                          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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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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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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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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Mr. John R. Hale - Page 7   (JM-721)




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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