From the May 2011 issue of Entrepreneur

We've all been there. You go to buy something innocuous in a store--batteries, a $20 alarm clock--and the cashier asks for your ZIP code. If you're willing to risk the ire of the people in line behind you, you may balk and ask what purpose it serves the retailer to have that information. As sure as sunrise, the answer comes back: "Oh, they use it for marketing. Have a nice day."

Well, not in California they don't--not as of mid-February, and not for store purchases with a credit card. That's because the California Supreme Court reversed two lower-court decisions to say that retailer Williams-Sonoma, in asking an in-store credit card customer for her ZIP code, was really making an unlawful request for personally identifiable information (PII). The court held that the request was a violation of California's Song-Beverly Credit Card Act of 1971, which prohibits retailers from asking for PII such as an address or a telephone number when customers make a credit card purchase.

The lower courts had ruled that a simple ZIP code was not personally identifiable, since many thousands of people might live in that same code area. But the state Supreme Court looked at the issue and decided that if it was against the statute to ask for a phone number or a street address--which might also be shared with others--then asking for a ZIP code was also a non-starter.

Of course, Williams-Sonoma helped their deliberations along by conceding that yes, in this case, it took the customer's name from her credit card transaction and the ZIP code she finally did give the cashier, put them together, looked her up in a public database and began sending her marketing materials.

As of press time, the high court decision has produced an explosion of lawsuits against retailers operating brick-and-mortar businesses in California, with brands ranging from Radio Shack to Tiffany & Co. getting hit with suits, many of them asking to be certified as class actions.

And there will be more: The court said its interpretation of the statute also applies retroactively. So businesses that used to ask for ZIP codes in these kinds of transactions could also be liable, even if they've stopped the practice. And third-party list brokers are in a tizzy, finding themselves faced with the prospect of having to weed out information on California customers that may have been acquired illegitimately.


36 Percent of consumers who follow a brand via social media

54 Percent of online advertising spend that goes to paid search

3.6 Annual increase in direct-mail spending 2010-2014

34 or fewer: number of characters in e-mail subject line that gets highest click-through rates

Source: Direct Marketing Association's 2011 Statistical Fact Book

What's the penalty? It's hard to be specific until the lower courts set the damages in the Pineda v. Williams-Sonoma case. Merchants could be on the hook for $250 for the first violation and as much as $1,000 apiece for ensuing ones. Then again, the courts have leeway to impose a fine of as little as one cent per infraction.

The head of the California Retailers Association was quoted as saying the ruling was "a terrible decision" because Williams-Sonoma was using the ZIP as an authentication measure. But that's just wrong: In those cases where the card is present, authentication is the job of the card issuer, not the retailer. The retailer pays a fee specifically for that service.

And yes, the California decision does let some retailers request a ZIP code. Gas stations, for example, are still able to request that customers punch in their ZIP to use a credit or debit card at the pump island, because their registers don't record that data. Retailers can also get a ZIP to use in online sales, to ship purchases or register warranties, or for a few other exceptions.

But retailers have grown accustomed to using ZIP code data on their customers for a number of non-transactional purposes. Some track the effects of their local media buys. Some plan the placement of new stores based on the ZIP codes they see coming through their checkout lines. Some do as Williams-Sonoma did and build their marketing lists from the information. And a subset then takes those lists and sells them to brokers, to rent or sell further.

I'm of the opinion that the time for that particular shortcut to lead gen has come and gone. You just can't assume that you'll be able to get leads for your marketing message by piggybacking on in-store transactions. The customer is in control both online and off, and that means you need to induce them into a marketing conversation with something of value--a coupon, a newsletter, a catalog, a web download, a shopper loyalty program--rather than simply hijacking their data at the point of service.

I'll go further and say that at least some retailers depend on the lack of transparency in this ZIP code shakedown. Cashiers are usually uninformed about how the codes are used. In some cases, they may convey the mistaken notion that withholding a ZIP code will invalidate the credit card purchase.

That's not only illegal in California now, but it's completely shortsighted in terms of the new rules of marketing. If you want data from consumers, you have to offer more than a cheery "Have a nice day."