Toysmart Settles with FCC

SAN FRANCISCO (07/21/2000) - The U.S. Federal Trade Commission voted 3-2 Thursday to accept a settlement with forbidding the defunct Internet toy retailer from selling off its customer data as a separate asset during bankruptcy proceedings. The FTC on Friday also announced new charges against Inc., alleging that it violated federal law by collecting personal data from children.

A federal bankruptcy court in Boston, which has scheduled a July 26 hearing, must ratify the settlement. The court's decision will be a key test of whether failing Internet companies will be allowed to treat personal data like a commodity in bankruptcy proceedings or will be required to abide by federal and state consumer protection laws, even as the companies scramble to liquidate themselves.

The new charges represent the first time the FTC has cracked down on an alleged violation of the Children's Online Privacy Protection Act of 1998, which forbids the online collection of personal data from children under 13 years of age. On July 17, the FTC announced that it was sending e-mail messages to "scores" of child-oriented Web sites, warning them that they appeared to be violating COPPA.

ToysMart ceased operations in May and filed for bankruptcy in June. The company has since been trying to sell off its assets, including its customer lists and databases. The prospective sale of data prompted a complaint from TRUSTe, the online watchdog group that accredited ToysMart's online privacy policy. TRUSTe complained to the FTC and the Massachusetts state attorney general's office that a data sale would violate a ToysMart policy that declared personal data such as names, addresses, credit card numbers and shopping preferences would never be shared with a third party.

The FTC, Massachusetts and 40 other states agreed. The FTC filed a complaint in federal court this month. Massachusetts and 38 other states jointly filed an objection in a Boston federal bankruptcy court. (Two other states filed separate objections.) Massachusetts Assistant Attorney General Pamela Kogut said the states would wait until the July 26 hearing to comment on the settlement.

"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, ensuring only a family-oriented Web site willing to buy the entire ToysMart Web site has the ability to do so." An attorney for ToysMart didn't return telephone calls seeking comment.

The settlement allows ToysMart to transfer its data only to a qualified buyer, defined as an entity in the "family commerce market" that buys the entire company - not just the data - and expressly agrees to be ToysMart's "successor in interest," assuming all of ToysMart's legal liabilities and responsibilities.

The FTC said it is willing to consider such an arrangement not to be a third-party data transfer. The buyer must agree to abide by ToysMart's privacy policy and notify consumers about any policy changes. Furthermore, the buyer must agree not to change how the information previously collected by ToysMart is used, unless it first gives customers notice and an affirmative choice.

According to the settlement terms, ToysMart has until July 31, 2001, to either sell itself or come up with a court-approved reorganization plan. Otherwise, the company must destroy all of its customer data by Aug. 31, 2001.

The Walt Disney Co., which is ToysMart's majority shareholder, had previously offered to buy the data and "retire" it, a step that falls short of today's settlement terms. All eyes are now on Disney, which had said that if it is not allowed to buy the data, the bankruptcy court should permit only "a purchaser of all the assets of ToysMart" to do so.

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