Billionaire Warren Buffett has encountered another road block in his effort to maneuver around a Texas law that is jeopardizing his continued ownership of more than two dozen automobile dealerships in the state, and he might be running short of options.
Texas Attorney General Ken Paxton put up the latest obstacle this week, issuing an opinion in which he declined to provide legal cover for a semantical fix that potentially would have enabled Buffett to comply with the state law without changing his ownership structure.
“It is somewhat unfathomable that there will not be some kind of solution here,” said Cliff Banks, an automobile industry analyst based in Detroit. “I think people will be shocked if Texas can not come to some sort of agreement or figure this out.”
Buffett’s Berkshire Hathaway conglomerate has run afoul of a Texas law that prohibits motor vehicle manufacturers from also owning dealerships, even if the vehicles aren’t of the same type. Berkshire Hathaway owns a dealership unit — Irving-based Berkshire Hathaway Automotive — and also owns Forest River Inc., an Indiana company that makes RVs.
Proponents of the Texas regulations, including the politically powerful Texas Automobile Dealers Association, say the rules safeguard consumers by preventing automakers from establishing retail monopolies. Critics of the law say it’s a protectionist measure designed to ensure dealerships continue to operate as third-party middlemen.
The law is the reason Tesla Inc. is prohibited from selling the electric cars that it makes directly to Texas consumers.
Berkshire Hathaway, in consultation with the Texas Department of Motor Vehicles, had been working on a potential way around the law in which Berkshire would technically “relinquish control” of Forest River while still owning it. Since the Texas law defines a manufacturer as someone “affiliated with” a manufacturer or “controlled by” a manufacturer, the idea was that Berkshire Hathaway might be able to “cease to be affiliated with” Forest River for the purposes of the law and still wholly own it and the dealership unit.
But Paxton shot down that plan, citing in his opinion “the common meaning of the word” affiliate.
“A court is likely to conclude that a company that relinquishes control of a manufacturer but maintains full ownership of that manufacturer remains affiliated with the manufacturer for purposes” of the law, Paxton wrote.
Spokesmen for Berkshire Hathaway and Berkshire Hathaway Automotive didn’t respond to requests for comment.
Berkshire Hathaway Automotive is appealing recent recommendations by the enforcement division of the Texas Department of Motor Vehicles that the company’s licenses for the 29 dealerships it operates in Texas be revoked because of the law, and that it not be issued a new license for its first Austin dealership — a Mercedes-Benz franchise it planned to open on a South Interstate 35 frontage road. Most of the company’s dealerships are in the Dallas-Fort Worth metro area.
Hearings in those appeals have not been scheduled yet, but Paxton’s opinion seems to blowsa hole in a key Berkshire legal argument.
“At this point, we’re reviewing the impact of the opinion to determine what the next steps are,” said Adam Shaivitz, a spokesman for the Department of Motor Vehicles.
The opinion from Paxton marks the second time since the spring that Buffett and Berkshire Hathaway have been stymied in their attempt to enlist top state leaders in their effort to find away around the law.
A lobbying effort in April that included a trip to Austin by Buffett himself failed to result in approval of a legislative fix, dubbed the “Buffett bill,” that would have permitted ownership of both a manufacturer and a dealership if the vehicles aren’t of the same type. The bill — which was supported by the Texas Automobile Dealers Association — initially appeared to be on a fast track before encountering strong opposition from observers, including some Tea Party groups, who criticized it as a sweet heart deal for a deep-pocketed potential donor.
Some also accused the Buffett bill’s legislative supporters of hypocrisy for not taking similar interest in Tesla-backed bills that would have enabled Tesla to sell its electric cars directly to Texas consumers without going through third-party dealers. The Tesla bills, which languished and died, were opposed by the auto dealers association.
Banks, who produces the Banks Report online publication analyzing the retail automobile industry, said the ultimate solution to Berkshire Hathaway’s Texas predicament increasingly looks like it will have to include changes to the law that also enable Tesla to operate more freely in the state.
“They tried the legislative route already without (including) Tesla, and they got hammered,” Banks said. “So it wouldn’t surprise me if the Texas dealers association will have to give in and allow Tesla some freedom to sell its cars. Really, that is one of the holdups here. I don’t think (the dealers association is) going to be able to maintain that (anti-Tesla) position if Buffet and Berkshire are going to be able stay in Texas.”
Bill Wolters, president of the Texas dealers association, couldn’t be reached for comment Tuesday.
If Berkshire is forced to sell its Texas dealerships, Banks said there won’t be any shortage of bidders because they the dealerships are well-run and extremely lucrative.
Still, he said, “the mindset, or the expectation (in the industry), is they will get it solved” one way or another.
Berkshire Hathaway Automotive executives previously have said the company employs about 4,200 people in Texas
According to the National Automobile Dealers Association, the average U.S. dealership had about $59.6 million in sales last year, while the average luxury dealership had $94.1 million in sales.