Direct Marketing Association, The v. Huber

Filing 18

DECLARATION of Kevin Lane Keller regarding MOTION for Preliminary Injunction with Incorporated Memorandum of Law 15 by Plaintiff Direct Marketing Association, The. (Attachments: # 1 Exhibit A)(Isaacson, George)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 10–CV–01546–REB–CBS

The Direct Marketing Association,
Plaintiff,
v.
Roxy Huber, in her capacity as Executive
Director, Colorado Department of Revenue,
Defendant.
______________________________________________________________________
DECLARATION OF PROFESSOR KEVIN LANE KELLER
______________________________________________________________________
I, Kevin Lane Keller, pursuant to 28 U.S.C. § 1746, do depose and state as
follows:
1. I am the E.B. Osborn Professor of Marketing at the Tuck School of Business at
Dartmouth College. I have been retained by the law firm of Brann & Isaacson, as
counsel to the Direct Marketing Association (“DMA”), to present my opinions regarding
the effect that a new Colorado law (House Bill 10-1193, “An Act Concerning The
Collection Of Sales And Use Taxes On Sales Made By Out-Of-State Retailers, And
Making An Appropriation Therefor” (“the Act”)), will have on the business of affected
Internet and catalog retailers, and on their relationships with Colorado customers. My
opinions in that regard are based upon my experience and expertise in the field of
marketing, as well as on my review of the result of a survey of Colorado consumers
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conducted in June 2010 by Resource Systems Group, Inc. (“RSG”), concerning
consumers’ reactions to the requirements of the Act and of related regulations adopted
by the Colorado Department of Revenue (“Department”). I conclude, as described
more fully in this declaration, that out-of-state retailers affected by the law will likely
suffer lost sales and permanent injury to their relationships with customers as a result of
complying with the requirement that they disclose their customers’ purchasing
information to the Department.
2. Much of my work, both as an academic and as a consultant to businesses,
focuses on the relationship between retailers (or brands) and consumers, including the
importance to a retailer (or brand) of establishing and maintaining the trust of its
customers. My work also frequently involves the use and/or analysis of consumer
surveys. During my MBA and PhD studies, I took graduate level courses in marketing
research that included survey design and interpretation. Since receiving my PhD, I
have run countless academic research studies that involved the design, conduct and
analysis of surveys. Many of my activities with consulting clients have also involved
survey work, including projects with Procter & Gamble, Ford, Samsung, and other
companies. A copy of my current curriculum vitae is attached hereto as Exhibit A.
3. It is my understanding that the new Colorado law requires out-of-state retailers
who do not collect Colorado sales tax to: (a) give Colorado purchasers notice with each
transaction that the retailer does not collect Colorado sales tax, but that the purchaser
has an obligation to self-report use tax to the Department, even on catalog and Internet
sales; (b) send each Colorado purchaser (at least those who purchase $500 in taxable
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goods or services from the retailer) an annual notice informing them, among other
things, of their total purchase amount for the past year and that the retailer is required to
report their name and total amount of purchases to the Department; and (c) file an
annual report with the Department listing for each Colorado purchaser (regardless of
purchase amount) the purchaser’s name, billing address, shipping address and total
amount of purchases.
4. I am aware that RSG conducted a survey of Colorado consumers in June 2010
to determine their reactions to the requirements of the new Colorado law. Indeed, I
reviewed a draft of the survey questionnaire when it was being prepared, and I have
reviewed a document prepared by RSG entitled “Colorado Consumer Survey, Final
Results,” dated August 9, 2010 (“Final Results”), setting forth the results of the full
survey. A copy of the Final Results is attached to the Declaration of Thomas J. Adler,
PhD, as Exhibit B. I have also reviewed the declaration of Dr. Adler concerning the
survey.
5. The objectives of the RSG survey were: (1) to determine whether Colorado
consumers consider the requirement that out-of-state retailers must report their
purchasing information to the Department to be an invasion of their privacy or, instead,
if Colorado consumers do not mind the disclosure of such information to the
Department; and (2) to determine whether the reporting requirement will affect, in any
way, Colorado consumers’ future purchases from out-of-state retailers who are required
to provide such information to the Department. Based on my understanding of the
requirements of the new law and the objectives of the survey, I believe that the survey
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was well-designed and executed. I am confident in relying upon the results of the
survey in support of my opinions expressed in this declaration.
Retailers Who Must Disclose Customer Purchasing Information
to the Department Will Lose Sales as a Result
6. Based upon my experience in the field of consumer marketing, and the results of
the RSG Survey, it is my opinion that many consumers will view negatively the
obligation of affected out-of-state retailers to disclose the customers’ names, addresses
and amount of purchases to a government agency. Indeed, many consumers who
become aware of the requirement, including past or current customers of the retailer,
will be less likely to make a purchase from such a retailer than they would be if the
retailer was not required to report their information to the government. This will be just
as true for consumers residing in Colorado as in any other state.
7. As a result, retailers required to make such disclosures to the Department will
lose a substantial portion of their Colorado sales. The amount of such lost sales for any
particular retailer will depend upon a number of factors, but for a law that applies
broadly to all Internet and catalog retailers with Colorado gross sales in excess of
$100,000 that do not collect Colorado sales tax, the aggregate volume of such lost
sales, industry wide, will be very large.
8. My conclusion that Internet and catalog retailers who are required to disclosure
their customers’ information to the Department will lose sales as a result is supported by
the results of the RSG survey. The results of the survey show that two-thirds of
Colorado Internet and catalog shoppers (67%) who aware of the disclosure requirement
will decrease their purchases from such retailers in the coming year. Even more
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tellingly, when asked to reflect upon a recent purchase from an out-of-state retailer that
does not collect Colorado sales tax, sixty-three percent (63%) of Colorado consumers
would most likely not make a similar purchase again from the affected the out-of-state
retailer because of the disclosure requirement. In stark contrast, Colorado retailers will
be directly benefitted by the law: forty-three percent (43%) of Colorado catalog/online
purchasers responded to the RSG survey that they will make future purchases instead
from a Colorado retailer that is not required to disclose their purchase information to the
Department. Of course, out-of-state Internet and catalog sellers can never recoup the
sales they will lose from customers who decided not to buy from them, or who choose to
buy from another, Colorado retailer.
The Harm to Retailers’ Customer Relationships
and Businesses Will Be Permanent
9. There are other, potentially more serious, even permanent, consequences for
affected out-of-state retailers that elect to comply with the new law and turn-over such
customer information to the Department. By disclosing customer purchasing
information to the Department, even if required to do so by law, out-of-state retailers will
definitely alienate customers in Colorado and elsewhere, including many of their best
customers (whom the retailer will be required to inform directly of the requirement that
the retailer must report such information to the Department).
10. Establishing a relationship of reliability and trust with customers is the key to the
long-term success of most retailers or brands. High levels of customer satisfaction with
a retailer derive not just from the retailer’s products, but from the entire customer
experience. For many of the most successful Internet and catalog retailers and brands,
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customer satisfaction depends upon maintaining the security and privacy of a
customer’s personal information, and not willingly disclosing it to any third-party,
including a state government agency. This is a major reason why almost all direct
marketers adopt clear privacy policies and disclose those policies to the public.
11. The privacy and security of personal information in the hands of both
businesses and government agencies remains a significant concern to many
consumers, and the extent to which government should be permitted access to
customer information maintained by businesses is much debated by policy makers. As
the results of the RSG survey indicate, many consumers view information maintained by
companies with which they do business, including generalized information such as their
identity as a customer of the company and the frequency or volume of their
transactions, to be private, confidential information that they would prefer not be shared
with the government. Companies that consent to allow governmental access to such
personal customer information, rather than resist government demands for it, are
viewed negatively by consumers, as the revelation in 2006 that telecommunications
providers Verizon, AT&T and Bell South may have disclosed customer phone records to
the National Security Agency illustrates.
12. Breaching trust with the customer and failing to live up to customer expectations
regarding protection of sensitive transaction information will have a long-lasting
detrimental effect on a retailer. Once the relationship of trust with a customer is
destroyed, many such customers will be permanently lost. Retailers that comply with
the requirements of the Colorado law by disclosing their customers’ information to the
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Department can expect to lose customers (and thus future sales) in Colorado and
elsewhere, as a result.
13. My conclusions in this regard are supported by the results of the RSG survey.
The survey shows that an overwhelming majority ― nearly 70% (including 44% who
“strongly agree”) ― of Colorado online and catalog shoppers believe that the
requirement of the new law that out-of-state retailers must report their customers’
purchase information to the Department constitutes an invasion of privacy, while only
14% of such consumers report that they do not mind the disclosure. Such strong
consumer sentiment indicates that retailers who make such disclosures will damage
their relationships with many Colorado customers with lasting negative effects on the
retailers’ sales and business.

I declare under penalty of perjury that the foregoing is a true and correct.
Executed on this 10th day of August, 2010

/s/ Kevin Lane Keller
Kevin Lane Keller

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