FTC Settles with Toysmart

FRAMINGHAM (07/21/2000) - The U.S. Federal Trade Commission (FTC) today announced that it had reached a settlement with Toysmart.com Inc. that would allow the bankrupt online retailer to go ahead with a proposed sale of its customer data only under limited circumstances.

In addition, 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. It will be the first time the commission has charged a company with violating the COPPA provisions and follows an announcement earlier this week that the FTC had sent e-mail messages to "scores of Web sites" warning them to comply with the new law.

FTC officials couldn't be reached for comment this afternoon. But in a statement, the commission said its settlement with Toysmart will allow the Waltham, Mass.-based company to sell its customer information only if the buyer acquires its entire Web site. In addition, the buyer must promise to abide by Toysmart's promise that it would never sell the information it collected from customers to third parties, the FTC said.

"Customer data collected under a privacy agreement should not be auctioned off to the highest bidder," said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. "This settlement protects consumers from a winner-take-all bid in bankruptcy court." It also "protects customers of Toysmart from unilateral privacy policy changes in the future by a bankruptcy purchaser," she added.

The settlement must be approved by the U.S. Bankruptcy Court in Massachusetts, which has scheduled a July 26 hearing on a proposal by Toysmart to sell off its customer data and other assets as part of a liquidation proceeding. Today was the last opportunity for opponents of the sale to file objections to the proposal with the bankruptcy court.

Harold Murphy, a Boston-based lawyer who is representing Toysmart in its bankruptcy case, said the company has no objections to the settlement with the FTC. "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."

The proposed sale of the customer information by Toysmart -- which promised on its Web site never to share personal data with other companies -- has touched off a major controversy. The FTC last week filed a suit seeking an injunction against the sale, and a group of attorneys general from 39 states joined in today by submitting an objection to the bankruptcy court.

Truste, a San Jose-based organization that gives a seal of approval to companies that promise to adhere to a set of online privacy guidelines it developed, also objected to the proposed sale in a filing to the bankruptcy court today. Toysmart, which went out of business in May, was among the companies that was granted Truste's privacy seal.

Regarding COPPA, the FTC said it will file an amended complaint with the U.S.

District Court in Boston alleging that Toysmart violated COPPA by collecting personal information from children under 13 without notifying their parents or obtaining any parental consent. The charge is meant to show that the FTC "is serious about enforcing" COPPA, Bernstein said.

Murphy said Toysmart officials "dispute there was any violation" of COPPA by the company. "The law went into effect in April, and we went out of business a couple of months later," he said. "Only 1,500 to 2,000 people [went to the site after the law took effect], so without admitting or denying anything we've decided to delete the information of those people."

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