FRAMINGHAM (07/07/2000) - An organization that developed a set of online data-privacy guidelines is taking legal action aimed at stopping failed Internet retailers from selling their customer lists and other information to third parties.
San Jose-based Truste said it plans to file a brief in U.S. Bankruptcy Court in Massachusetts in an attempt to prevent Toysmart.com Inc. from selling customer data as part of a liquidation process that began after the online toy store closed its virtual doors in May.
Toysmart, which filed for Chapter 11 bankruptcy protection last month, included its customer lists and database among the items it wants to dispose of in a motion seeking the bankruptcy court's approval for a public sale of the firm's remaining assets. The court gave Toysmart permission to proceed with the bidding process pending a July 26 hearing on the public-sale motion.
But Toysmart was a participant in Truste's program, and Truste spokesman Dave Steer claimed that the sale of the Waltham, Massachusetts, company's customer records would violate Toysmart's legally binding contract with Truste, as well as the privacy policy that was posted on Toysmart's Web site.
"Toysmart.com entered into a contract with their customers saying they would not release customer data to third parties," Steer said. "And we're making the assertion that Toysmart is in breach of [that] contract and what it is doing is illegal." Truste has also asked the U.S. Federal Trade Commission (FTC) to investigate Toysmart's actions, he added.
Toysmart officials couldn't be reached for comment, and Alex Rodolakis, one of the Boston-based attorneys representing the company in its bankruptcy case, didn't return a phone call. Meanwhile, a spokesman for the FTC said he could neither confirm nor deny that the commission is looking into the matter.
Toysmart, which was majority-owned by The Walt Disney Co. in Burbank, California, is just one of about a half-dozen online retailers that went out of business this spring as funding began to dry up for unprofitable Internet ventures.
The controversy over the proposed sale of Toysmart's customer list comes amidst a high-profile debate about whether the federal government should pass privacy legislation or continue allowing companies to regulate themselves.
Jason Catlett, president of privacy advocate Junkbusters Corp. in Green Brook, New Jersey, said a federally enforceable law is the only way to guarantee the privacy of online shoppers. "This is one of the many cases where the current legal processes are grossly unsatisfactory," he said.
"There's not a lot of law around the issue of privacy in the U.S.," said Jonathan Moskin, an intellectual property lawyer at the New York law firm Pennie and Edmonds LLP. "But Truste may have a claim for breach of contract, which could very well result in the court issuing an injunction against [the sale proposed by] Toysmart."
The Toysmart case last week prompted Representative Spencer Bachus (Republican-Alabama) to announce plans to introduce legislation that would make it illegal for bankrupt companies to sell private information they originally told customers they wouldn't share.
Steer said Truste has also enlisted the help of Massachusetts Lt. Gov. Jane Swift and the state's attorney general. In June of last year, Swift filed privacy legislation aimed at protecting the personal information of Massachusetts consumers by preventing online companies from selling that data to third parties without an individual's consent.
But the bill is stalled in a legislative committee, and Swift said state government officials are trying to determine what, if anything, they can do in the Toysmart case.
"There are a lot of questions about whether privacy protections are better considered at the [state or] federal level," she said. "But there's no movement in the [FTC]."