Direct Marketing Association, The v. Huber

Filing 57

REPLY to Response to 14 MOTION to Dismiss Plaintiff's First Amended Complaint filed by Defendant Roxy Huber. (Attachments: # 1 Exhibit Exhibit 1)(Snyder, Melanie)

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.
DEFENDANT’S REPLY IN SUPPORT OF MOTION TO DISMISS
PLAINTIFF’S FIRST AMENDED COMPLAINT
Defendant, Roxy Huber, Executive Director of the Colorado Department of
Revenue (“DOR”), submits this Reply to Plaintiff, the Direct Marketing Association
(“DMA”)’s Response in Opposition to Defendant’s Motion to Dismiss Plaintiff’s First
Amended Complaint, filed August 27, 2010 [Dkt. 23] (“Response” or “Resp.”). 1
I.

DMA LACKS STANDING AS TO COUNTS III, VII, AND VIII. 2
To sustain standing as an association, DMA must sufficiently allege: 1) its

members would otherwise have standing to sue in their own right; 2) the interests it
seeks to protect are germane to the organization’s purpose; and 3) that neither the
claim asserted nor the relief requested requires the participation of individual members
1

DMA has agreed to the dismissal, without prejudice, of its State Constitutional Claims (Count IV- Right
to Privacy, Count VI- Free Speech, relevant portions of Counts VII- Due Process and VIII- Taking). See
Resp., pp.35-36.
2

After DMA submitted a sworn declaration from an individual with personal knowledge to establish at
least one DMA member is subject to the Law, DOR agreed not to contest DMA’s standing to assert its
Commerce Clause claims and filed a motion to withdraw that portion of the Motion. See Defendant’s
Notice of Partial Withdrawal of Motion to Dismiss, filed September 16, 2010 [Dkt. 30].

of the association. Hunt v. Wash. State Apple Adver. Comm'n, 432 U.S. 333, 343
(1977). DMA's Takings claims (Counts VII and VIII) fail to meet the first requirement 3
and its First Amendment claim (Count III) fails to meet the third.
The crux of Count III is that some retailers' identities or product lines are
sufficiently expressive to implicate the free speech rights of those retailers and their
customers, such that the Law would chill their free speech rights. Resp., p.25. As
detailed infra Part VI, the Complaint, however, does not allege that any DMA members
fit this profile. See Compl. ¶105 (“many” businesses, organization, and retailers fit this
profile). The participation of a retailer with a name so revealing or controversial that
anyone who purchases from it contends they enjoy constitutional protection from
disclosing its name is required. Without identifying any particular DMA members at
issue, the parties will not only be reduced to litigating hypotheticals in a vacuum, but
also, DMA has failed to properly assert standing.
II.

DMA LACKS JUS TERTII STANDING AS TO COUNTS III AND V.
Jus tertii standing arises in two circumstances: 1) where enforcement of a

restriction against a litigant prevents a third party from entering into a relationship with
the litigant to which the third party has a constitutional entitlement ("enforcement of a
restriction"); and 2) where a plaintiff brings a First Amendment challenge to a statute
affecting a third party’s rights ("First Amendment challenge"). DMA conflates these two
lines of analysis, and fails to demonstrate standing under either test.

3

As discussed infra Part VI, DMA fails to state a takings claim and thus a procedural due process claim.
DMA has no standing because its members have no standing to sue in their own right.

2

A.
Enforcement of a Restriction.
To establish jus tertii standing in an enforcement of a restriction case, DMA must
make two showings in addition to having its own Article III standing. It must
demonstrate: 1) a sufficiently close relationship with the third party to assure that the
plaintiff will operate as effectively as the third party in asserting that party's rights; and 2)
a hindrance or inability of the third party to pursue his own claim. Aid for Women v.
Foulston, 441 F.3d 1101, 1111-1113 (10th Cir. 2006). As shown above, DMA has not
sufficiently alleged its own standing to raise a First Amendment claim, and DMA also
has not demonstrated either the close relationship with its members' customers to justify
jus tertii standing or any hindrance of its Colorado customers to bring their own suit.
1.

No Sufficiently Close Relationship.

The close relationship requirement for jus tertii standing assures that the litigant
will properly frame and present the issues and litigate with appropriate adversarial zeal.
Aid for Women, 441 F.3d at 1113 (citing Sec'y of State of Md. v. Joseph H. Munson Co.,
Inc., 467 U.S. 947, 956 (1984)). A "close relationship" is typified by a relationship of
trust or reliance. See, e.g., United States v. Triplett, 494 U.S. 715, 721 (1990)
(attorney-client relationship); Aid for Women, 441 F.3d at 1112-1113 (physician-patient
relationship); Penn. Psychiatric Soc. v. Green Spring Health Servs., Inc., 280 F.3d 278,
289-290 (2002) (psychiatrist-patient relationship). DMA broadly contends that an
association has jus tertii standing to bring claims on behalf of third parties whose
interests the association's members can represent. That statement, however, is not
borne out by an analysis of the cases DMA cites. In Pennsylvania Psychiatric Society,
3

the case turned on the existence of a doctor-patient relationship, which is a far different
relationship that the one alleged here by DMA. 280 F.3d at 289-290. Moreover, in
neither Ohio Assoc. of Indep. Schools v. Goff, 92 F.3d 419, 422 (6th Cir 1996) nor
Fraternal Order of Police v. United States, 152 F.3d 998, 1002 (D.C. Cir. 1998), did the
court address the close relationship requirement.
In some instances a vendor-customer relationship may suffice for a close
relationship. The vendor cases on which DMA relies, however, permitted a vendor to
assert customers' constitutional rights when the vendor was prohibited or restricted by a
law from selling to the third party customer under threat of sanction thereby reducing or
restricting its market. Craig v. Boren, 429 U.S. 190 (1976) (analyzing a law that
prohibited and criminalized the sale of beer to males between the ages of 18 and 20);
see also Carey v. Population Servs. Int’l., Inc., 431 U.S. 678 (1977) (challenged law
criminalized and prohibited the distribution or advertisement of contraceptive devices);
Eisenstadt v. Baird, 405 U.S. 438 (1972) (statute prohibited the distribution of
contraceptives). As the Court noted in Craig, "[i]n both Eisenstadt and here, the
challenged statutes compel jus tertii claimants either to cease their proscribed activities
or to suffer appropriate sanctions." 429 U.S. at 196, n.5. In the these cases, the
concern that the litigant properly frame and present the issues and litigate with
appropriate adversarial zeal was satisfied because the challenged statute severely
restricted or foreclosed the vendor's market, giving it the incentive to advocate for the
third party. The elimination or reduction of the vendor's market caused by the
4

challenged law is the lynchpin for the vendor's right to represent the interests of the third
party customer, not the mere existence of a vendor-customer relationship. See Craig,
429 U.S. at 195 ("[V]endors and those in like positions have been uniformly permitted to
resist efforts at restricting their operations by acting as advocates of the rights of third
parties who seek access to their market or functions." ); Rothner v. City of Chicago, 929
F.2d 297 (7th Cir. 1991) (distributor and operator of video games had jus tertii standing
to represent constitutional rights of minors under 17 in challenge to ordinance
prohibiting minors under 17 from playing video games during school hours); Hejira
Corp. v. MacFarlane, 660 F.2d 1356 (10th Cir. 1981) (vendor of drug paraphernalia had
jus tertii standing to raise due process claims of its customers in challenge to law
forbidding and criminalizing sale or advertisement of drug paraphernalia).
Unlike either Craig or Eisenstadt, the challenged law in this case does not
prohibit or proscribe an entire realm of conduct. DMA's members are not forbidden
from selling to Colorado customers and are not penalized if they do. Similarly, their
customers are not forbidden from purchasing from DMA's members or patronizing them
in any way. Because the Law does not restrict DMA's members' markets by foreclosing
any part of the market (particularly when all members will be subject to the same
requirements), DMA lacks the appropriate vendor-vendee relationship to give it jus tertii
standing for the claims of its members’ customers.
2.

No Obstacle or Hindrance.

DMA has not alleged that its members' customers are hindered in any way in
bringing their own suit to protect their interests, and its Response ignores this second
5

requirement of jus tertii standing. A hindrance or obstacle may be exemplified by a third
party's concern for privacy, Aid For Women, 441 F.3d at 1114 (patients' desire to keep
information about their sexual activities private), or age (minority) and lack of legal
sophistication, id., stigma associated with receiving mental health services or impaired
mental condition, Penn. Psychiatric Soc’y, 280 F.3d at 289-90, or fluid membership in a
potential class, Craig 429 U.S. at 194. See also Miller v. Allbright, 523 U.S. 420, 449450 (1998) (Justice O'Connor concurring) (Third party standing is permitted only when
"daunting barriers" deter the rightholder from bringing suit, e.g., death of rightholder,
difficulty of demonstrating likelihood of recurring discrimination, privacy concerns
deterring third party, insurmountable procedural obstacle (imminent mootness in
abortion case or challenge to age-related beer sale restriction)). A hindrance suggests
that a rightholder did not simply decline to bring suit, but rather, could not do so. Id.
Here the opposite is true. This is not a case in which the third party customer
would be reluctant to engage in the activity (buying from a DMA member) for fear of
prosecution or penalty, Broadrick v. Oklahoma, 413 U.S. 601, 612 (1973), or a case in
which the customer could not demonstrate that the alleged injury was likely to reoccur,
Powers v. Ohio, 499 U.S. 400, 414-415 (1991). DMA simply has not alleged any
obstacle to a customer's bringing a claim based on a privacy or First Amendment
challenge that rises to the level of a hindrance to his bringing a suit.
B.

First Amendment Challenge

The usual requirements for third party standing are relaxed for facial challenges
due to overbreadth. Joseph H. Munson, Inc., 467 U.S. at 956-57. The requirements,
6

however, are not eviscerated. See IMS Health Inc. v. Ayotte, 550 F.3d 42, 49-50 (1st
Cir. 2008) (no court has exhibited a willingness to write the hindrance element out of the
standing test). Even under the relaxed standards for First Amendment cases, DMA has
not alleged any hindrance to individuals bringing a facial challenge to the Law.
Even if DMA has sufficiently pleaded a hindrance to third parties, it must still
allege facts that, if proved, show substantial threats to the free speech rights asserted
on behalf of its members' customers. Mere interference with third parties' rights does
not suffice; DMA must plead that the Law "substantially abridges the First Amendment
rights" of the third parties. The Pitt News v. Fisher, 215 F.3d 354, 364 (3d Cir. 2000)
(quoting Village of Schaumberg v. Citizens for a Better Environment, 444 U.S. 620, 634
(1980)). DMA has simply failed to do so.
Here DMA's members' customers do not face any sanction under the Law, nor
are they foreclosed from purchasing from DMA members or from purchasing elsewhere.
Additionally, their First Amendment rights are not implicated by the vast majority of
commercial transactions that are covered by the Law. As a result, DMA has not
sufficiently alleged a First Amendment claim to demonstrate jus tertii standing.
III.

DMA’S TAKINGS CLAIMS ARE NOT RIPE (COUNTS VII AND VIII).
The Court lacks subject matter jurisdiction over Counts VII and VIII because they

are not ripe. A takings claim is not ripe until 1) the defendant government entity has
reached a final decision on the application of the regulations in question; and 2) the
plaintiff has sought compensation through procedures provided by the state. Rocky
Mountain Christian Church v. Bd. of County Comm’rs of Boulder County, 481 F. Supp.
7

2d 1213, 1218 (D. Colo. 2007) (internal citiions omitted). Equitable relief is not available
to enjoin an alleged taking, duly authorized by law, 4 when a subsequent suit for
compensation can be brought. Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1016
(1984). Here, DMA members have failed to exhaust adequate state law remedies. See
COLO. REV.STAT. § 38-1-101; §§7-74-101. et. seq. (2010).
In its Response, DMA now asserts that its takings claims mount only a facial
challenge to the Law and thus its claims were ripe upon enactment of the Law. 5 Resp.,
pp.34-35. To the extent DMA cites cases that preceded Lingle v. Chevron USA, Inc.,
544 U.S. 528 (2005), its reliance is misplaced. See, e.g., San Remo Hotel, L.P. v. City
& County of San Francisco, 545 U.S. 323, 340, n.23 (2005) (finding facial challenges
ripe); Yee v. City of Escondido, 503. U.S. 519, 534 (1992) (same). Yee and San Remo
applied the “substantially advances” test in holding that facial takings challenges are
ripe. Id. The Supreme Court, however, repudiated that test in Lingle. 544 U.S. at 545.
Counts VII and VIII are not ripe and the effect of DMA’s facial challenge to the
Law substantially raises its burden. Dias v. City & County of Denver, 567 F.3d 1169,
1180 (10th Cir. 2009) (noting a plaintiff’s “heavy burden” associated with a facial
challenge); see also infra Part VI.B. (failure to state a facial challenge on takings claim).
4

See Custer County Action Assoc. v. Garvey, 256 F.3d 1024, 1042 (2001) (“’Unauthorized’ conduct in the
takings context equates to the ultra vires actions of an agency, i.e., action explicitly prohibited or outside
the normal scope of agency responsibilities.”).
5

DMA contends that because the Law does not guarantee confidentiality, “the extent of the injury” to its
member retailers’ property rights is “even worse.” Resp., pp.29-30. Aside from being false, this allegation
regarding the extent of DMA retailers’ alleged injury further belies DMA claim that its takings claim
advances solely a facial challenge. See Resp., pp.34-35 (discussing its limited facial challenge and that
its taking claim “does not depend on the extent to which [member retailers] are deprived of the use of
their…property”).

8

IV.

DMA FAILS TO STATE A CLAIM THAT THE LAW VIOLATES
CONSTITUTIONALLY-RECOGNIZED PRIVACY RIGHTS (COUNT III).
DMA’s Count III first fails to state a claim because neither the Supreme Court nor

the Tenth Circuit has recognized that a constitutional right of privacy exists in
information about an individual’s shopping habits. Even DMA’s Response does not
point to any authority indicating that courts have expressly recognized that a report to
the State, which reveals the names of retailers with whom an individual shops and the
amounts spent, is deserving of constitutional protection.
Constitutionally-protected privacy rights are only those that are “objectively,
deeply rooted in this Nation’s history and tradition, and implicit in the concept of ordered
liberty, such that neither liberty nor justice would exist if they were sacrificed.”
Washington v. Glucksberg, 521 U.S. 702, 720-21 (1997) (internal citations omitted).
Courts have not recognized that information about Americans’ shopping preferences is
so fundamental as to fall within the Constitution’s notions of ordered liberty. Rather, the
Supreme Court has counseled restraint in this area, recognizing that a designation of
fundamental rights “to a great extent, places the matter outside the arena of public
debate and legislative action and risks transforming the Due Process Clause into the
policy preferences of the Members of the Court.” Seegmiller v. LaVerkin City, 528 F.3d
762, 770 (10th Cir. 2008), citing Glucksberg, 521 U.S. at 720. As a result, for example,
neither the Supreme Court nor the Tenth Circuit has recognized a constitutionallyprotected interest in the privacy of financial information. See, e.g. United States v.
Miller, 425 U.S. 435, 440 (1977) (no constitutional right of privacy in bank records).
9

DMA’s argues that the Annual Customer Report could reveal private information
such as medical conditions, financial situation, family issues, sexual orientation,
religious beliefs or political opinions. The Law, however, does not seek to collect
information on these topics, and any collection of such information is indirect and
incidental to the Law’s purpose. Taxing authorities regularly indirectly collect personal
information about taxpayers of the type asserted by DMA, including information
regarding taxpayers’ marital status, family status, employment status, financial
condition, charitable and/or religious interests, health expenditures beyond a certain
threshold, and gambling winnings or debts. Courts have not found that such incidental
revelations to a taxing authority result in a violation of constitutional privacy rights. Cf.,
e.g., Yorkshire v. Internal Revenue Serv., 829 F. Supp. 1198, 1202 (C.D. Cal. 1993) (no
recognized right of privacy under the federal constitution in the confidentiality of
consolidated tax returns); Plante v. Gonzales, 437 F. Supp. 536, 540 (N.D. Fla. 1977)
(“The secrecy of one’s personal assets and business transactions has never been
granted the freedom from governmental scrutiny traditionally accorded the sanctity of
the family.”) (internal citations omitted); see also Whalen v. Roe, 429 U.S. 589, 602
(1977) (holding that a state government’s collection of prescription information did not
violate individuals’ constitutional privacy rights). 6

6

In Whalen, the Court also rejected the argument made by DMA that individuals’ privacy is jeopardized
because the Act does not sufficiently provide for safeguards of the data submitted to DOR. See Compl.
¶85. The Whalen Court held that the mere possibility of a deliberate or inadvertent disclosure of personal
information was not sufficient to challenge the validity of a statute on its face. 429 U.S. at 600-601.

10

Count III fails to state a claim for the ancillary reason that the Complaint does not
plausibly allege disclosures of private information. DMA illustrates this precisely when it
lists a handful of websites that potentially could reveal personal customer information.
These facts, however, are nowhere contained in the Complaint. Moreover, in neither
the Complaint nor the Response does DMA make the necessary corollary allegations
that the operators of these websites are DMA members, that they do enough business
to be subject to the thresholds of the Act, that the business name for the Annual
Customer Report is the same as the website, or that the business name readily reveals
private information. The allegations relating to privacy fail to extend beyond the
assertion that private information hypothetically could be revealed. See Compl. ¶¶80,
83. DMA’s failure to support these conclusory assertions with particular facts renders
the claim subject to dismissal.
V.

DMA SIMILARLY FAILS TO STATE A CLAIM THAT THE LAW VIOLATES
THE FIRST AMENDMENT RIGHTS OF DMA OR ITS MEMBERS (COUNT V).
DMA’s Count V fails to state a claim for the same reasons as its privacy claim.

First, the First Amendment claim should be dismissed because courts have not yet
recognized that First Amendment protection extends to the speech or conduct alleged –
in this case, the information contained in the Annual Customer Report. In fact, several
courts have suggested that the First Amendment is not implicated in the disclosure to
the government of customer names and amounts spent with a particular retailer.
Amazon.com, LLC v. Lay, No. 10-cv-00664-MJP, 2010 WL 4262266 (W. D. Wash 2010)
(attached as Exh. 1); Tattered Cover, Inc. v. City of Thornton, 44 P.3d 1044, 1053 n.17
11

(Colo. 2002). Recently, in the Amazon.com, LLC litigation, the court determined that a
state department of revenue’s collection of data regarding the specific items purchased
by taxpayers would violate the First Amendment, but held that the collection of customer
names, addresses, and general product information would be permissible. Exh. 1,
Amazon, 2010 WL at *10-11. Similarly, in Tattered Cover, the Colorado Supreme Court
determined that disclosure of particular book titles would violate the First Amendment,
but noted that records, such as billing invoices, would not. 44 P.3d at 1053 n.17.
DMA’s Response does not offer any authority demonstrating that courts have
recognized that the First Amendment covers the data at issue. Rather, DMA’s
Response asserts that its Complaint states a claim that the Act chills the exercise of
freedom of speech by dissuading buyers and sellers from transactions involving
expressive content. This response misses DOR’s point. The Court need not reach the
question of whether the exercise of speech may be chilled, because the exercise of
speech (here, the buying and selling of goods), as a matter of law, is not implicated.
DMA’s Response additionally highlights that its Complaint brings a facial
challenge of overbreadth under the First Amendment. Compl., ¶109. When bringing a
facial challenge, DMA must show that the Law “creates an impermissible risk of
suppression of ideas” “in every application.” Colorado Right to Life Comm., Inc. v.
Coffman, 498 F.3d 1137, 1155 -1156 (10th Cir. 2007) (emphasis in original). This is a
“heavy burden.” Id. at 1155. When a facial challenge is brought, the Court’s “first task”
is to determine whether the Act reaches an amount of constitutionally protected conduct

12

that is both real and substantial when “judged in relation to the statute's plainly
legitimate sweep.” Jordan v. Pugh, 425 F.3d 820, 828 (10th Cir. 2005).
The Complaint does not assert that the First Amendment covers the vast sea of
regular transactions for goods from direct marketing sellers. DMA, for example, does
not assert that the First Amendment bars the reporting of data from sellers of office
supplies, tennis shoes, or computers. Rather, the Complaint focuses on alleged sellers
of expressive content, contending that “many businesses and organizations that employ
direct marketing methods and sell products and services at retail are highly specialized
and closely associated with particular ideas, issues, opinions and beliefs.” Compl.,
¶105 (emphasis added). The Complaint, however, does not offer any particular
examples or assert any specific facts that plausibly allege that the Act’s reach over
constitutionally-protected conduct is real and substantial when compared to the
legitimate transactions that the Act covers. 7 The Complaint’s sweeping statements
about the Act’s propensity to chill conduct do not sufficiently allege the particulars – that
real and substantial numbers of sellers of expressive content are covered by the Act
and that the Act would reveal particular information about them that is protected by the
First Amendment. See Murphy v. Matheson, 742 F.2d 564, 569 (10th Cir. 1984) (“That
some unconstitutional applications of the law can be imagined is insufficient to
invalidate the statute on overbreadth grounds.”). As a result, DMA has failed to
plausibly state a claim as to Count V, and that claim should be dismissed.

7

The same is true of DMA’s privacy claim. DMA has not plausibly alleged that the Act covers a real and
substantial amount of constitutionally-protected conduct as compared to the legitimate reach of the Act.

13

VI.

DMA FAILS TO STATE A CLAIM FOR VIOLATIONS OF THE FIFTH AND
FOURTEENTH AMENDMENTS (COUNTS VII AND VIII).
In addition to the grave ripeness deficiencies discussed supra Part III, DMA’s thin

and conclusory assertions fall short of stating claims for a violation of procedural due
process (Count VII) and a taking of private property (Count VIII). Even if DMA had
adequately pleaded a takings claim, the Just Compensation Clause of the Fifth
Amendment does not require pre-deprivation remedies or compensation.
A.

Count VII Fails to State a Procedural Due Process Claim.

DMA contends that Count VII addresses the absence of a pre-deprivation
remedy against the disclosure requirements of the Law. 8 Resp., p.26. 9 However, it is
well-established that the Just Compensation Clause does not require pre-deprivation
remedies or compensation. See Williamson, 473 U.S. at 195, n.14 (“Unlike the Due
Process Clause, however, the Just Compensation Clause has never been held to
require pretaking process or compensation.”) (citing Monsanto, 467 U.S. at 1016). As a
result, DMA fails to state a procedural due process claim.
DMA’s due process claim fails for the additional reason that it has not adequately
alleged a violation. DMA incorrectly contends that the Law does not provide for any
“front-end process” or “back-end guarantee” that retailers’ trade secrets will be held with
the same level of care by DOR as by the retailers. Resp., p.32. Colorado law,
however, expressly prohibits disclosure of all information obtained by DOR pursuant to
8

Due to the vagueness of the Complaint, it was initially unclear whether Count VII asserted a substantive
or procedural due process claim. See Motion, pp.31-33 (addressing both substantive and procedural due
process claims). DMA now states that it only intended to assert the latter. Resp., p.33 n.12.
9

DMA’s Response cites to the Complaint ¶¶14, 133-136; however, none of these references allege the
absence of a pre-deprivation remedy.

14

Article 21 Title 39 of the Colorado Revised Statutes. See COLO.REV.STAT. §§ 39-2112(4)(a) and -112(6) (prohibiting disclosure absent court order and providing for
criminal and civil penalties as well as termination from employment for any violation). In
Monsanto, the Supreme Court recognized that the value of a trade secret lies in the
advantage it gives the owner over competitors, and it is thus a disclosure that allows a
competitor access to the trade secret that is of concern in a takings context. Id. at 1012,
n.15. DMA has not and cannot allege, beyond mere speculation, any such disclosure.
Further, DMA’s citations to case law requiring notice and a pre-deprivation
hearing before property interests are negatively affected by government are inapposite.
Resp., pp.32-33. As discussed infra Part VI.B., DMA has failed to allege, beyond
conclusory statements, any negative effect upon retailers’ trade secrets as a result of
the Law- whether by disclosure to DOR or DOR’s theoretical future disclosure to
competitors. For these reasons, DMA fails to state a procedural due process claim.
B.

Count VIII Fails to State a Takings Claim.

The basis for DMA’s takings claim has shifted. DMA now contends that Count
VIII addresses the irreparable harm to the value of DMA member retailers’ customer
lists as a result of the disclosure requirements of the Law. 10 Resp., p.26. DMA
employs the following flawed logic to advance its takings claim: 1) DMA member
retailers’ customer lists are trade secrets (Compl. ¶¶14, 135, 147); 2) the Law compels
disclosure of these customer lists to DOR (id. at ¶¶136, 148); 3) disclosure of the
10

Because DMA alleges a facial challenge to the Law (Motion, pp. 34-35), it faces a heavy burden of
alleging that the Law is unconstitutional in all its applications. See Dias, 567 F.3d at 1180 (affirming Rule
12(b)(6) dismissal because plaintiffs did not allege the law was vague in all applications).

15

customer lists to DOR effects a taking (id. at ¶146); 4) some customers find this
disclosure to be an invasion of privacy (id. at Id. at ¶43); 5) these customers will
decrease or discontinue their purchases from DMA members causing the loss of sales
and alienation of customers (id.); 6) as a result of this alleged loss of sales and
customers, the value of the customer lists is lost (Resp., p. 28-29); 7) this loss in value
constitutes a taking by the State of Colorado (Resp., pp.33-34). The Complaint,
however, does not support the circuitous theory DMA now advances. Premise number
six is nowhere to be found in even the most generous reading of the Complaint.
Perhaps recognizing that disclosure of customer lists by DOR is remote due to the strict
confidentiality law, DMA now, in effect, amends its complaint to allege a taking based on
the alleged loss of profits and goodwill that renders the customer lists valueless.
DMA’s attenuated logic is based on assumptions that do not support a plausible
taking. As such, Count VIII should be dismissed. See Rhodes v. Physician Health
Partners, 2010 WL 728213, at *2 (D. Colo. 2010) (“[T]he mere metaphysical possibility
that some plaintiff could prove some set of facts in support of the pleaded claims is
insufficient; the complaint must give the court reason to believe that this plaintiff has a
reasonable likelihood of mustering factual support for these claims.”) (citing Ridge at
Red Hawk, LLC v. Schneider 493 F.3d 1174, 1177 (10th Cir. 2007).
Even accepting DMA’s new takings theory, Count VIII nonetheless fails to state a
takings claim based on the following factors set forth in Penn Cent. Transp. Co. v. City
of New York: 1) the character of the governmental action; 2) the economic impact of the

16

regulation on the claimant; and 3) the extent to which the regulation interferes with
investment-backed expectations. 438 U.S. 104, 124. (1978). 11
As to the first factor, the Law is a regulatory tool that allows the State of Colorado
to enforce its sales and use tax for the benefit of the public and does not effect a taking.
“Government regulation often curtails some potential for the use or economic
exploitation of private property and not every destruction or injury to property by
governmental action has been held to be a taking in the constitutional sense.” E.
Enterprises v. Apfel, 524 U.S. 498, 523 (1998) (internal citations omitted). “Government
hardly could go on if to some extent values incident to property could not be diminished
without paying for every such change in the general law.” Id. (quoting Pennsylvania
Coal Co. v. Mahon, 260 U.S. 393, 413 (1922)). A taking may more readily be found
when the government physically invades property than when there is interference with
property arising from a public program “adjusting the benefits and burdens of economic
life to promote the common good.” Penn Central, 438 U.S. at 124. Because courts

11

The Supreme Court has recognized three categories of governmental takings, the first two of which
constitute per se takings: (1) physical takings involving the permanent physical invasion of property, see,
e.g., Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982) (law requiring owners to permit
cable companies to install cable in apartment buildings constituted taking), (2) total regulatory takings
depriving the owner of all economically beneficial uses of the property, Lucas v. S.C. Coastal Council,
505 U.S. 1003 (1992), and (3) all other alleged takings, judged under Penn Central. Lingle, 544 U.S. at
538-39. While DMA alleges that the Law has “decimated” the value of the customer lists (Resp., p.29), it
does not and cannot allege that it has lost all sales from and alienated all Colorado purchasers (Resp.,
p.34 “extinguishing some or all” customer list value; Compl. ¶43 “substantial majority” of consumers will
decrease or discontinue purchases). See Clajon Production Corp. v. Petera, 70 F.3d 1566, 1577 (10th
Cir. 1995) (declining to apply per se test when plaintiff did not allege a taking of all economically beneficial
use of the property). Because the Complaint and Response do not advance a per se takings claim,
Count VIII is properly judged under the Penn Central factors.

17

have not recognized that this type of disclosure requirement, properly within the State’s
taxing authority, amounts to a taking, Count VIII fails to state a claim as a matter of law.
As to the second Penn factor, the Complaint fails to advance more than
conclusory allegations to support the economic impact on its members. Even if some
DMA members have property rights in their customer lists,12 it does not follow that the
mere enactment of the Law resulted in the loss of the economically viable use of all
DMA member retailers’ customer lists. See Keystone Bituminous Coal Assoc. v.
DeBenedictis, 480 U.S. 470, 495 (1987) (noting a plaintiff’s “uphill battle” in alleging the
“mere enactment” of a law constitutes a taking and limiting the inquiry to whether the
law “denies an owner economically viable use of his land”). This inquiry requires a
comparison of the value taken from the value that remains. Id. at 497. The value of a
trade secret lies in the advantage it gives the owner over competitors by virtue of the
exclusive access to the data that makes up the trade secret. Monsanto, 467 U.S. at
1012. DMA now discards the theory that it is the potential disclosure of its customer
lists to competitors that effectuates the taking. Rather, it argues that as a result of the
Law, customers will not make future purchases and the value of the customer list is thus
lost. Resp., p.29. This type of loss does not constitute a taking of a trade secret. See
Monsanto, 467 U.S. at 1012, n.15 (loss of potential profits and sales due to consumer
reaction to trade secret disclosure cannot constitute taking of a trade secret).

12

DMA’s failure to go beyond a recitation of the elements to establish that a customer list is a trade secret
in the first instance is fatal to its taking claim. Motion, pp.27-28.

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Additionally, resting on its conclusory allegation that a taking occurred the
moment the Law was enacted, DMA asks this Court to take a leap of faith that Ashcroft
v. Iqbal, __ U.S.__,129 S.Ct. 1937 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007) simply do not allow. DMA concludes that the Law will cause lost profits and
alienation of customers due to their concerns for privacy. Compl. ¶43; Resp., p.29.
However, it is just as likely that any lost profits or alienation may result from customers
seeking to avoid paying sales and use tax. See Twombly, 550 U.S. at 567-68
(dismissing a Sherman Act conspiracy claim when there was “an obvious alternative
explanation”); Iqbal, 129 S.Ct. at 1951(“It is the conclusory nature of respondent’s
allegations, rather than their extravagantly fanciful nature, that disentitles them to the
presumption of truth.”). Because DMA has not nudged its claims across the line from
conceivable to plausible, Count VIII must be dismissed. Twombly, 550 U.S. at 570.
Finally, under the third Penn Central factor, DMA has failed to allege that the Law
interferes with any reasonable investment-backed expectations. Even if DMA could
adequately plead a taking, which it cannot, the Supreme Court has consistently
recognized that government may legitimately adopt laws that adversely affect
recognized economic values. Penn Central, 438 U.S. at 124. Exercise of the taxing
authority is “one obvious example.” Id. The Law is a tool the State may legitimately
utilize in exercising its authority to enforce the sales and use taxes.
Further, while DMA’s taking claim is cloaked in an alleged taking of the value of
customer lists, the true loss it alleges is one of potential profits and goodwill. Compl.
¶43 (retailers “risk losing sales and alienating customers”). However, “goodwill and
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profits traditionally have not been regarded as elements of just compensation under
either the due process or just compensation clauses of the federal and state
constitutions.” Auraria Businessmen Against Confiscation, Inc. v. Denver Urban
Renewal Auth., 517 P.2d 845, 847 (Colo. 1974).
VII.

CONCLUSION
DMA has not properly alleged standing or an entitlement to relief on its claims

and these basic deficiencies should be “exposed at the point of minimum expenditure of
time and money by the parties and the court.” Twombly, 550 U.S. at 558. For the
foregoing reasons, DOR’s Motion to Dismiss should be granted.
Respectfully submitted this 30th day of November, 2010.
JOHN W. SUTHERS
Attorney General
s/ Melanie J. Snyder
MELANIE J. SNYDER, 35835*
Assistant Attorney General
STEPHANIE LINDQUIST SCOVILLE, 31182*
JACK M. WESOKY, 6001*
Senior Assistants Attorney General
1525 Sherman Street, 7th Floor
Denver, Colorado 80203
Telephone: [phone] (Snyder)
Telephone: [phone] (Scoville)
Telephone: [phone] (Wesoky)
FAX: [phone]
E-Mail: [e-mail]
E-Mail: [e-mail]
E-Mail: [e-mail]
*Counsel of Record
Attorneys for Defendant

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CERTIFICATE OF SERVICE
I hereby certify that on November 30, 2010, I electronically filed the foregoing
Defendant’s Reply in Support of Motion to Dismiss Plaintiff’s First Amended
Complaint with the Clerk of the Court using the CM/ECF system which will send
notification of such filing to the following e-mail addresses:
[e-mail]
[e-mail]
Attorneys for Plaintiff

s/ Melanie J. Snyder

cc: Via inter-office mail
Ms. Roxy Huber
Executive Director
Colorado Department of Revenue
1375 Sherman Street
Denver, Colorado 80261

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