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When Dot-Coms Die, Will Your Privacy?

TRUSTe goes to court to prevent Toysmart from selling customer data.

By Elinor Abreu, The Industry Standard   

In classified advertisements in the Wall Street Journal last month, Toysmart, based in Waltham, Massachusetts, announced it is selling its assets, including customer lists and databases. However, selling the customer information to a third party violates the online company's agreement with TRUSTe, an organization that encourages good privacy practices by awarding sites with seals of approval.

"They're hiding behind the veil of bankruptcy law to be able to do it," says TRUSTe spokesperson Dave Steer. But, the agreement between Toysmart and TRUSTe is still binding, and companies that deviate from it can be found in breach of contract, he says.

Toysmart ceased operations May 19, filed for Chapter 11 bankruptcy on June 9, and hired the Recovery Group to help it sell its assets. Stephen Gray, the managing director of the Recovery Group, did not return calls to comment Friday. The hearing in bankruptcy court in Massachusetts is scheduled for July 26.

Looking for Legislation

In addition to preparing its court brief, TRUSTe has complained about the matter to the U.S. Federal Trade Commission, and the lieutenant governor and attorney general of Massachusetts. Executives at the FTC and the attorney general's office did not return calls to comment.

"Our office is looking into ways we can help change state bankruptcy laws," as well as include privacy protections for customers in federal bankruptcy law, says Jason Kauppi, a spokesperson for Lieutenant Governor Jane Swift of Massachusetts. Meanwhile, proposed federal legislation would require consent for Web sites to share customer data with third parties and prevent companies from selling customer data with its assets.

Toysmart illustrates the need for privacy legislation, according to David Sobel, legal counsel for the Electronic Privacy Information Center in Washington, D.C.

"There really is no meaningful protection provided to Internet users and that means both the absence of federal laws in this area and the reliance that some people in some companies are placing on certain programs like TRUSTe," Sobel says.

Can the Government Help?

Steer suggests that TRUSTe could sue members for breach of contract if they don't follow their agreed-upon policy, but that recourse is untested. Rather than adopt privacy legislation, he favors expanding TRUSTe's "legal framework" for upholding contracts in the event of bankruptcies.

"I'm skeptical of the government's ability to effectively address this issue," Steer says.

TRUSTe is looking into other faltering online companies to make sure they are not planning to sell customer data in their liquidations. In one noteworthy case, Fashionmall.com, based in New York, acquired customer data along with the intellectual property of failed U.K. fashion site Boo.com. But Ben Narasin, chief executive officer of Fashionmall, says that unlike Toysmart, which is selling its assets piecemeal, he bought Boo's assets to keep the company going.

Fashionmall will abide by Boo's privacy policy for existing Boo customers but will follow its own policy for new Boo customers. Fashionmall's privacy statement promises not to share customer data with third parties without their consent, allows customers to remove information from the company's database, and lets customers opt out from receiving communications from the company or its partners.

For more in-depth coverage of the Internet Economy, visit The Industry Standard.