Seventh Circuit Rejects Preliminary Injunction As Overbroad In Auto Dealership Management Software Case Alleging Agreement To Restrain Trade
11/21/2017On November 6, 2017, the Seventh Circuit Court of Appeals vacated a preliminary injunction in an action alleging an agreement in restraint of trade under Section 1 of the Sherman Act against defendants CDK Global, LLC and Reynolds & Reynolds Co. Authenticom, Inc. v. CDK Global LLC, No. 17‐cv‐318‐jdp (7th Cir. Nov. 6, 2017). In an opinion by Chief Judge Diane Wood, the Court held that the preliminary injunction exceeded the proper scope of a preliminary injunction to preserve the status quo and improperly imposed on the defendants a duty to deal with the plaintiff.
Defendants CDK Global, LLC (“CDK”) and Reynolds & Reynolds Co. (“Reynolds”) each design and sell computerized dealer-management systems for automotive dealerships that help dealers track accounting, payroll, sales, and other business matters. Historically, CDK had used an “open architecture” system that allowed third-parties to access dealer-originated data on these systems. Reynolds, on the other hand, had used a closed architecture system that barred third-party data-collection in its software license agreements with dealers. That changed in 2015, when CDK decided to switch to a closed architecture system and bar third-parties from accessing data from its systems. Plaintiff Authenticom is one of several companies that “scrapes”—or collects—this dealer-originated data from the defendants’ management systems and sells the data to application manufacturers or integrates the data into its own applications. CDK’s open architecture facilitated this kind of scraping, although Authenticom also sometimes collected data from Reynolds’s closed architecture system as well, by using individual dealers’ access credentials (in violation of those dealers’ user agreements with Reynolds). CDK also operated two subsidiaries, Digital Motorworks and IntegraLink, that competed with Authenticom and also scraped data from dealerships’ closed Reynolds systems.
Having switched to a closed architecture, CDK sought to wean its subsidiaries off the practice of scraping data from Reynolds’ closed systems. Accordingly, CDK and Reynolds entered into a series of agreements, which collectively provided that (1) CDK would wind down the subsidiaries over the course of five years; (2) during the wind-down period, CDK’s subsidiaries would not scrape data from dealers using the Reynolds system without Reynolds’ permission; (3) the two companies would allow each other’s proprietary integration software to have access to their respective systems; and (4) the companies would not use any unauthorized or unsecured methods to access each other’s systems.
The combination of CDK’s decision to shift to a closed architecture system and these agreements left Authenticom without the ability to scrape data from the two largest dealership data management systems, and its business suffered severely as a result. In 2017, Authenticom filed suit against CDK and Reynolds, alleging that the agreements were unlawful agreements to restrain trade in violation of Section 1 of the Sherman Act because they were agreements not to compete in the data integration market and were intended to drive independent providers, such as Authenticom, out of the market. Early in the litigation, the District Court issued a preliminary injunction that, among other things: (1) prevented the defendants from blocking Authenticom from using log-on credentials provided to it by its dealer customers or otherwise blocking it from having access to dealers; and (2) required the defendants to provide Authenticom-specific log-on credentials to any dealership wishing to use Authenticom’s services. The defendants filed an interlocutory appeal in the Seventh Circuit, challenging the injunction.
The Seventh Circuit assumed (without deciding) that Authenticom would be able to establish the first three requirements necessary for a preliminary injunction: (1) that Authenticom would be irreparably harmed without one, (2) that it had no adequate remedy at law, and (3) that there was some likelihood that Authenticom would be successful on the merits. The Court thus focused on the final requirement for preliminary relief: whether the harm Authenticom would suffer by denying the injunction would outweigh the harm that the Defendants would suffer from granting the injunction. While the Court noted that both Authenticom and the defendants alleged that they would suffer significant harms if the balance were not weighed in their favor, it held that an analysis of the balance of the harms was not necessary to resolve the dispute. Instead, the Court held that the proper preliminary injunctive remedy for a Sherman Act Section 1 violation would be to set aside the offending agreement and return the parties to the status quo before the agreement. The District Court’s injunction, however, went further than that, and imposed upon the defendants an obligation to do business with Authenticom on terms that they did not desire. This order, the Seventh Circuit held, effectively imposed a duty to deal that was inconsistent with the Supreme Court’s decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), and could not stand.
The Court acknowledged the District Court’s concern that Authenticom would go out of business before having the opportunity to litigate its potentially meritorious antitrust case. Nonetheless, it held that risk did not justify issuing a preliminary injunction that was not sufficiently tethered to the alleged illegal conduct—here an allegedly anticompetitive agreement—and went beyond what was necessary to restore the market to what it would have been in the absence of the allegedly anticompetitive agreement.