August 5, 2020 — A recent judicial ruling may be the most promising sign yet that third-party technology vendors will soon be free of alleged expensive and restrictive data access policies enacted by CDK Global and Reynolds and Reynolds.
On July 24, a judge in Arizona’s District Court ruled against a motion filed by Reynolds and Reynolds and CDK Global asking for a preliminary injunction to stop enforcement of recent legislation governing access to data residing in dealership technology systems.
The ruling is the latest in a battle that six years erupted into a war now being fought on three fronts between auto retail vendors and the two leaders in the dealer management system (DMS) space — Reynolds and Reynolds and CDK Global. Combined, the two tech firms control an estimated 75% of the overall DMS market.
The three fronts include a three-year Federal Trade Commission investigation into potential anti-trade violations; multiple ongoing lawsuits currently consolidated into a multi-district litigation (MDL) suit in federal court in Illinois’ Northern District; and legislative efforts in multiple states to restrict certain DMS practices considered by many to be unique to CDK and Reynolds.
Having to fight this battle on only one of these fronts is a challenge. But having to deal with the inevitable and constant distractions from multiple fronts from the legal teams along with the legal fees exceeding millions of dollars (there have been approximately 2,000 court filings related to the various lawsuits filed against both firms since 2017), and questions from investors, customers, and pesky media types — it adds up.
Nevertheless, except for the few lawsuits that have been settled (more on those below), Reynolds and CDK have given no indication they are backing down from the fight.
About 15 years ago, Reynolds and Reynolds — prior to its acquisition by Universal Computer Systems — citing security concerns began limiting third-party access to the management systems it provides dealers. It also began charging third-party vendors for access to dealership data housed in those systems.
Over the years, vendors complained the fees had increased to the point of being gratuitous. Meanwhile, claiming security issues, Reynolds is alleged to have also begun denying access to certain vendors — many of whom had competitive solutions.
In 2015, CDK Global adopted similar practices raising the fees it charges vendors for access while making it harder for certain vendors to gain access.
Dealers also began complaining as they claim many of the higher fees were being passed through to them. The argument being, the higher access fees resulted in dealers ultimately being charged for access for their own data.
According to testimony from one of the plaintiff’s expert witnesses in one of the dealership lawsuits, combined, CDK and Reynolds overcharged vendors by more than $360 million over a six-year period from 2013 to 2019.
In numerous conversations over the years, executives from both companies have consistently cited their investing millions of dollars to develop and build systems that go above and beyond protecting the data on those systems as the reason for the access charges.
Federal Trade Commission Investigation
Trying to combat the growing problem, several vendors and dealers in 2016 began meeting quietly with the Federal Trade Commission to convince the agency to begin an investigation into alleged anti-competitive activity by the two large tech firms.
(The Banks Report wrote in October 2015 about the possibility of the FTC getting involved in the issue Data Access Battle Goes Nuclear).
The meetings were successful. The agency started an investigation and executed a Civil Investigative Demand soliciting documents from both companies in 2017 and began interviewing customers and employees last year about potential antitrust violations stemming from multiple agreements between the two firms in 2015. According to CDK’s SEC filings, the company has also received similar requests for information from some state attorneys general (We assume Reynolds also received similar notifications from the same states).
The investigation also may have impacted the FTC’s decision to stop CDK’s acquisition of competing DMS firm Auto/Mate that was announced in 2017.
The three-year investigation may be nearing an end. Recent chatter on the street indicates the FTC likely will move forward soon with a lawsuit against both companies. There was speculation the FTC was going to submit a complaint in June, but no announcement has been made as of yet.
Normally, the process calls for the FTC to attempt to seek a consent order/agreement with alleged violators. Consent agreements can take many forms including admission or no admission of guilt; fines or no fines; increased government oversight; and/or cease and desist orders.
If a consent agreement cannot be reached, the FTC submits an administrative complaint. A complaint begins a formal proceeding before an administrative law judge. The process acts much like a federal trial with witnesses and evidence.
Decisions can be appealed to the U.S. Court of Appeals, and ultimately, the U.S. Supreme Court.
Regarding CDK and Reynolds specifically, below are how the different scenarios could unfold over the next few months:
- The FTC can decide not to move forward with any action.
- The FTC decides to move forward and attempts to enter into a consent agreement with both companies.
- Either one – or both firms sign the consent order.
- Either one – or both firms refuse to sign a consent order.
- The FTC then moves forward with a lawsuit against whichever firm does not agree to a consent order.
During the same time dealers and vendors were meeting with the FTC to discuss potential investigations, other vendors were planning lawsuits.
From February 2017 to February 2019 as many as seven vendors and 25 dealerships filed lawsuits against either one or both Reynolds and Reynolds and CDK.
Several of the lawsuits were consolidated into what is called multi-district litigation (MDL) in federal court in Illinois’ Northern District. Combining several related federal lawsuits into a single case (MDL) streamlines and speeds up the deposition and pre-trial activity. (The MDL case in Illinois Northern District Court is case number: 1:18-cv-00864).
The MDL is nearing its end as final arguments are currently scheduled for the end of August. CDK and Reynolds are seeking summary judgments that would result in the dismissal of the various lawsuits.
If the suits are not settled or dismissed, they will be sent back to the original states in which they were filed to proceed to trial. It is likely the trials will not begin until sometime in the second quarter of 2021.
Below are the various lawsuits and where they are in the process:
Reynolds and Reynolds:
- MVSC – MDL
- Authenticom – MDL
- Dealers – Settled
- Superior Integrated Systems (Darwin) – Arbitration
- i3 Brands – Arbitration
- MVSC – Settled
- Authenticom – MDL
- CRMSuite – Settled prior to MDL
- Cox Automotive – Settled
- AutoLoop – MDL
- i3 Brands – Settled
- Dealers – MDL
- Motor Vehicle Service Corporation (MVSC), which provides electronic vehicle registration and titling services to dealers, was the first to move, filing a lawsuit in February against CDK, Reynolds and Reynolds and Computerized Vehicle Registration (CVR – a joint venture between the two DMS vendors).
- MVSC settled its lawsuit with CDK in October 2019.
- Its lawsuit against Reynolds is currently part of the MDL.
- Data integrator Authenticom also filed a lawsuit against Reynolds and CDK in July 2017.
- Its lawsuit is currently part of the MDL.
- Reynolds and CDK both filed counterclaims against Authenticom in 2017. The cases are included in the MDL.
- Superior Integrated Systems (SIS/Darwin) filed a lawsuit against Reynolds and Reynolds in August 2017.
- The case was later moved to arbitration in 2018 and is not part of the MDL.
- CRMSuite filed a lawsuit against CDK in August 2017.
- The lawsuit was settled in November 2017 and never was part of the MDL.
- Cox Automotive filed a lawsuit against CDK in December 2017. (Reynolds was not included in the lawsuit, but was listed as a co-conspirator). Cox and CDK later settled the lawsuit in June 2019. According to SEC filings, CDK’s total legal expenses in the fiscal year 2019 totaled $90 million — a substantial portion of which resulted from the settlement with Cox. CDK has set aside $57 million as of June 2020 for potential settlements of the remaining cases.
- As a result of the settlement with Cox, it is not part of the MDL.
- AutoLoop filed a lawsuit in April 2018 against CDK. It later filed an amended lawsuit in June 2018 for the purposes of creating a putative class action representing all vendors that purchased data or integration services from either CDK or Reynolds and Reynolds.
- The case is part of the MDL.
- i3 Brands (PartProtection LLC) filed a lawsuit against Reynolds and Reynolds and CDK in February 2019.
- The judge kicked i3 Brands’ lawsuit against Reynolds to arbitration in February 2020. It remains in arbitration. Its status in the MDL will be determined by the arbitration outcome.
- i3 Brands and CDK settled in March 2020 and therefore, the CDK portion of the suit not part of the MDL.
- Approximately 25 dealers filed lawsuits in the fall of 2017 and into 2018 against both DMS firms, with the idea of gaining enough traction to put together a putative class-action suit.
- Reynolds and Reynolds settled with the dealers for $29.5 million.
- The dealer lawsuit against CDK is ongoing and is part of the MDL.
In its 10-K annual filing August 6, CDK said there has been an absence of productive settlement discussions with Authenticom, AutoLoop, or the dealers.
In 2018, a third front in the battle for data access opened at the state level when dealership state associations began pushing for legislation restricting DMS vendors from charging for access to the data, while also giving dealers more control over which vendors have access to their data.
Hawaii was the first state to pass stricter legislation in 2018.
Last year, Arizona’s state legislature unanimously voted to enact its Dealer Data Security Law which gives dealerships greater control over the data in their dealer management systems (DMS). North Carolina, Montana, and Oregon also passed similar laws in 2019.
Arizona, though, is considered to have adopted the most restrictive legislation governing access. Key provisions in the law stipulate:
- Vendors (DMS vendors) cannot charge for access to customer or other data housed in the dealer’s DMS. This provision is directed at CDK and Reynolds and Reynolds, about whom third-party vendors have complained for years about the gratuitous fees they charge for access to data housed on the systems they provide dealers.
- Third-party vendors need a dealer’s written permission prior to accessing data on their systems. This part of the law also is directed at CDK and Reynolds and Reynolds by giving dealers the control over which vendors can access their data.
- A third provision allows dealers to terminate vendor contracts following a 90-day notice.
In April 2019 Arizona Governor Doug Ducey signed the bill into law which was slated to begin a few months later in August.
CDK and Reynolds, though, filed a lawsuit at the end of July 2019 against Arizona’s attorney general and the state transportation director hoping to overturn the law.
They also filed a motion asking for a preliminary injunction to keep the legislation from going into effect while the lawsuit works its way through the court.
The court dismissed seven of the lawsuit’s 10 claims in May and in June, the two firms filed a revised suit. On July 24th, the judge denied their request on all three counts for the injunction, effectively allowing the law to go into effect immediately.
Even though the ruling involved only the injunction request and doesn’t impact the lawsuit, both the Arizona Automobile Dealers Association and the National Automobile Dealers Association (whose legal fund contributed $500,000 to effort) claimed it was a big victory.
They aren’t wrong. In his decision, Judge G. Murray Snow wrote that the two firms had not proven a likelihood of their case’s success.
Reynolds and CDK have filed a motion to appeal the injunction decision (and stop the legislation from being enforced) with the United States Court of Appeals for the Ninth Circuit in California.
As of publication, the court has yet to issue a decision on the appeal.
Legally and legislatively, it appears the era of charging third-party vendors for DMS access to be nearing an end.
But the industry may not know for another year or so how these battles will play out. There are still too many issues working their way through the courts to predict the final results.
The two most immediate questions are whether the justices in the MDL case issue summary judgments in the next couple of months and what actions the FTC may take.
It is likely state legislatures will continue enacting laws that will not be friendly to Reynolds and CDK.
As access to the data becomes less expensive and more open, it is likely automotive retail will become more attractive for outsiders to bring innovations to the space. However, in some ways, this could become a case for dealers of “be careful what you wish for.” While many industry players decry the policies of the two leading DMS vendors, there is a sense in which they have protected the industry from outside companies that may have sought to displace the dealer model.
Third-party vendors say they will spend less money and creative energy trying to gain access to the data and instead will direct those resources toward innovation and serving their dealer customers.
Separate from all of the legal challenges, the landscape the next decade will change drastically due to the emergence of the connected vehicle.
The DMS will take a back seat role as the center of the data universe in automotive retail will switch from the DMS to the connected vehicle.
OEMs will have control of the vehicle data and will be able to marry that data to the customer/owner data (which they will have via OEM phone apps).
DMS vendors with strong OEM relationships and viable platform strategies will be in the strongest position to have a vital role in the evolving OEM-dealer relationship.