Documentation

Public Version 6 File No. CT-2016-COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34 (the “Act”); AND IN THE MATTER OF an application by CarGurus, Inc. for an order pursuant to section 103.1 of the Act granting leave to bring an application under sections 75, 76, and 77 of the Act;

AND IN THE MATTER OF an application by CarGurus, Inc. for an order pursuant to sections 75, 76, and 77 of the Act;

BETWEEN: CARGURUS, INC. Applicant

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TRADER CORPORATION

PROPOSED NOTICE OF APPLICATION UNDER SS. 75, 76 AND 77 OF THE COMPETITION ACT

TAKE NOTICE THAT: 1. The Applicant, CarGurus, Inc. (“CarGurus”), will make an application to the Competition Tribunal (“Tribunal”) pursuant to section 75, 76 and 77 of the Competition Act (the “Act”) for: (a) an Order pursuant to section 75(1) of the Act requiring the Respondent to accept the Applicant as a customer within 15 days of the Tribunal’s order, on the same standard trade terms applicable to other Digital Marketplaces;

Respondent

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(b) an Order pursuant to section 76(2) of the Act prohibiting the Respondent from continuing to engage in the practices that form the basis of this Application; (c) an Order pursuant to section 76(2) of the Act requiring the Respondent to accept the Applicant as a customer within 15 days of the Tribunal’s order, on the same standard trade terms applicable to other Digital Marketplaces; (d) an Order pursuant to section 76(8) of the Act prohibiting the Respondent from continuing to engage in the practices that form the basis of this Application; (e) an Order pursuant to section 76(8) of the Act requiring the Respondent to accept the Applicant as a customer within 15 days of the Tribunal's order, on the same standard trade terms applicable to other Digital Marketplaces; (f) an Order pursuant to section 77(2) of the Act prohibiting the Respondent from continuing to engage in exclusive dealing; (g) an Order pursuant to section 77(2) of the Act requiring the Respondent to accept the Applicant as a customer within 15 days of the Tribunal's order, on the same standard trade terms applicable to other Digital Marketplaces; (h) an Order expediting the hearing of the within Application; (i) an Order for costs, if the within Application is opposed; and (j) such further and other orders as the Applicant may request and the Tribunal deems just.

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AND TAKE NOTICE THAT: 2. The person against whom the orders are sought is the Respondent, Trader Corporation (“Trader”). The Respondent’s address is set out below. 3. The Applicant will rely on the Statement of Grounds and Material Facts attached as Schedule “A” hereto; the Affidavit of Martha Blue, sworn April 14, 2016; and such further and other grounds and material facts as counsel may advise and the Tribunal may permit. 4. A concise statement of the economic theory of the case is contained in Schedule “B” hereto. 5. The Applicant requests that the within Application be heard in the English language. 6. The Applicant requests that the documents for this Application be filed in electronic form. DATED at Toronto this 15th day of April, 2016. _____________________________ WEIRFOULDS LLP Barristers & Solicitors 4100 - 66 Wellington Street West P.O. Box 35, Toronto-Dominion Centre Toronto, ON M5K 1B7

Nikiforos Iatrou Bronwyn Roe

Tel: 416-365-1110 Fax: 416-365-1876

niatrou@weirfoulds.com broe@weirfoulds.com

Lawyers for the Applicant

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TO: The Registrar Competition Tribunal 90 Sparks Street, Suite 600 Ottawa, ON K1P 5B4

Tel: 613-957-7851; Fax: 613-952-1123 filing.depot@ct-tc.gc.ca

AND TO: John Pecman Commissioner of Competition Competition Bureau 50 Victoria Street Gatineau, QC K1A 0C9

Tel: 819-997-4282 Fax: 819-997-0324

AND TO: GOODMANS LLP Bay Adelaide Centre 333 Bay Street, Suite 3400 Toronto, ON M5H 2S7

Peter Ruby Michael Koch Hannah Arthurs

Tel: 416-979-2211 Fax: 416-979-1234

pruby@goodmans.ca mkoch@goodmans.ca harthurs@goodmans.ca

Lawyers for the Respondent

Public Version 10 SCHEDULE “A” – STATEMENT OF GROUNDS AND MATERIAL FACTS PART 1 - THE APPLICATION IN A NUTSHELL 1. CarGurus and Trader compete by offering Digital Marketplaces that allow consumers to search Vehicle Listings from automobile dealers and private sellers for new and used vehicles for sale. Trader is dominant in two relevant markets: (1) the downstream market for Digital Marketplaces in Canada; and (2) the upstream market for the supply of Vehicle Listings to Digital Marketplaces. 2. Trader is engaged in anticompetitive conduct in order to shut CarGurus out of the Digital Marketplaces market: (a) Trader discriminates against CarGurus in respect of Vehicle Listings that Trader administers by refusing to syndicate those listings on usual trade terms made available to other Digital Marketplaces;

(b) Trader refuses to syndicate to CarGurus Vehicle Listings from dealers who request that Trader do so;

(c) Trader instructs third parties not to syndicate to CarGurus by threatening to otherwise cut off its syndication to these third parties; and

(d) Trader improperly asserts copyright and has commenced litigation over thousands of non-copyrightable photographs, in an attempt to litigate CarGurus out of the market for Digital Marketplaces for Vehicle listings.

Alternatively, even if Trader’s copyright assertions are upheld, Trader’s refusal to supply its copyrighted photographs in listings is also violating the Act since:

(e) such a refusal is more than the mere exercise of copyright because of its cumulative effect on Trader’s market power in the provision of Digital Marketplaces.

Collectively, the above conduct is referred to below as “Trader’s Conduct”.

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3. CarGurus is directly and substantially affected by Trader’s Conduct. CarGurus is currently being denied access to at least 42.5% of Vehicle Listings in Canada, representing listings that dealers cannot syndicate to CarGurus without Trader’s permission, which permission Trader is refusing to grant (likely the number is higher). Its revenues are being drastically harmed, which harm will only continue to grow given that network effects are critical in this market. By rendering CarGurus unable to effectively compete, Trader is simultaneously preventing or lessening competition, denying dealers and consumers the innovation and choice that CarGurus offers and ensuring that dealers and consumers use Trader’s higher-cost, less innovative vehicle listing services. 4. Trader’s Conduct violates sections 75, 76 and 77 of the Act. CarGurus respectfully seeks an order granting access to those listings that Trader effectively controls and that are necessary for competition. PART 2 - FACTS A The Parties 5. CarGurus owns and operates websites that enable potential purchasers of automobiles to research and compare listings for used and new automobiles within a geographic area, and to contact sellers. In the context of this application, such websites are referred to as “Digital Marketplaces”. 6. CarGurus announced the launch of its Canadian website, http://www.ca.cargurus.com (the “CarGurus Website”) on May 26, 2015. CarGurus’ U.S. website, http://www.cargurus.com (the “CarGurus U.S. Website”), launched in 2007. CarGurus’ business is further described below.

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7. Trader operates websites in Canada—autotrader.ca (English-language) and autohebdo.com (French-language) (collectively, the “Trader Website”)—that are Digital Marketplaces which directly compete with the CarGurus Website. Trader is the dominant Digital Marketplace in Canada. Trader’s business is further described below. B Digital Marketing of Automobiles for Sale in Canada 8. Over the last few decades, the consumer purchase path in the automotive industry has transformed. Today, the path increasingly begins online, and while most consumers do not buy vehicles online, they often conduct research and price evaluations before visiting sellers. Consumers use Digital Marketplaces to acquire information about vehicle availability, features and prices, quickly and at a low (or no) cost. 9. When researching online, consumers want information tailored to their needs while searching for a new or used automobile, and use online channels to narrow their search. At the same time, they expect that in accessing a given Digital Marketplace, they will see as much vehicle inventory as is available in the market, so that they may conduct accurate, comparative research. Consumers have come to expect this, given their experiences using Digital Marketplaces for travel, real estate and other purchases. If a consumer thinks that a Digital Marketplace only lists a fraction of available inventory, he or she is more likely to use another, more comprehensive, alternative. 10. Information about specific makes and models of automobiles is commonly available online from original equipment manufacturers (“OEMs”). In the automobile industry, OEMs include branded automotive companies, most of whom operate their own websites. For example, General Motors Canada operates a website at http://www.gm.ca.

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11. Information about automobiles available for sale is also commonly provided by dealers. The Canadian automotive market is comprised of two categories of dealers: (a) dealers franchised by OEMs automobiles (“franchised dealers”); and

(b) non-franchised, independent dealers who sell used automobiles (“independent dealers”).

12. CarGurus estimates that there are approximately 6,000 to 8,000 dealers across Canada. 13. In addition, there are a large number of private sellers who want to advertise their automobiles for sale online. 14. Other “offline” means to make consumers aware of vehicle pricing and availability, such as TV and newspaper advertising, are not comparable to, nor a substitute for, online resources, given the limitations of such traditional media.. While some consumers may also use such media to inform themselves, increasingly, they are relying on online sources of information. 15. A number of businesses provide services to OEMs, dealers and private sellers to make it easier to disseminate vehicle listing information to consumers. For example, there are a number of suppliers of online support services to OEMs and dealers, including Trader and a U.S.-based company called Dealer Dot Com, Inc. (“DDC”). 16. One of the many services that Trader, DDC and others offer to OEMs and dealers in the United States and Canada is website development and hosting. Trader and DDC offer joint website development and web hosting to OEMs and dealers under Trader’s dealerSMARTsolutions products. For the purpose of this Application, companies that offer website development and hosting will be referred to as “Enhanced Services Providers”.

to sell their new and used

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17. In Canada, roughly 1,500 dealers have their websites hosted on the servers maintained by DDC. These websites display Vehicle Listings that are also syndicated to Digital Marketplaces. 18. In addition to OEMs’ and dealers’ own websites, consumers also look to Digital Marketplaces for comparative and unbiased information. 19. Typically, the information available on Digital Marketplaces includes, for each vehicle, the make, model, year, Vehicle Information Number (“VIN”), mileage, price, photographs, and other details about the car, such as the type of transmission and engine size. This collection of information is displayed in a “Vehicle Listing”. 20. In some cases, the price of the vehicle is not provided because the dealer wants to be able to negotiate it. However, it is uncommon to market a vehicle without photographs. 21. Trader and CarGurus are direct competitors in that they both operate Digital Marketplaces that aggregate information from OEMs, dealers and private sellers and make it accessible to consumers through search engines on their respective websites in Canada, the Trader Website and the CarGurus Website. 22. Through these Digital Marketplaces, Trader and CarGurus do not sell automobiles; rather, they connect buyers and sellers so that transactions may be conducted directly. C Trader is the Dominant Digital Marketplace in Canada and the Dominant Supplier of Vehicle Listings to Digital Marketplaces

23. There are approximately 10 businesses in Canada that operate Digital Marketplaces. 24. Trader is the dominant Digital Marketplace in Canada and the dominant supplier of Vehicle Listings to Digital Marketplaces. On its website, Trader self-describes as “the leading digital player in Canadian automotive, boasting the top marketplaces

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autoTRADER.ca (which generates 14 million visits each month), autoHEBDO.net, and the popular car buyer information site Autos.ca”. There are a number of ways to track market share, including the number of dealers and their Vehicle Listings, inventory, and daily views: (a) Dealers: Trader’s website indicates that it has a relationship with 6197 dealers in Canada. Assuming an estimate of 8,000 dealers in Canada, Trader has a relationship with 77% of the new and used automotive dealers in Canada. If there are fewer than 8,000 dealers in Canada, Trader has an even larger market share.

(b) Vehicle Listings: CarGurus believes that Trader has the exclusive control of an estimated 42.5% of all Vehicle Listings in Canada. This estimate is based on CarGurus’ internal analysis of Vehicle Listings that CarGurus cannot obtain from any source other than, or without the consent of, Trader. In fact, Trader-controlled inventory may be higher if all or part of the other 57.5% of inventory from Feed Providers includes Vehicle Listings from Trader.

(c) Website Visits: In terms of customer traffic, ComScore data shows that of all the Digital Marketplaces that present only new and used car listings (unlike, for example, Kijiji.ca Cars and Vehicles, which also displays listings for spare parts and accessories), Trader is by far the largest, enjoying four times the number of unique visitors as the next largest competitor.

25. Trader has admitted its dominance as a major supplier of Vehicle Listings in Canada in an affidavit filed in support of an application it filed against CarGurus in the Ontario Superior Court of Justice for alleged copyright infringement (Court File No. CV-15-11232-00CL) (the “Trader Application”), wherein Roger Dunbar (Vice President of Marketing at Trader) states at paragraph 11 of his affidavit that “Trader is at the center of the car buying process in Canada, connecting consumers, dealers and original equipment manufacturers (also known as “OEMs” or car manufacturers).” 26. Because of Trader’s dominance in this downstream market, dealers and automobile sellers believe they need to have their listings on the Trader Website, and enter into

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agreements with Trader whereby the dealers and sellers give up to Trader any rights in Vehicle Listings. This grants Trader access to a massive database of unique listings over which it has absolute control. D Network Effects in Digital Marketplaces 27. Digital Marketplaces are a two-sided platform, in that they connect two distinct groups of users: sellers of vehicles and potential buyers of vehicles. Each group benefits from an increase in the size of the group on the other side of the platform. 28. Consumers who use Digital Marketplaces for Vehicle Listings expect to be able to access comprehensive listings. There are two elements to comprehensiveness. The first is that consumers want to know that they are accessing as many Vehicle Listings as are available for the geographic area they are interested in. As well, they expect the information that comprises the Vehicle Listing to be as complete as possible. This ensures that the consumer has confidence that in conducting research, he or she is being afforded the opportunity to conduct thorough comparisons and effective research. 29. If a consumer has doubts about the comprehensiveness of the Vehicle Listings at a given Digital Marketplace, that consumer is more likely to choose to use an alternative, more comprehensive, Digital Marketplace. In a two sided market like this (with dealers on one side, populating the Digital Marketplace with vehicles, and consumers on the other side, seeking to conduct market research), a drop in the number of consumers using the site will have a concomitant effect on the number of dealers who will be willing to use the site. 30. Comprehensive Vehicle Listings are critical to the success of a Digital Marketplace: there is a direct correlation between Vehicle Listings, website traffic, “leads” to dealers

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(inquiries from consumers to specific dealers about specific Vehicle Listings, containing the consumer’s name and basic contact information) and resulting revenue for the Digital Marketplace. 31. In terms of website traffic, Vehicle Listings have a multiplier effect. If on the first visit to a Digital Marketplace, a consumer is presented with a comprehensive Vehicle Listings inventory, the consumer is more likely to have a positive experience. As a result of that positive experience, the consumer is more likely to return to the website and refer others to that website. 32. For CarGurus, more visitors to the CarGurus Website results in more leads to dealers (i.e. potential customers are directed to the dealer and its Vehicle Listings). Leads are the only tangible way that CarGurus can show dealers that the CarGurus Website adds value to their businesses. 33. There are other benefits to having comprehensive inventory. Visitors stay on the CarGurus Website for longer when there is, for example, a higher number of photographs of vehicles. This in turn increases page views, which in turn assists to attract further Vehicle Listings, advertisers, and improve search results rankings. 34. Trader’s dominance and status as a major Digital Marketplace for Vehicle Listings allows it to benefit from powerful network effects. In the Trader Application, Roger Dunbar acknowledges that “Trader’s marketplaces …benefit from powerful network effects” and states that “[t]he size of Trader’s visitor base draws more dealers (and their vehicle inventories) to Trader’s marketplaces, whose listings in turn draw more consumers.” 35. As described below at paragraphs 109-113, CarGurus is suffering from the inverse of these network effects, caused by Trader’s refusal to allow CarGurus access on usual

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trade terms to what Trader has designated as “Trader Inventory”, which includes the following (collectively, “Inventory”): (a) Vehicle Listings on dealer websites that are hosted using dealerSMARTsolutions products;

(b) Vehicle Listings containing photographs allegedly taken using Trader’s “Capture Service” (as defined by Lucian Neacsu, Director of Operations for Trader, in his Trader Application affidavit); and

(c) Vehicle Listings syndicated by Trader (i.e. fed by Trader to third parties pursuant to written agreements).

36. CarGurus is unaware of anyone other than Trader in Canada who seeks to assert copyright over photographs they have been asked by a dealer to take.

37. The market power that Trader enjoys in the upstream market due to its exclusive rights is being used to lessen competition in the downstream market, by hindering CarGurus’ ability to present to consumers comprehensive Vehicle Listings.

E Vehicle Photographs Are an Essential Input to Digital Marketplaces 38. Photographs are a key feature for how dealers and sellers present and market their vehicles online, as acknowledged by Trader in the Trader Application. Evidence filed by Trader in the Trader Application demonstrates that buyer interest in a Vehicle Listing is much higher if even a single photograph is included.

39. The harm that CarGurus’ Canadian business has sustained as a result of the removal of Inventory, described at paragraphs photographs are an essential input for a Digital Marketplace to be an effective competitor.

109-113 below, demonstrates that these

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F CarGurus’ U.S. Business is Innovative and Consumer-Focused 40. In the U.S., the inventory on CarGurus’ website is primarily populated by obtaining data feeds of Vehicle Listings from third parties, such as DDC, who receive Vehicle Listings from dealers directly (collectively, “Feed Providers”). CarGurus also used to populate its site by crawling websites for additional Vehicle Listings, though it does not do so any more. Both DDC and Trader, in addition to being Enhanced Service Providers, are also Feed Providers. 41. In the U.S., some Feed Providers take photographs of vehicle inventory for dealers (“capture services”). Some dealers also take photographs of the vehicles themselves. These photographs are then used in Vehicle Listings. CarGurus does not offer capture services. 42. In the U.S., regardless of who takes the photograph, the prevailing industry view is that dealers own the photographs in the Vehicle Listings. If dealers do not want their Vehicle Listings displayed on the CarGurus U.S. Website, the Vehicle Listings are removed by CarGurus upon request, in accordance with the notice and takedown provisions in the Digital Millennium Copyright Act. 43. Take down requests in the U.S., however, are very rare because CarGurus provides a valuable service to dealers. In particular, the more often dealer inventory is presented to potential buyers, the greater the number of leads to the dealers; the greater the number of leads, the greater the likelihood of a resulting sale. 44. There are several ways in which CarGurus’ Digital Marketplace is innovative and distinguishes itself from others in the U.S. (and in Canada as discussed in the next section):

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(a) Clean Interface. The CarGurus U.S. Website provides a clean (i.e. uncluttered) interface for users. The website is efficient, effective and easy to use.

(b) Mathematical algorithms to produce Instant Market Value (“IMV”). CarGurus developed a mathematical algorithm to analyze and compare prices and features on automobiles for sale. The algorithm looks at each individual Vehicle Listing on a CarGurus website and gives an analysis for the consumer as to whether the associated price is “fair”, “good”, “great” or “over-priced” relative to other Vehicle Listings in the market. In other words, CarGurus does the analysis for the consumer rather than the consumer having to research whether the price offered for a particular car by a particular dealer is a good deal. Unlike other sites, like Trader’s, CarGurus embeds this feature into its website. CarGurus was the first Digital Marketplace in the U.S. to apply a comparative analysis to individual Vehicle Listings. Components of CarGurus’ mathematical algorithm are the subject of two pending patents in the U.S.

(c) Search Engine. The CarGurus U.S. Website is a search engine and not merely a classified site. CarGurus tries to index and provide consumers with the entirety of vehicle inventory available for purchase listed online and in the market.

(d) Consumer-Focused Site. CarGurus is a consumer-focused site even though its revenue is generated from dealers. CarGurus tracks how long vehicles have been on dealers’ lots, dealers’ reputations, consumer feedback on dealers, fraud detection, and dealers who may be trying “bait and switch” techniques. CarGurus gathers a great deal of information from Vehicle Listings to rank vehicles using its IMV, providing the best potential matches to consumers. CarGurus tries to create a fair and transparent marketplace to help consumers make good purchasing decisions. CarGurus believes what is good for the consumer is also good for the dealer, and will result in a less complicated transaction with a more satisfied consumer. Consumers who visit dealers with a third party price validation are often more ready to purchase a vehicle and less likely to haggle.

(e) Price Drop Feature. CarGurus tracks the price history of Vehicle Listings posted on a CarGurus website and alerts users who have signed up for such alerts to drops in price for specific vehicles being tracked by those users. Notably, in response to this innovation, Trader began offering this service in September 2015.