Other Opponents of Reviewing FTC Settlement

FRAMINGHAM (07/24/2000) - Truste, a San Jose-based online privacy organization, and a group of officials from 39 states are reviewing a settlement deal announced Friday afternoon between the U.S. Federal Trade Commission (FTC) and Toysmart.com Inc. to see what impact it may have on their separate efforts to block a proposed sale of the defunct online toy retailer's customer data.

Truste, which awards a seal of approval to companies that promise to adhere to a set of online privacy guidelines it developed, went ahead on Friday and filed an objection to Toysmart's plans in U.S. Bankruptcy Court in Boston on the grounds that the sale would violate the privacy policy posted on the company's Web site. Friday was the last opportunity for opponents to object before the bankruptcy court holds a hearing on the proposed sale this Wednesday.

But the 11th-hour settlement between the FTC and Toysmart "looks interesting," said Truste spokesman David Steer. "We are taking a closer look at what it means to see if it's acceptable to us. Until then, we are moving forward."

Toysmart, which went out of business in May, was one of Truste's licensees and used the organization's privacy seal on its Web site.

The proposed sale of the customer information by Toysmart -- which promised on its Web site never to share shoppers' personal data with other companies -- has touched off a major controversy.

Meanwhile, a spokeswoman for Massachusetts Attorney General Tom Reilly -- who led a the group of state attorneys general that filed an objection to the proposed sale with the bankruptcy court last week -- said it's unclear what the group's next step will be.

"We're aware of the settlement and we're reviewing it," said Reilly spokeswoman Marsha Cohen. "We'll have further comment at the bankruptcy hearing Wednesday."

The FTC also had moved to block to the proposed sale of Toysmart's customer list and related information by filing suit in U.S. District Court in Boston.

But the settlement announced on Friday would allow the company to proceed with the sale under limited circumstances.

Toysmart would only be able to sell its customer information to a "successor" company that buys its entire business, including its Web site, goodwill, company name and all other assets in addition to the customer data, said Lauren Mazzarella, spokeswoman for the FTC's consumer protection division.

"Toysmart's privacy policy said the information would never be shared with a third party," Mazzarella said. "We had to figure out what a third party is.

Someone who steps into the shoes of Toysmart (by buying the entire company) is not a third party." She added that the successor company couldn't sell the information to an "affiliate" but could sell the data to another successor company if it also ended up going out of business.

Harold Murphy, a Boston-based lawyer who is representing Toysmart in its bankruptcy case, said the company has no objections to the settlement, which still needs to be approved by the bankruptcy court. "We drafted the settlement, (and) we're pleased with it," Murphy said. "We think it balances the needs of our creditors while protecting our customers."

One company interested in buying Toysmart's customer data is Digital Research Inc. (DRI), a marketing research firm based in Kennebunk, Maine. On Friday, DRI said it was submitting a bid on the customer data to the bankruptcy court and pledged to keep the information out of the hands of other companies. A company official today claimed that its offer would fit within the FTC's proposed settlement with Toysmart.

"The terms of the settlement seem to fall in line exactly with DRI's mission," said Jennifer Hutchins, a marketing consultant for DRI. "If our research isn't anonymous, then it's bogus. We have our own privacy pledge. None of the customers who are on our research panels are ever sold anything."

In addition, The Walt Disney Co. -- which owns a 60% stake in Toysmart -- recently offered to buy the company's customer list and retire the information.

Also on Friday, the FTC said it plans to file a complaint against Toysmart for allegedly violating the Children's Online Privacy Protection Act (COPPA), a new law that went into effect in April. Murphy said Toysmart officials "dispute there was any violation" of COPPA by the company.

Jennifer DiSabatino contributed to this article.

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