In re Dealer Management Systems Antitrust Litigation, Case No. 18-cv-864

• Decision Date: 25 January 2019
• Docket Number: Case No. 18-cv-864
• Parties: IN RE DEALER MANAGEMENT SYSTEMS ANTITRUST LITIGATION, MDL 2817 This Document Relates to: the Dealership Class Action
• Court: U.S. District Court — Northern District of Illinois

362 F.Supp.3d 510

IN RE DEALER MANAGEMENT SYSTEMS ANTITRUST LITIGATION, MDL 2817

This Document Relates to: the Dealership Class Action

Case No. 18-cv-864

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

Signed January 25, 2019

MEMORANDUM OPINION AND ORDER

Robert M. Dow, Jr., United States District Judge

Before the Court are Defendant CDK Global, LLC's motion to compel arbitration and stay claims, or, in the alternative, to dismiss the dealership consolidated class action complaint [262], and Plaintiffs' unopposed motions for leave to submit supplemental authority [366; 420]. Plaintiffs' unopposed motions for leave to submit supplemental authority [366; 420] are granted. The Court considers those submissions as well as Defendant's responses (in its reply and in its own supplemental brief) in ruling on the pending motion to dismiss. For the reasons set forth below, Defendant's motion to dismiss in favor of arbitration is denied, and its alternative motion to dismiss is granted in part and denied in part.

I. Background¹

Defendants CDK Global, LLC ("CDK") and Reynolds and Reynolds Company ("Reynolds") provide Dealer Management System ("DMS") software and services to automobile dealerships throughout the United States, including in Illinois. [198 (Compl.), at ¶¶ 51-52.] In addition to providing DMS services, CDK and Reynolds also provide data integration services ("DIS") indirectly to dealerships throughout the United States, including in Illinois. [Id. ] Plaintiffs are automobile dealerships across the country who are purchasing and/or who have purchased DMS services from CDK or Reynolds. [Id. at ¶¶ 26-50.] Plaintiffs purport to bring this class action against Defendants CDK and Reynolds for alleged violations of the Sherman Act and state antitrust and consumer protection laws. [Id. at 5.] Plaintiffs allege that Defendants unlawfully colluded and conspired to restrain and/or eliminate competition by charging supracompetitive prices in the markets for: (1) DMS software services; and (2) DIS. [Id. at ¶ 1.]

A. The DMS Market

The DMS, sometimes described as the "central nervous system" for dealerships, is an enterprise software system designed specifically for automobile dealerships. [Id. at ¶ 3.] The DMS functions as the dealerships' central database and repository of all its operational information, including information regarding sales, financing, inventory management (both vehicles and parts), repair and service, accounting, payroll, human resources, marketing, and car manufacturer certifications. [Id. at ¶¶ 3, 61.] The physical storage of the data is either onsite at the dealerships, at private data centers operated by the DMS provider, or with cloud-based data storage companies. [Id. at ¶ 61.] The DMS includes a database and data storage component that allows dealerships to enter and store data in real time. [Id. at ¶ 3.]

Switching DMS providers is difficult, expensive, and disruptive to a dealership's business. [Id. at ¶ 4.] Changing DMS providers requires entirely new hardware and software. [Id. ] It can cost as much as $ 50,000 up front to change DMS providers. [Id. ] It typically takes dealerships a year or more to prepare for changing DMS providers. [Id. ] In November 2016, CDK's CEO acknowledged that "switching DMS providers can be very difficult. It [is] quite a process [to] change and takes time, which is part of the reason that many dealers are hesitant to switch." [Id. at ¶ 66.] Switching DMS providers is not only a costly and lengthy procedure, it is also extremely risky. [Id. at ¶ 67.] Dealers store vital data on their DMSs, and access to their data is crucial to the daily operation of their business. [Id. ] DMS providers control access to dealers' DMSs and can restrict or deny access to the DMSs, severely crippling the dealers' businesses as retribution for changing DMS providers. [Id. ]

CDK and Reynolds are in the business of providing DMS software and services to dealerships like Plaintiffs. [Id. at ¶ 2.] Together they control approximately 75 percent of the United States DMS market measured by the number of franchised automobile dealerships using their systems, with CDK controlling approximately 45 percent of the DMS market and Reynolds controlling approximately 30 percent of the DMS market. [Id. ] The remaining 25 percent is divided among other smaller DMS providers that typically service smaller dealerships in niche submarkets. [Id. at ¶ 2 n.1.] CDK and Reynolds have even higher market shares when measured by revenue, with CDK having approximately $ 2.2 billion in total annual revenue and Reynolds having approximately $ 1.7 billion in total annual revenue. [Id. ]

Both CDK and Reynolds have previously indicated that dealers own the data on their DMSs. For example, Steve Annen (CDK's former CEO) stated, "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, when in fact it's really the data belonging to the dealer. As long as they grant permission, how would you ever go against that wish?" [Id. at ¶ 74.] Howard Gardner (CDK's Vice President of Data Strategy) has stated that CDK "has always understood that dealerships own their data and enjoy having choices on how best to share and utilize that data with others." [Id. ] Matt Parsons (CDK's Vice President of Sales and Marketing) has stated, "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. ] Similarly, Reynolds spokesman Tom Schwartz stated that "[t]he data belongs to the dealers. We all agree on that." [Id. ]

B. The DIS Market

CDK and Reynolds also provide DIS separate from their DMS offerings. [Id. at ¶ 5.] CDK's data integration service is known as Third Party Access ("3PA"), and Reynolds's data integration service is known as Reynolds Certified Interface ("RCI"). [Id. at. ¶ 71.] Although 3PA and RCI only provide DIS for Defendants' respective DMSs, CDK also owns two independent data integrators—Digital Motorworks ("DMI") and IntegraLink—that provide DIS with respect to data stored on others' DMSs (e.g. , Reynolds) as well. [Id. at ¶ 76.] DIS are critical to the proper functioning of dealerships. [Id. at. ¶ 5.] DIS enable dealers and third-party software application providers (also known as vendors) to extract, organize, and integrate the dealers' data on their DMSs into a usable format. [Id. ]

To effectively run their dealerships, dealers engage vendors to provide necessary services such as inventory management, customer relationship management, warranty services, repair orders, and electronic vehicle registration and titling. [Id. ] For example, a dealer might engage a vendor to electronically register new automobiles upon sale. [Id. at ¶ 73.] In providing services to dealers, vendors need to access and utilize DMS data. [Id. ] A single dealership typically uses multiple vendors, with each vendor requiring access to the dealership's data stored on its DMS. [Id. ] Vendors generally engage DIS providers that charge vendors for their services. [Id. at ¶ 5.] Although vendors have the dealers' authorization to access and utilize the data on their DMSs, vendors generally cannot obtain access to the data in a usable format directly from dealers. [Id. at ¶ 75.] To access and utilize dealer data, vendors engage data integrators to extract, format, and organize the data. [Id. ] The data integrators access the data stored on the DMS and convert it into a form suitable for the specific service provided by the vendor. [Id. ]

Historically, the DIS market was active, with numerous DIS providers competing to provide affordable, secure, and reliable access to DMS data for dealerships and vendors. [Id. at ¶ 6.] In 2006, Reynolds began selectively and sporadically blocking data integrators from accessing dealer data on the Reynolds DMS by disabling data integrators' dealer-created login credentials. [Id. at ¶ 77.] CDK differentiated itself and the CDK DMS from Reynolds by publicly touting the openness of its DMS. [Id. ] CDK repeatedly vowed (including in public statements by its CEO and top marketing officers) that it would not block independent data integrators from accessing dealer data on its DMS. [Id. ] CDK marketed its "open" system directly to dealers and issued press releases stressing that it "believes in the fair competitive environment and does not use its leverage through supply of the dealer management system to reduce competition through the restriction of data access." [Id. at ¶ 78.] CDK was successful in marketing its "open" DMS to dealers as a competitive advantage over the Reynolds DMS, and dealers purchased DMS services from CDK based in large part on CDK's public representations about the openness of its DMS. [Id. ] As a result, CDK gained market share from Reynolds. [Id. ] In 2013, Reynolds began vigorously blocking data integrators. [Id. at ¶ 79.] CDK, however, continued to allow open access to its DMSs and to compete with Reynolds. [Id. ]

C. Alleged Agreement

Despite CDK's success in wresting market share away from Reynolds, its biggest competitor in the DMS market, competition between Reynolds and CDK suddenly ceased in 2015. [Id. at ¶ 80.] Plaintiff alleges that this was the result of horizontal agreements between CDK and Reynolds to restrain competition in the DMS and DIS markets. Specifically, CDK and Reynolds agreed to cooperate in closing their respective DMSs. [Id. at ¶ 81.] In February 2015, CDK and Reynolds entered into three written agreements: (1) the Data Exchange Agreement or "Wind Down" Agreement; (2) the 3PA Agreement; and (3) the RCI Agreement. [Id. at ¶ 82.]

The Data Exchange Agreement provides that CDK is to wind down its data integration business on Reynolds's DMS. [Id. at ¶ 83.] In other words, CDK would stop providing services to dealers relating to the third-party integration of data stored on...