States Formally Object to Toysmart, FTC Settlement

FRAMINGHAM (08/04/2000) - The attorneys general of 44 states Thursday filed a legal brief in U.S. Bankruptcy Court in Boston formally objecting to a proposed settlement between the U.S. Federal Trade Commission (FTC) and Inc. that would allow the defunct online toy retailer to sell its customer data to another company under some circumstances.

Led by Massachusetts, where Toysmart is based, a group of 39 states already had stated their opposition to the settlement deal at a bankruptcy court hearing two weeks ago (see story). But they have now been joined by five more states as well as the District of Columbia, the Virgin Islands and the Northern Mariana Islands, according to the brief filed Thursday.

In addition, officials from New York and Texas have separately objected to both Toysmart's planned sale of information about its customers and the proposed settlement between the company and the FTC. That leaves just four states that haven't weighed in on the controversial effort by Toysmart to recoup some of its losses by selling off its customer list and related data despite having promised not to share the information with third parties in the privacy policy posted on its Web site.

The settlement with the FTC -- which last month filed a suit aimed at blocking the planned sale -- would allow Waltham, Mass.-based Toysmart to transfer the customer data to a "successor" company. The FTC defined a successor as a "family-friendly" company that would agree to step in and buy Toysmart's entire Web site, not just the customer data.

But the states contend that any sale of the customer list to a third party would constitute an "unfair and deceptive" business practice and violate their consumer protection laws. In the filing to the bankruptcy court, the attorneys general argued that Toysmart should be required to notify consumers and get permission to sell their personal information before being allowed to go forward with the proposed sale.

The objection was submitted by Massachusetts Attorney General Tom Reilly, who said in the filing that the effort to sell the customer data "is a breach of Toysmart's promise and constitutes deception pursuant to the Consumer Protection Act of Massachusetts" and similar measures in the other states.

Despite the opposition from the states, FTC spokesman Eric London said the agency stands by the settlement agreement. "We came up with this settlement because we believed it protects consumers," London said. "We feel we reached a balance that would allow the company to be sold [without violating] the privacy rights of consumers."

The attorneys handling Toysmart's liquidation proceedings in bankruptcy court couldn't be reached for comment. At a July 26 hearing before the court, the company's request for approval of the customer-data sale was put on hold until after a separate hearing could be held on the proposed settlement with the FTC.

That hearing is scheduled to be held Aug. 17. But Bankrupcty Court Judge Carol Kenner indicated on July 26 that she's unlikely to approve the proposed settlement, in part because of the objections registered by the various states.

However, the judge vowed to keep an open mind on the issue.

Truste, a San Jose-based organization that awards seals of approval to companies that promise to adhere to a set of online privacy guidelines it developed, also filed an objection to Toysmart's plans with the bankruptcy court and has said that it opposes the proposed settlement with the FTC.

Toysmart was one of the companies given a seal by Truste.

Two companies have offered to buy the customer list -- The Walt Disney Co., which owns a 60 percent stake in Toysmart, and Digital Research Inc., a marketing research firm in Kennebunk, Maine. But at the July 26 hearing, Toysmart's attorneys rejected both of their bids as too low.

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