E-tailer told to keep privacy promise

A privacy-related maelstrom last week erupted in Washington after the US Federal Trade Commission clobbered a bankrupt e-tailer for moving to sell off an extensive customer database as part of its bankruptcy liquidation efforts.

After working privately with toysmart.com's lawyers to address concerns that Toysmart.com's sale of its customer database would violate the e-tailer's own privacy policy, the FTC lashed out publicly against the company.

"Even failing dotcoms must abide by their promise to protect the privacy rights of their customers," FTC chairman Robert Pitofsky said.

The commission backed up its rebuke with legal action by filing a complaint against toysmart with the US District Court to stop the company selling the data.

Trying to defuse the situation, Walt Disney, the majority owner of the bankrupt company, then offered to purchase the company's customer list.

Nonetheless, the proposed sale and the FTC's strong reaction to it kicked off a host of questions and issues about how customer information - given under the auspices of a privacy statement - should be treated in a bankruptcy setting.

Those issues prompted the introduction of legislation that would make it illegal for companies to sell private data as an asset during bankruptcy proceedings.

"This is the first time an issue like this has come up in a bankruptcy situation," said former FTC official Peter Ward, now an attorney in the e-business group at the law firm Baker Donelson Bearman & Caldwell.

"In the bricks-and-mortar world, there is typically no representation on the part of a seller that that information will be protected," Ward said.

But toysmart has gathered the names and birth dates of children - a particularly sensitive area when it comes to corporate privacy issues.

And because toysmart has had a posted privacy policy which said expressly that the company would not sell the data to third parties, FTC officials vowed to hold toysmart to that promise even though the company went out of business on May 22.

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