Federal Bankruptcy Judge Rejects FTC Agreement With Toysmart.com

A federal bankruptcy judge rejected the Federal Trade Commission's agreement with Toysmart.com Thursday, casting aside restrictions on a prospective buyer for the online retailer's most valuable and controversial asset, a list of personal information on an estimated 190,000 customers. The company gathered the data while promising to keep it in confidence.

Judge Carol Kenner of the U.S. Bankruptcy Court in Boston dismissed the agreement, which listed restrictions on the sale of the list including one that the buyer would be "family friendly." She, however, did not preclude a sale of the data.

Until a buyer is determined, and until that buyer specifies how it will use and protect the information, the terms of the agreement are premature, Kenner said in court, according to news reports and interviews with people on both sides of the dispute whose subordinates attended the hearing.

The otherwise unremarkable bankruptcy proceeding has captured the attention of privacy advocates, state attorneys general and federal regulators. The case has shed light on the debate over online privacy and whether Internet retailers should be subject to government regulation limiting how they handle and protect customer information. But the ruling Thursday did little to address privacy concerns and instead cleared an obstacle in a far more traditional bankruptcy issue: asset valuation.

The judge filed only a brief document saying the agreement was rejected "without prejudice to the parties raising these issues."

Bids for List

Two companies filed bids for the names just before the FTC reached its agreement with the company in July. A lawyer, however, for the company's creditors said they would now seek a higher bid. In an earlier hearing, the judge allowed the creditors to reject the bids, which they considered too low.

Walt Disney(DIS Quote) bid around $50,000, according to Alex Rodolakis, lawyer for the creditors' committee. Disney, which owns 60% of Toysmart, had agreed to retire the list.

Digital Research, of Kennebunk, Maine, had bid $15,491 for the list and sundry Web assets, including the site and 33 domain names. The company had offered to auction the other properties and return a portion of the proceeds to the creditors and to allow customers to choose whether to be included on the list before it was handed over.

Rodolakis said the creditors received fewer than 10 bids on the list from competitors when it first advertised the sale of Toysmart.com's assets. He, however, said those bids each more than doubled Disney's offer.

"We're hopeful that we're going to find a buyer and one that's going to offer in excess of what Disney is offering," Rodolakis said.

Michelle Bergman, spokeswoman for the Walt Disney Internet Group, said the company's offer to purchase the list still stands, although she declined to comment further.

FTC Reacts

Dana Rosenfeld, assistant director of the FTC Bureau of Consumer Protection, said, "We were disappointed that the judge denied the motion."

FTC staff attorneys, who attended the hearing believe the judge's ruling, will allow them to file similar objections later on privacy grounds if the creditors committee finds a buyer it likes, Rosenfeld said. In that case, the FTC would do so, offering stipulations similar to those in the original agreement, she added.

Bob Domine, president of Digital Research, noted that the list loses value daily. As for the FTC stipulations, the requirement that the bidder operate in a family market would have a chilling effect, he added.

"Since there were only two bids in the first place, it doesn't seem like a process that can take much chilling," he said in a faxed statement.

The FTC settlement would have allowed Toysmart.com to sell the list of personal information it gathered on customers to a bidder that was engaged in the family commerce market and that agreed to abide by Toysmart.com's privacy policy.

Seed for Legal Fight

Toysmart.com announced on May 22, that it was closing operations and selling its assets because a last-minute investment attempt to reposition the company broke down. A majority of the company's board members are appointees of Disney.

Internet retailers assert they can regulate themselves by disclosing on their sites whether and how they might use customer data accrued when visitors join sites or make purchases.

"The problem would go away if we had a privacy law that required all companies to treat information fairly whether they got it in a fire sale or obtained it from the customers directly," said Jason Catlett, a privacy advocate who maintains the Junkbusters.com Web site.

The FTC sued Toysmart.com on July 10 to prevent the Waltham, Mass.-based company from selling a list consisting of addresses and other personal information about its customers. Toysmart's privacy policy, posted on its Web site, states that its customers' personal information "is never shared with a third party.''

The company had gone on to reassure customers that their names and addresses were stored on a separate server, and it gave them the option of securing the data with a password.

On June 8, Toysmart.com took out an advertisement in the Wall Street Journal offering the sale of both tangible and intangible assets, including ''databases and customer lists.''

The list includes customers' addresses, buying habits, children's ages and other personal information. The list is thought to include information on roughly 190,000 people, said Michael W. Macleod-Ball, a lawyer for Digital Research.

The list is split in two parts, Macleod-Ball said. It includes detailed information on around 100,000 people who made purchases from Toysmart.com's Web site and less extensive data on 90,000 people who registered with the site but did not buy toys.

Bidding on the list was open until July 21. Under rules set up by Toysmart.com, bidders could make offers for all the company's assets or any of four portions: leases of real property, furniture, software or the Web site. That last lot included the name list.

On June 29, the Wall Street Journal advertisement came to the attention of Truste, a nonprofit agency that certifies the privacy policy of online retailers. Toysmart.com was among roughly 2,000 sites, including major online search engines, that have received Truste's seal of approval of private policy.