FTC to Block Sale of Consumer Data By Toysmart.com

FRAMINGHAM (07/10/2000) - The U.S. Federal Trade Commission (FTC) today filed a complaint against Toysmart.com Inc. in an effort to block a proposed sale of the failed online toy retailer's customer list and personal information that the company collected from people who visited its Web site. But the two sides also have started talking about a possible out-of-court settlement.

In a statement, the FTC said it's seeking an injunction in U.S. District Court in Massachusetts to prevent Toysmart from selling the customer information to another company as part of an ongoing liquidation process. Such a sale by Toysmart would be "in violation of its own privacy policy," the FTC said.

Toysmart's privacy policy, which can still be viewed on its Web site, said people who submit their names, addresses and other personal data to the Waltham, Mass.-based company "can rest assured that your information will never be shared with a third party."

The FTC voted 5-0 to take action against Toysmart. "Even failing dot-coms must abide by their promise to protect the privacy rights of their customers," said FTC Chairman Robert Pitofsky as part of the commission's statement. "The FTC seeks to ensure these promises are kept."

However, David Medine, associate director of financial services at the FTC, said it isn't asking the court for an immediate injunction against Toysmart.

Because the sale isn't imminent -- a hearing on the proposed public sale of the company's assets is scheduled for July 26 in U.S. Bankruptcy Court in Massachusetts -- the FTC hopes to resolve the issue with the company without legal intervention.

"In the short term, we're not asking the court for anything," Medine said.

"Currently, we're talking with the company's lawyers and hope (to reach a settlement) before the hearing date. But if that doesn't happen, we'll ask for the injunction."

Toysmart attorney Alex Rodolakis didn't return phone calls seeking comment on the matter today. But he told The Industry Standard, a sister publication to Computerworld, that the company also is interested in settling the dispute. "We forwarded a proposal to resolve (the FTC's) issues," Rodolakis said. "We believe a resolution can be effected".

Toysmart closed its virtual doors in May and last month agreed to an involuntary bankruptcy petition that was filed by its creditors. The company's customer list and database of personal information were included among the assets that Toysmart asked the bankruptcy court for permission to sell in an attempt to recoup some of the losses it suffered.

But the proposed sale became the subject of controversy after Truste, a San Jose-based organization that gives a seal of approval to companies that adopt its set of online data-privacy guidelines, said it planned to file a legal brief opposing the sale with the bankruptcy court. Toysmart was licensed to display Truste's seal on its Web site and continues to do so.

Truste also said it had asked the FTC to investigate Toysmart's plan, and Medine acknowledged the commission's complaint was precipitated by the request from Truste.

Dave Steer, a Truste spokesman, said he's glad to see the FTC agreeing that there is reason to believe Toysmart's intended sale of its customer data would violate the law. "We believe that Toysmart and its creditors are going to hide behind the veil of bankruptcy. . . to hoodwink consumers," Steer said. "(But) a promise is a promise."

The controversy over Toysmart's proposed sale of its customer information comes in the middle of a highly-charged debate over whether the federal government should pass legislation governing online privacy or continue allowing companies to regulate themselves. Toysmart also is just one of nearly a half-dozen online retailers that went out of business this spring as venture-capital funding for unprofitable Internet ventures began drying up.

"In the absence of any clear legislation or other legal guidelines, this is a useful action by the FTC to enforce a customer's privacy agreement with a retailer," said Jonathan Moskin, an intellectual property lawyer at the New York law firm Pennie & Edmonds LLP.

Jason Catlett, president of privacy advocate Junkbusters Corp. in Green Brook, N.J., said what's at issue here is whether a posted privacy protection promise survives the failure of a company. "If the FTC prevails, this will be a very significant event," he said. "But it also raises a lot of questions about whether the FTC has to sue every company (that violates its privacy agreement with its customers.)"

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