February 17, 2011

California Supreme Court Says Stores Generally Can't Ask for ZIP Codes

Arnold & Porter Advisory

In a potentially far-reaching decision, the California Supreme Court has held that ZIP codes constitute "personal identification information" that generally cannot be sought from customers in connection with credit card transactions.

Disapproving a prior case that held to the contrary, the California Supreme Court has tightened the restrictions on what information a merchant can obtain from its customers in connection with credit card transactions. Specifically, in Pineda v. Williams-Sonoma Stores, Inc., Case No. S178241, the Court held that ZIP code information is "personal identification information" under California's consumer protection laws, and thus, without more, may not be requested and recorded by the merchant in a credit card transaction.

Background Of Pineda v. Williams-Sonoma Stores, Inc.

Subject to certain exceptions, California's Song-Beverly Credit Card Act of 1971 (Civil Code §1747 et seq.) prohibits merchants from requesting that cardholders provide "personal identification information" during credit card transactions, and then recording that information. The statute is essentially a privacy measure designed to deter merchants from obtaining such information for marketing purposes under the guise that it is necessary to complete the card transaction. Although the statute gives examples of "personal identification information" such as address and telephone number, it does not purport to give an exhaustive list nor to define the phrase beyond broadly stating that it is information "concerning" the cardholder.

In Pineda, Williams-Sonoma allegedly sought and recorded its customers' ZIP code numbers along with their names, and then used customized computer software and available databases to reverse search for their addresses. From this, the company was able to compile a customer database for its own marketing purposes and for sale to third parties.

The lower courts in the case held that a ZIP code standing alone does not fall within the statute. In so holding, they relied on an earlier appellate court decision, Party City Corp. v. Superior Court, 169 Cal. App. 4th 497 (2008), that reached a similar conclusion.

The California Supreme Court's Opinion

In unanimously holding otherwise, the California Supreme Court noted the statute's very broad proscriptive language and drew on its legislative history and established rules of statutory construction favoring liberal interpretation of such consumer protection statutes. Much of its most significant analysis came in rebutting the conclusion of the lower courts that a ZIP code is too individually non-specific to fall in the same category as such enumerated information as a street address or telephone number. The Court rejected this proposition for multiple reasons, including: (1) non-uniqueness cannot be material because even a street address, which the statute explicitly identifies as proscribed information, may not be exclusive to a single individual; and (2) the only reasonable interpretation of what the statute seeks to proscribe is information unnecessary to the sales transaction that, alone or together with other data such as a cardholder's name or credit card number, can be used for the retailer's business purposes. The lower court's contrary interpretation "would permit retailers to obtain indirectly what they are clearly prohibited from obtaining directly," (i.e., the cardholder's complete address or telephone number).

What Are The Implications?

Pineda is narrowly concerned with ZIP codes, but its reasoning applies broadly to acquiring any information from the consumer in connection with a credit card purchase that (1) is unnecessary to the transaction and (2) through compilation with other available data, would enable the merchant to target the customer for further marketing. The trend in marketing generally is to take advantage of increasingly powerful technology to do precisely this sort of data acquisition, compilation and targeting. At least where the starting point is obtaining some squib of information from the credit card customer at the point of sale that isn't strictly necessary to the card transaction, Pineda stands squarely athwart this trend.

That said, it should be noted that Pineda does not rule out all possibility of legally obtaining such information where payment is by credit card. The statute itself recognizes certain exceptions to its proscriptions, including where the information is for a legitimate purpose "incidental" to the sale. In addition, there may be important First Amendment free speech limits on application of the statute that would permit a carefully-designed program to obtain such information.

Please note that in response to Pineda, the plaintiff's bar has already begun filing new lawsuits against other merchants who have been obtaining ZIP codes from their customers under the false comfort of the previous lower court opinion.

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