Judge Blocks Toysmart's Plan To Sell Customer List

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August 18, 2000 (4:15 PM EDT)

Judge Blocks Toysmart's Plan To Sell Customer List

By Jill Morneau,

A federal judge has kept a bankrupt online toy retailer from selling customers' personal information -- at least for now.

U.S. Bankruptcy Court Judge Carol Kenner Thursday denied a motion by Toysmart.com to approve a settlement it had reached with the Federal Trade Commission to sell its customer list as an asset to a third party.

The court action, combined with an underwhelming response from bidders for the information, kept the list from being sold. However, the judge delayed a final decision.

"This is the first case of its kind where a dot-com company had a specific privacy policy that said it would not share company information that includes names, addresses, billing information, shopping preferences," said Pamela Kogut, Massachusetts assistant attorney general, who is handling the case.

"The consumers think this information will be kept private, especially with the explicit privacy policy," she said. "We wanted to make sure that in this first significant case [dealing with privacy] we were taking a position."

Toysmart, Waltham, Mass., filed for bankruptcy earlier this year after experiencing financial problems. While in business, the e-tailer had pledged to keep customers' personal information confidential.

According to documents from the office of the Massachusetts Attorney General, toysmart.com's privacy statement on its Website read: "At toysmart.com, we take great pride in our relationship with our customers and pledge to maintain your privacy while visiting our site. Personal information voluntarily submitted by visitors to our site, such as name, address, billing information and shopping preferences, is never shared with a third party."

In May, toysmart.com asked permission from the Federal Trade Commission to sell off its customer list to a third party, arguing that selling its directory was similar to a company acquiring the information in an acquisition.

Kogut countered that it was not an acquisition, or even a sale of 100 percent of the company's assets. Instead, only a portion of its assets was involved.

By July 21, the FTC and toysmart.com reached an agreement that allowed the customer list to be sold to a third party, and it did not require the consumers on the list to be notified of the sale. Consumers on the list also were not given the opportunity to consent to having their name and information sold to a third party.

The terms for selling the database stipulated by the FTC said that it could only be sold to a qualified bidder that focused on family commerce, and agreed to keep the list confidential in the future, Kogut said.

But Massachusetts took the lead in objecting to the agreement in U.S. Bankruptcy Court, with 38 additional states following suit.

"The information collected about consumers on Toysmart's website likely includes information collected from children, the information should be considered sensitive," according to documents from the Massachusetts Attorney General's office.

In April, the Children Online Privacy Protection Act also entered the equation, legal officials said, because that law states that a company cannot ask children for personal information if they are under 12. However, evidence was never presented regarding Toysmart.com's violation of this act, Kogut said.

Among the highest offers for the list was $50,000 by Walt Disney Co., a major shareholder in Toysmart, and $15,000 by a market research firm from Maine, Kogut said.

"I think our objections chilled the sale," she said.

The creditors had anticipated a much larger profit for the database, and it was taken off the auction block.

"It would have sent a terrible message," said Kogut. "The main point is, here's a company who could not have sold this list outside of the bankruptcy court. It's unfair to sell private information customers think will be kept private."

Toysmart officials declined comment and referred calls to their attorney, who did not respond the messages.

David Bersoff, director of research with Yankelovich Partners, an IT economy consultancy, said, "Promises were made when people gave you that information. It has a real chilling effect on the market."

Yankelovich Partners also did a study that found 67 percent of the 1,173 people it surveyed said selling mailing lists without permission is an invasion of privacy.

By comparison, 35 percent of respondents said they think screening employees for AIDS is a violation of privacy, and 34 percent said compelling employees to take psychological tests is as well.

To the dot-com advertisers, the databases are like currency.

"The issue that is most important to consumers is that they don't realize the attempts to build databases," Bersoff said. "People are willing to take losses until they can parlay into money and profits later on."

The creditors now want to find a higher bidder for the database.

Kogut vowed to keep up the fight in court if another sale is attempted.