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Authenticom, Inc. v. CDK Global, LLC

United States Court of Appeals, Seventh Circuit

November 6, 2017

Authenticom, Inc., Plaintiff-Appellee,
CDK Global, LLC, and Reynolds and Reynolds Co., Defendants-Appellants.

          Argued September 19, 2017

         Appeals from the United States District Court for the Western District of Wisconsin. No. 17-cv-318-jdp - James D. Peterson, Chief Judge.

          Before WOOD, Chief Judge, and Easterbrook and ROVNER, Circuit Judges.


         The backdrop for this appeal is the world of automotive dealerships. But we are not concerned with the cars themselves. Instead, the controversy before us has to do with the management of the data those dealerships need in order to run an efficient business. In an effort to keep track of such vital business matters as accounting, payroll, inventory, sales, parts, service, finance, and insurance, the dealerships use computerized dealer-management systems. The dealers in our case did not write their own software or create their own hardware, however. Instead, some licensed a dealer-management system from CDK Global LLC, and others licensed a system from Reynolds and Reynolds Company.

         Some dealer-management systems use open architecture, under which third parties have some access to dealer-originated data that has been plugged into the system. Others use closed architecture, under which that type of data scraping is forbidden under the license. The present litigation arose when CDK decided to change from an open system to a closed system, and CDK and its competitor Reynolds entered into agreements designed to ease the transition. Authenticom, a company that had been in the business of collecting data from the dealer-management systems and selling or using it for various applications ("apps"), sued under section 1 of the Sherman Act, 15 U.S.C. § 1, claiming that those agreements violated the Act. Because Authenticom's loss of access to the data was imperiling its survival as a company, it asked for and received a preliminary injunction from the district court in support of its suit.

         CDK and Reynolds took an interlocutory appeal from the grant of the preliminary injunction, as is their right. See 28 U.S.C. § 1292(a)(1). We heard oral argument, and we now conclude that the injunction must be set aside. It goes well beyond the scope of the alleged violation, and in so doing fails to adhere to the lessons of Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), and Pacific Bell Telephone Co. v. Linkline Communications, Inc., 555 U.S. 438 (2009). In light of Authenticom's representations about its need for a quick resolution of this matter, however, we urge the district court to do what it can to expedite its final judgment.


         Companies such as CDK and Reynolds that furnish dealer-management systems to automotive dealerships are in the business of providing a service to their customers. So are the companies that collect data for apps, or that design apps using data either uploaded by the dealer to the systems or generated by the systems. A glimpse at Authenticom's website indicates that it is in the data collection business. See (last visited Nov. 2, 2017). (It is unclear whether it also creates apps, but that detail does not matter for present purposes.) Neither the integration of data nor the development of apps competes with the systems. Instead, the collection and integration of data creates an intermediate downstream product; that data set can then be organized and used as an input for apps, either developed by outside vendors or by Authenticom itself. Functionally, a data integrator such as Authenticom is no different from an intermediary in any industry, whether sheet steel, uncut fabrics, or anything else. The fact that some of the dealer-management system providers are, or have been, vertically integrated such that they also sell integrated data or produce apps does not change the fundamental competitive analysis. That was one of the main points in the Supreme Court's Linkline decision, which dealt with independent internet service providers that competed with AT&T in the retail market, while at the same time they leased transport service lines from AT&T.

         Authenticom has been around since 2002, when it was founded by Steve Cottrell. It describes itself as a third-party data integrator, meaning that it collects data from dealerships, organizes the data for various purposes, and sells this service to third-party app vendors, who use Authenticom's integration services to ensure that their apps are compatible with a dealer's management system. Critically, however, Authenticom does not obtain its data directly from raw dealership records. Instead, it "scrapes" (or collects) data from the management system that the dealer uses. CDK and Reynolds are the nation's largest system providers, although their relative market shares have changed over time. Until 2015, the system furnished by CDK placed no restrictions on data harvesting by third-party integrators; Reynolds, in contrast, has always forbidden that practice in its system licenses. (The record indicates that the restriction in the Reynolds licenses did not stop Authenticom from persuading some Reynolds users to permit it to scrape data from them as well, in violation of their agreements with Reynolds.) Apparently dealers liked the open approach. At one point Reynolds had about 40% of the market and CDK had less, but by the time the complaint in this case was filed, their relative positions had flipped, with CDK holding over 40% of the market and Reynolds around 30%. The remaining quarter of the market is occupied by one significant fringe firm, Dealer Track (now owned by Cox Automotive, with roughly 17% of the market), and numerous other smaller players. Despite the apparent preference of the dealers for the open model, CDK decided in 2015 to switch to a closed system.

         Both CDK and Reynolds provide some data-integration services in-house (i.e. they are vertically integrated to some degree). The CDK product is called 3PA, and the Reynolds product is RCI. During its period as an open system provider, CDK also had two subsidiaries, Digital Motorworks and IntegraLink, which operated in the same way as Authenticom. An interested dealer would provide its log-in credentials to the integrator, which would then be able to pull data from the dealer's management system and provide it to an app vendor. The app market is highly competitive, populated not only by Reynolds and CDK, but also by such well-known firms as Carfax, AutoLoop, and Kelly Blue Book.

         Until CDK switched to a closed system, Authenticom seems to have been satisfied with its place in the market. Reynolds had always used the closed model, meaning that it blocked (or tried to block) third-party access to data generated by its system. CDK, on the other hand, did not prevent third-party integrators, including Authenticom, from accessing and scraping data from its system, with dealer permission. The reason CDK gave for changing its model from open to closed in 2014 was the need to respond to a series of "well-publicized security breaches" that worried its cybersecurity team. It also appears to have been motivated by a desire to squeeze more value out of its internal integration program, 3PA. Either way, after CDK made the switch to a closed system, Dealer Track was left as the only major open dealer-management system provider.

         CDK's change to a closed system left its data-integration subsidiaries, Digital Motorworks and IntegraLink, in an awkward position, because they had been following the same business model as Authenticom and had, it seems, scraped data from dealers with the Reynolds system despite the prohibitions in the dealers' license agreements. In order to wean CDK's subsidiaries from their dependence on the ability to scrape data, CDK and Reynolds entered into a series of written agreements. The first was the "Data Exchange Agreement/' in which CDK agreed to a five-year wind-down of the two subsidiaries. During the wind-down period, CDK agreed that the subsidiaries would not scrape data from Reynolds users without Reynolds's permission. In turn, Reynolds agreed that it would not block Digital Motorworks and IntegraLink from obtaining access to its system during the wind-down. CDK also promised that it would help its subsidiaries' clients (that is, the third-party app providers who used the subsidiaries to collect data from the Reynolds system) to move away from using Digital Motorworks and IntegraLink's services, over to Reynolds's in-house integrator, RCI. Finally, the Data Exchange Agreement committed both Reynolds and CDK not to help anyone else gain access to the other company's data management system without permission.

         The other two agreements between CDK and Reynolds were called the 3PA and RCI Agreements. In them, each company promised to allow the other company's proprietary integration software to have access to its data management system. Thus, for instance, CDK's 3PA software was entitled to take data from the Reynolds system. The parties agreed that neither would use any unauthorized or unsecured methods of obtaining access to the other's data management system. Notably, ...

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