued that

by delaying the establishment of automobile

dealerships whenever competing dealers protest,

the state scheme gives effect to privately

initiated restraints on trade.

Id. at 109. The court stated that the California regulatory scheme

was

a system of regulation, clearly articulated and

affirmatively expressed, designed to displace

unfettered business freedom in the matter of the

establishment end .relocationof automobile dealer-

ships. The regulation is therefore outside the

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Mr. John R. Hale - Page 8 (JM-721)

reach of the antitrust laws under the 'state

action' exemption.

Id. The court also countered the argument that the legislation

conflicted with the Sherman Act because it allowed the auto dealers to

invoke state power to restrain competition. Quoting Exxon Corporation

v. Governor of Maryland, the court observed that there was a conflict

between the statute and the central policy of the Sherman Act, but

that

this sort of conflict cannot itself constitute a

sufficient reason for invalidating the . . .

statute. For if an adverse effect on competition

were, in and of itself, enough to render a state

statute invalid, the States' power to engage

in economic regulation would be effectively

destroyed.

439 U.S. at 111 (quoting Exxon Corporation v. Governor of Maryland,

437 U.S. at 133). In our opinion, the proposed enactments do not

violate either-the state or the federal antitrust laws.

SUMMARY

House Bill Nos. 1531 and 1953 of the 70th

Legislature restrict the locations from which new

and used cars may be sold. These proposed

restrictions do not on their face violate the

equal protection clause, the due process clause,

or the commerce clause of the United States

Constitution. Nor do they violate the Texas

Antitrust and Free Enterprise Act of 1983, Tex.

Bus. & Comm. Code 0515.01 et seq., nor the Sherman

Act, 15 U.S.C. 91 et seq. Scholarly authorities

and cases from other states on due process

requirements of state constitutions, if adopted by

the Texas Supreme Court, suggest that these bills

would violate article I, section 19 of the Trxas

Constitution.

JACK HIGHTOWER

First Assistant Attorney General

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Mr. John R. Bale - Page 9 (JM-721)

,r-

MARY KELLER

Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY

Special Assistant Attorney General

RICK GILPIN

Chairman, Opinion Committee

Prepared by Susan L. Garrison and

Donald Bustion

Assistant Attorneys General

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