States to Block Sale of Toysmart's Customer Data

FRAMINGHAM (07/21/2000) - A group of attorneys general from 39 states yesterday asked the U.S. Bankruptcy Court in Boston to block the controversial sale of Inc.'s customer data that the failed online toy retailer has proposed as part of an ongoing liquidation process.

Meanwhile, the U.S. Federal Trade Commission (FTC) -- which also has filed a request for an injunction blocking the proposed sale -- is expected to vote today on a possible out-of-court settlement with Toysmart. Today is the last chance that parties interested in the case have to file objections against the company's plan with bankruptcy court.

Led by Tom Reilly, Massachusetts' attorney general, the states group said in its objection that the proposed sale of Toysmart's customer lists and related information would violate the Waltham, Mass.-based company's promise to consumers that it wouldn't sell their personal data to any third parties.

"Toysmart's decision to sell its customer list breaks a promise to its consumers, who thought their personal information would be safe," Reilly said in a statement. He added that Massachusetts has "joined with the other states to make sure that the privacy of those customers is not jeopardized to benefit Toysmart."

Harold Murphy, a Boston-based lawyer who is representing Toysmart in the bankruptcy case, couldn't be reached for comment this morning.

The involvement of the states adds yet another wrinkle to what already has become a high-profile test case on whether e-commerce companies that go out of business can include their customer lists in liquidation sales if they promised not to divulge any personal information as part of the privacy policies posted on their Web sites.

For example, Toysmart's privacy policy, which can still be viewed on its Web site, states that people who submitted their names, addresses and other personal data to the company could "rest assured that your information will never be shared with a third party."

But after closing its virtual doors in May and filing for bankruptcy protection last month, Toysmart included the information it collected from customers on a list of assets that it asked the bankruptcy court for permission to sell.

That quickly drew the ire of Truste, a San Jose-based organization that gives a seal of approval to companies that agree to adhere to a set of privacy guidelines it developed. Truste said it planned to submit a legal brief in an attempt to stop the proposed sale by Toysmart, which features the Truste seal on its Web site.

Truste also lodged a complaint with the FTC, asking that the commission investigate Toysmart's actions. Spurred by the complaint, the FTC filed a suit seeking an injunction against the sale in U.S. District Court in Massachusetts, saying that such a move by Toysmart would be "in violation of its own privacy policy."

At the same time, the FTC and Toysmart also started talking about a possible settlement. FTC officials couldn't be reached for comment today on the commission's expected vote on a possible deal with the company.

The issue became even thornier last week when The Walt Disney Co. -- which owns a 60 percent stake in Toysmart -- offered to buy the company's customer list and retire it to protect the privacy of Toysmart's shoppers.

Although most privacy advocates have decried Toysmart's actions, the Independence Forum, a public policy research organization in Washington, this week issued a statement chastising the FTC for sticking its nose in a place where it doesn't belong.

"The government is out of line to interfere with something that is already illegal under existing laws. It often does so in order to set up a new regulatory structure without the direction of Congress," said Danielle Bujnak, the group's president. "There is no need to jump into a frenzy over a very simple breach-of-contract situation."

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