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In re Dealer Management Systems Antitrust Litigation

United States District Court, N.D. Illinois, Eastern Division

May 14, 2018

IN RE DEALER MANAGEMENT SYSTEMS ANTITRUST LITIGATION This Document Applies to: Authenticom, Inc.
v.
CDK Global, LLC Case No. 18 CV 868

          MEMORANDUM OPINION AND ORDER

          AMY J. ST. EVE United States District Court Judge.

         Plaintiff Authenticom, Inc., a data-integration firm, sued Defendants CDK Global, LLC and The Reynolds and Reynolds Company, the premier purveyors of dealer management systems, for violating Sections 1 and 2 of the Sherman Act and committing tortious interference. Both Defendants filed respective motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). (R. 53, R. 56.) For the reasons explained below, the Court grants in part and denies in part Defendants' motions.

         PROCEDURAL HISTORY

         Authenticom filed this lawsuit on May 1, 2017, in the Western District of Wisconsin. With its Complaint, Authenticom filed an emergency motion for a preliminary injunction. The motion sought to enjoin Defendants' allegedly anticompetitive practices which, as explained below, allegedly prevented Authenticom from accessing Defendants' respective dealer management systems (“DMS”), a necessary part of Authenticom's data-integration business. Authenticom claimed that those practices effectively excluded it from the market and, as a result, were “on the verge of putting [it] out of business.” (No. 18-cv-868, R. 5.) Over the next three months, the parties submitted voluminous exhibits and declarations, and the district court held a two-and-a-half-day hearing in early July 2017.

         On July 14, 2017, the district court granted Authenticom's motion for a preliminary injunction. It ruled that Authenticom had demonstrated a “moderate” likelihood of success on its Section 1 claims (it did not address the Section 2 claims), and that Authenticom had no adequate remedy at law as evidence suggested Defendants' conduct could force it to shutter its business. See Authenticom, Inc. v. CDK Glob., LLC, No. 17-CV-318-JDP, 2017 WL 3017048 (W.D. Wis. July 14, 2017), vacated, 874 F.3d 1019 (7th Cir. 2017). Weighing the harms, the court granted Authenticom's motion, and after some further briefing, entered a preliminary injunction against each Defendant on July 28, 2017. See also Authenticom, Inc. v. CDK Glob., LLC, No. 17-CV-318-JDP, 2017 WL 3206943 (W.D. Wis. July 28, 2017), vacated, 874 F.3d 1019 (7th Cir. 2017). Those preliminary injunctions forced, among other things, Defendants to allow Authenticom access to their DMSs.

         Defendants appealed, and the Seventh Circuit vacated the preliminary injunctions and remanded the case. The Seventh Circuit held that whatever the merits of Authenticom's Section 1 claims, the injunctions' forced sharing of Defendants' DMSs ran afoul of the bedrock principle that firms generally have no duty to deal with competitors. Authenticom, Inc. v. CDK Glob., LLC, 874 F.3d 1019, 1021 (7th Cir. 2017) (citing Verizon Commc'ns Inc. v. Law Offices of Curtis v. Trinko, 540 U.S. 398 (2004), Pacific Bell Tel. Co. v. Linkline Commc'ns, Inc., 555 U.S. 438 (2009)). It reasoned that “[t]he proper remedy for a section 1 violation based on an agreement to restrain trade is to set the offending agreement aside, ” not force the alleged violators to deal with the complainant. Id. at 1026. The Seventh Circuit, however, “urge[d]” the district court to do what it could to expedite resolution of the matter based on Authenticom's representations of financial distress. Id. at 1021.

         By the time the Seventh Circuit issued its decision, software vendors and automobile dealers had filed a handful of potential tag-along lawsuits across the country against Defendants. The day after the Seventh Circuit's decision, Defendants filed a motion for transfer and consolidation of those cases (and ones later filed) with the Judicial Panel on Multidistrict Litigation (“JPML”). The JPML granted that motion and transferred the cases to this Court for consolidated pretrial proceedings. (R. 1.) Meanwhile, the district court presiding over Authenticom had granted Defendants' motion for a partial stay of discovery given the pending MDL.

         In the midst of the preliminary-injunction and appellate proceedings, the parties briefed Defendants' Rule 12(b)(6) motions to dismiss. Those motions are now before the Court.

         LEGAL STANDARDS

         I. Rule 12(b)(6) and the Plausibility Standard

         “A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) challenges the viability of a complaint by arguing that it fails to state a claim upon which relief may be granted.” Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014); see also Hill v. Serv. Emp. Int'l Union, 850 F.3d 861, 863 (7th Cir. 2017). Under Rule 8(a)(2), a complaint must include “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). To survive a Rule 12(b)(6) challenge, a “complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Mann v. Vogel, 707 F.3d 872, 877 (7th Cir. 2013). Courts, of course, accept all well-pleaded facts as true and draw reasonable inferences in the plaintiff's favor. See, e.g., Forgue v. City of Chicago, 873 F.3d 962, 966 (7th Cir. 2017). After “excising the allegations not entitled to the presumption” of truth, courts “determine whether the remaining factual allegations plausibly suggest an entitlement to relief.” McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir. 2011).

         II. The Materials Upon Which the Court Relies on a Rule 12(b)(6) Motion

         In addition to well-pleaded facts, “a court ruling on a motion to dismiss can rely on the complaint itself, documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice.” Olson v. Bemis Co., 800 F.3d 296, 305 (7th Cir. 2015); see also, e.g., Geinosky v. City of Chicago, 675 F.3d 743, 745 n. 1 (7th Cir. 2012). Further, although a “complaint may not be amended by the briefs in opposition to a motion to dismiss, ” Agnew v. Nat'l Collegiate Athletic Ass'n, 683 F.3d 328, 348 (7th Cir. 2012), courts may “consider additional facts set forth in” a brief opposing dismissal “so long as those facts are consistent with the pleadings, ” Phillips v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1019-20 (7th Cir. 2013) (quoting Geinosky, 675 F.3d at 745 n. 1); see also, e.g., Jones v. Sparta Cmty. Hosp., 716 Fed.Appx. 547 (7th Cir. 2018) (“because [plaintiff-appellant] now elaborates on the factual allegations in his amended complaint, and his elaborations are consistent with the pleadings, we consider that information in our review”); Heng v. Heavner, Beyers & Mihlar, LLC, 849 F.3d 348, 354 (7th Cir. 2017) (“Materials or elaborations in appellants' brief opposing dismissal may be considered, so long as those materials or elaborations are consistent with the pleadings.”); Martin v. Cook Cnty., Ill., No. 17 C 2330, 2018 WL 1942654, at *1 (N.D. Ill. Apr. 25, 2018) (a court may consider “additional facts set forth in [plaintiff's] brief opposing dismissal, so long as those additional facts are consistent with the pleadings.”). “To the extent that an exhibit attached to or referenced by the complaint contradicts the complaint's allegations, the exhibit takes precedence.” Phillips, 714 F.3d at 1020.

         BACKGROUND

         I. DMSs, Data Integration, and Auto Dealers

         This case concerns the data services and businesses upon which auto dealers rely in conducting their operations.[1] Two purported markets in that space are of principal relevance here: the DMS market and the data-integration market.

         A. The DMS Market

         DMS software is the “central nervous system” of a dealership. (Compl. ¶ 28.) It is essentially enterprise software designed specifically for dealers, and a DMS manages “virtually every aspect of a dealer's business.” (Id.) Specifically, DMS software handles information regarding sales, financing, part and vehicle inventory, repair and service, accounting, payroll, human resources, marketing, and still more. In addition to some management functionalities, a DMS is a database in which dealers effectively house this critical information and data. A dealer has only one DMS provider at a time; it would be “functionally impossible” for a dealer to try to use more than one. A DMS provider licenses its software to a dealer through a written contract generally lasting between five to seven years. The Complaint defines the DMS market as providers that sell DMS software to dealers in the United States. (Id. ¶ 32.)

         CDK and Reynolds “dominate” the DMS market. (Id. ¶ 33.) Viewed by dealer-customers, they together control approximately 75 percent of the market. CDK has approximately 45 percent of it, and Reynolds has approximately 30 percent. Viewed by the number of vehicles sold, their collective control increases to approximately 90 percent.

         As alleged duopolists, CDK and Reynolds enjoy a profitable business. They each, for example, earn approximately 40 percent profit margin. Their customers, the dealers, are also unable to freely switch between DMS providers. In addition to the contract lengths, “it is enormously difficult and disruptive for a dealer to switch DMS” given the costs of transferring data, retraining employees, and reconfiguring systems. (Id. ¶ 40.) Adding to those “logistical nightmares, ” the Complaint claims that CDK and Reynolds “punish” dealers that try to change DMS providers through lawsuits and by restricting third-party access to the dealers' DMS-stored data. In part for those reasons, the average DMS-dealer relationship lasts more than 20 years. (Id. ¶ 44.)

         B. The Data-Integration Market

         Critical as it is, a dealer's DMS is not the only data service upon which it relies. Many dealers use third-party application providers-or vendors-for service and management applications. These applications help a dealership, for example, track vehicle inventory, customer information, service and repair appointments, and recalls. Most dealerships have ten or more vendors.

         To make their applications, vendors require access to dealerships' data-which is stored on DMSs. A vendor that provides an application organizing vehicle registration and titling must be able to obtain purchaser, vehicle, and financing information from a dealer's DMS. Some vendors, further, must be able to input data into a DMS. For example, an application that handles customer information must be able to “push” sales information into the DMS when a dealership sells a car from the lot. The Complaint does not estimate how many vendors exist, but it asserts that both CDK and Reynolds offer application services. CDK and Reynolds both, for example, offer relationship-management applications, and they jointly operate a provider of electronic-vehicle registration and titling.

         Vendors, however, do not access the DMSs directly. Instead, data integrators-like Authenticom-provide this service to vendors. Data integrators “specialize in extracting dealers' data from DMS databases, aggregating that data and putting it into a standard format, and then delivering to vendors the specific data required for their applications.” (Id. ¶ 54.) To pull the needed data from the DMS, data integrators generally receive authorization from dealerships. In many cases, including Authenticom's, dealers set up separate login credentials for the integrators so that they can access the DMSs. Once in, data integrators “data scrape” or “screen scrape” the DMS, an automatic process that pulls relevant data. Although dealers generally choose whether to authorize integrators' access to the DMSs, they do not directly pay integrators. Vendors, as the customers receiving the integrators' data output, make the payments.

         Dealers “own” their data in the DMSs. The Complaint quotes a Reynolds spokesperson as having stated, “The data belongs to the dealers. We all agree on that.” (Id. ¶ 65.) CDK, likewise, has stated publicly that it “has always understood that dealerships own their data and enjoy having choices on how best to share and utilize the data with others.” (Id. ¶ 66.) Both CDK's and Reynolds's websites make similar claims. Similarly, the Complaint cites a number of statements by CDK representatives (though not Reynolds representatives) making clear that dealers can permit third-party access to their DMS-stored data, at least before 2015. To take just one example, Matt Parsons, CDK's vice president of sales, stated in 2007, “We're not going to limit the ability of a dealer to give an ID to someone else to, in essence, dial into their system. That is the dealer's right. We have no right to tell them they can't do that.” (Id. ¶ 70.)

         The Complaint defines the data-integration market as comprised of providers of integration services in the United States. According to the Complaint, there used to be “numerous” data integrators. Today, only CDK, Reynolds, and Authenticom remain.

         Steve Cottrell founded Authenticom in 2002. Authenticom's feature product is DealerVault, which gives dealerships “state-of-the-art control over how their data is pulled and shared.” (Id. ¶ 78.) In addition to pulling data from DMSs, Authenticom has begun, in limited fashion, “pushing” data as well, which benefits vendors and dealers in that it expands the services provided. Before accessing a dealer's DMS, Authenticom secures the dealer's-though not the DMS provider's-express authorization. The Complaint also highlights that Authenticom has never incurred a data breach and that its tools and practices are secure. As to pricing, Authenticom generally charges approximately $25 for a first data set, and $50 for two or more. The average price Authenticom charges a vendor is between $30 and 40 per month for one dealership.

         CDK and Reynolds also offer integration services. CDK, for its part, owns the two largest data integrators in the market-Digital Motorworks and IntegraLink. It also offers a product that permits direct access to CDK DMSs, called the 3PA program. Digital Motorworks and IntegraLink function like Authenticom; they obtain login credentials for a DMS from the dealer, then extract and format the data. Indeed, Digital Motorworks and IntegraLink formerly pulled data from Reynolds DMS for vendors. Reynolds did not begin to block CDK “and others” from doing so until 2009. (See Id. ¶ 91.) After Reynolds began to block Digital Motorworks and IntegraLink-that is, prevent them from accessing Reynolds DMSs-CDK devised the “SMART-R” solution, which permitted its integrators to continue to access Reynolds DMSs. As a result, CDK (through Digital Motorworks and IntegraLink) continued to access Reynolds DMSs on behalf of its vendor clients, again at least until 2015.

         Unlike Digital Motorworks and IntegraLink, 3PA, also known as “Third Party Access, ” allows access to CDK DMSs only. CDK's 3PA formerly offered three “levels”: one supplied vendors with login credentials for the dealership's system, another allowed third parties “subscriber access” that the dealer controlled, and a third permitted real-time access to CDK DMSs. That, too, changed after the alleged anticompetitive agreements of 2015, when CDK revised 3PA to prohibit dealer control over third-party access to CDK DMSs. CDK represented that the change was the result of its “SecurityFirst” initiative, which ended up increasing charges to vendors to approximately $250 to $300 per connection-almost triple what it charged before the 2015 revision, and far more than the $25 to $50 per connection that Authenticom charges. Today, CDK has taken the position that 3PA is the “only approved method for accessing” CDK DMSs. (Id. ¶ 101.) CDK considers all other access “unauthorized, ” and it forbids vendors from obtaining data on a CDK DMS from any integrator other than 3PA.

         Reynolds does not offer integration services to access other providers' DMS software, but it does offer the Reynolds Certified Interface Program (“RCI”). RCI is an “equivalent” to CDK's 3PA, and it is the only Reynolds-authorized method by which vendors can access Reynolds DMSs. (Id. ¶¶ 102-103.) Like with CDK and 3PA, Reynolds contractually restricts both dealers and vendors from using integrators other than RCI to access Reynolds DMSs. Reynolds's RCI pricing is not publicly available, but the Complaint represents that it is “even steeper” than CDK's 3PA pricing. (Id. ¶ 104.)

         The Complaint describes other integrators that, though once successful, have been forced out of business as a result of Reynolds's prohibition and CDK's more-recent prohibition on third-party access to their respective DMSs. Those prohibitions, while having the purported effect of excluding data integrators from the data-integration market generally, also allow CDK and Reynolds (through 3PA and RCI, respectively) to dominate their single-brand aftermarkets.

         The Complaint alleges that such aftermarkets are cognizable in this case, because when dealers purchase a DMS, they are “locked in” to that purchase through high switching and information costs. (Id. ¶ 112.) A vendor who wants to work with both CDK and Reynolds dealers must purchase both 3PA and RCI services. In turn, Defendants can, and do, charge supracompetitive pricing for their respective integration services.

         C. CDK and Reynolds Pre-2015 Treatment of Data Integrators and Third-Party Access

          Initially, and for over a decade, all DMS providers-CDK and Reynolds included- permitted dealers the right to authorize third-party access to the DMSs. That industry-wide agreement began to erode in 2007, when Reynolds announced that it would start blocking data integrators from Reynolds DMSs. Since then, Reynolds has considered third-party, unauthorized scraping of its DMSs as “hostile access.” As a result of this policy change, Reynolds began disabling Authenticom's credentials in 2009 by imposing “challenge questions” and “captcha” (entry requests to enter random or blurred text), which identify non-human users. In 2013, Reynolds began disabling Authenticom's credentials en masse.

         CDK, on the other hand, countenanced third-party access for far longer. Indeed, CDK touted its open architecture. Its CEO, for example, publicly stated, “We're not going to prohibit” integrators' access “or get in the way of that. . . I think we've stated pretty emphatically, we really believe the dealer owns the data. I don't know how you can ever make the opinion that the data is yours to govern and to preclude others from having access to it.” (Id. ¶ 6.) In 2015, however, CDK came to echo Reynolds's disapproval of third-party access.

         II. CDK and Reynolds's Alleged Conspiracies

         The Complaint alleges that in February 2015, CDK and Reynolds “entered into an agreement to eliminate competition in the Dealer Data-integration market and the single-brand after markets.” (Id. ¶ 117.) Essentially, these agreements took two forms-written agreements, signed in early 2015, and a general understanding. The alleged purpose of Defendants' agreements was twofold: first, to protect vendors from siphoning any part of their DMS market duopoly by offering services that could compete with DMS software, and second, to protect CDK and Reynold's data-integration businesses and aftermarket single-brand monopolies.

         A. The February 2015 Agreements

         Effective February 18, 2015, CDK and Reynolds entered into a Data Exchange Agreement (the “DEA”).[2] The DEA purportedly served as a wind-down arrangement, in which CDK agreed to eventually restrict (during a term that could last up to five years) its integrators- Digital Motorworks and IntegraLink-from accessing Reynolds DMSs. (See R. 54, Ex. 1 § 4.0.)

         As a part of that wind-down arrangement, CDK agreed to “cooperate” in efforts to have Digital Motorworks's and IntegraLink's vendor-clients join RCI. (Id. § 4.1.) The wind-down arrangement also featured Section 4.5, titled a “Prohibition on Knowledge Transfer and DMS Access, ” which stated:

Each of Reynolds and CDK further covenants and agrees not to sell, transfer, or assign to any affiliate or third party any technology, business process, or other such knowledge regarding integration with the other party's DMS or take any other step to assist any person that it reasonably believes to have plans to access or integrate with the other party's DMS without the other party's written consent. For the avoidance of doubt, this Section 4.5 is not intended as a “covenant not to compete, ” but rather as a contractual restriction of access and attempted access intended to protect the operational data security integrity of Reynolds DMS and CDK DMS and protection of intellectual property.

(Id. § 4.5.) According to Authenticom, this arrangement constituted an agreement to divide the market: Reynolds would not access, or aid the access of, CDK DMSs without CDK's permission, [3] and CDK would not access, or aid the access of, Reynolds DMSs without Reynolds's permission. Section 4.5's terms do not expire. (Id; id. § 6.1.)

         The parties also entered into two, contemporaneously executed, reciprocal agreements.

         In the “3PA Agreement, ” Reynolds's vendor applications received five years' of free data integration using 3PA to access CDK DMSs. (See 54, Ex. 2; R. 54 at 8; 56 at 11.) In the “Reynolds Interface Agreement” (collectively, with the DEA and 3PA Agreement, the “2015 Agreements”), CDK agreed to enlist seven of its vendor applications in the RCI program to access Reynolds DMSs. (See 54, Ex. 3; R. 54 at 8; R. 56 at 11.) By way of both agreements, Defendants, in their capacity as application providers (though only for seven of CDK's applications[4]), agreed not to use other integrators when extracting data from the other's DMSs. Specifically, Reynolds agreed that it would not “otherwise access, retrieve, license, or otherwise transfer any data from or to a CDK System (including, without limitation, pursuant to any ‘hostile interface') for itself or any other entity, ” nor contract with a third-party to access CDK DMSs. (R. 54, Ex. 2 § 1(e).) CDK likewise agreed to a provision titled “Non-Approved Access, ” which prohibited it from obtaining “[a]ny direct or indirect access of the Reynolds System for the benefit” of the applications “by CDK or an agent acting on behalf of CDK other than with Reynolds' prior written consent.” (R. 54, Ex. 3 § 1.8.)

         B. The General Agreement to Oust Authenticom

         In addition to a market-division agreement, the Complaint alleges that Defendants reached a broader agreement to expel Authenticom and other third parties from the data-integration market. Defendants have allegedly conveyed this agreement to Authenticom. On April 3, 2016, Dan McCray, CDK's Vice President of Product Management, approached Mr. Cottrell at an industry convention. Mr. McCray led Mr. Cottrell off the convention floor and to a secluded area. There, he told Mr. Cottrell that CDK and Reynolds had agreed to “lock you and the other third parties out.” (Compl. ¶ 180.) Regarding an offer CDK had made to acquire Authenticom's business for approximately $15 million, Mr. McCray asserted that the offer was relatively low because Authenticom's “book of Reynolds business is worthless to us because of the agreement between CDK and Reynolds.” (Id.) Mr. McCray then threatened: “I wanted to look you in the eye and let you know man to man, I have been mandated by our new CEO to seek you out and destroy your business on our systems.” (Id.) Regarding CDK-dealer contracts prohibiting third-party access, Mr. McCray stated further, “we will enforce our contract with the dealers and sue them if needed to keep you out of our systems.” He concluded, “For god's sake . . . you have built a great little business, get something for it before it is destroyed otherwise I will f***ing destroy it.” (Id.) Steve French, CDK's Senior Director of Client and Data Services and former Reynolds employee, delivered a similar (albeit more tempered) explanation of the supposed CDK-Reynolds agreement to a vendor. In attempting to move a vendor over to the 3PA program, Mr. French stated that he was working with Reynolds to lock out third-party integrators like Authenticom. (Id. ¶ 183.)

         Reynolds's executives have delivered the same message to Authenticom. In May 2015, Robert Schaefer, Reynolds's Director of Data Services and the person in charge of the RCI program, told Mr. Cottrell during a phone conversation that CDK and Reynolds had an agreement to support each other's 3PA and RCI programs, and therefore block integration competitors like Authenticom. Mr. Schaefer shared with Mr. Cottrell that Bob Brockman, Reynolds's Owner, Chairman, and CEO, was “adamant” about blocking independent data integrators. (Id. ¶ 181.)

         The Complaint cites examples of Defendants carrying out these shared threats. Reynolds unsuccessfully proposed a wind-down agreement with Authenticom, and CDK began blocking Authenticom from their DMSs. In August 2016, for example, CDK disabled Authenticom's credentials at thousands of dealerships. After doing so, CDK sent a letter to all dealers whose vendors use Authenticom. The message said that the dealers must join the 3PA program to avoid business “disruption.” (Id. ¶ 201.) Reynolds has delivered similar messages. (Id. ¶ 202.)

         III. CDK and Reynolds's ...


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