The US Court of Appeals for the Ninth Circuit affirmed a district court’s conclusion that there is no conflict between an Arizona statute aimed at strengthening privacy protections for consumers whose data is collected by car dealers and the Copyright Act provision that grants the owner of a copyrighted work the exclusive right “to reproduce the copyrighted work in copies.” CDK Global LLC v. Mark Brnovich, et al., Case No. 20-16469 (9th Cir. Oct. 25, 2021) (Miller, J.)

Car dealers use specialized dealer management software (DMS), which at its core is a database containing information about a dealer’s customers, vehicles, accounting, parts and services. Some of the data includes personal information, such as social security numbers and credit histories. The data is used for a variety of tasks, from financing to inventory management. Dealers also rely on separate software applications for various aspects of their business, such as marketing and customer relations. For those applications to properly function, they must access the data stored in a dealer’s DMS.

CDK is a technology company that licenses DMS to dealers. In the past, CDK allowed dealers to share access to the DMS with third-party companies that would integrate data from the DMS with other software applications. Recently, however, CDK began to prohibit the practice and instead offered its own data integration services to dealers.

In 2019, the Arizona legislature enacted a statute, known as the Dealer Law, to ensure that dealers retain control over their data. There are two provisions of the Dealer Law central to this case. First, the statute prohibits DMS providers from taking any actions (contractual, technical or otherwise) to prohibit a dealer’s ability to protect, store, copy, share or use the data stored in its DMS. Second, the statute requires DMS providers to adopt and make available a standardized framework for the exchange, integration and sharing of data.

CDK sued the attorney general of Arizona for declaratory and injunctive relief, asserting a range of claims. In one of its claims, CDK argued that the Dealer Law is preempted by the Copyright Act, 17 U.S.C. § 101 et seq. CDK asserted that the Dealer Law conflicts with the Copyright Act because the Dealer Law grants dealers and their authorized integrators the right to access CDK’s systems and create unlicensed copies of its DMS, its application programming interfaces (APIs) and its data compilations. CDK argued that in all three respects, the statute conflicts with 17 U.S.C. § 106(1), which grants the owner of a copyrighted work the exclusive right “to reproduce the copyrighted work in copies.” The district court dismissed most of the claims but allowed the copyright preemption claims and a few others to proceed. Following a hearing, the district court denied a preliminary injunction. CDK appealed.

On appeal, the Ninth Circuit found that CDK presented no evidence that the Dealer Law would require the embodiments of CDK’s DMS to persist for a period of more than transitory duration. The Court explained that the reproduction right set forth in the Copyright Act extends only to the creation of “copies,” which are defined as “material objects . . . in which a work is fixed . . . and from which the work can be perceived, reproduced, or otherwise communicated.” Citing Second Circuit precedent, the Ninth Circuit noted that there are two distinct requirements: embodiment and duration. A work is fixed in a tangible medium of expression when its embodiment is sufficiently permanent or stable to permit it to be perceived, reproduced or otherwise communicated for a period of more than transitory duration. The Court also noted that loading software into a computer memory satisfies the embodiment requirement, but embodiment does not result in the creation of a copy unless it also persists for a period more than transitory duration.

The Ninth Circuit also rejected CDK’s argument that the Dealer Law would force CDK to allow third parties to copy its APIs, which could violate its rights under the Copyright Act. The Court explained that the Dealer Law does not require a provider to use an API, and there are many other methods a provider may use.

Lastly, the Ninth Circuit found no support for CDK’s argument that the Dealer Law would give dealers and integrators the right to copy and distribute its data compilations. The Court pointed out that the statute bars DMS providers from limiting access to protected dealer data—nowhere does it require or permit the copying of any copyrighted data compilations. The Court noted that DMS providers do not hold a copyright in the data itself, so making copies of the raw data does not infringe a DMS provider’s copyright.