FTC and Toysmart Negotiate Over Sale of Customer Data

Complaint alleges the online retailer misrepresented its privacy policy

The Federal Trade Commission and Toysmart.com LLC were in settlement negotiations last month after the FTC filed a complaint against the failed Internet retailer. The complaint seeks to prevent the sale of personal information collected on the company’s Web site despite its privacy guarantee “never” to share that information.

The suit, filed in U.S. District Court for the District of Massachusetts, alleges that Toysmart misrepresented to consumers that personal information would not be shared with third parties by offering that information for sale among its assets in at least one venue, a June advertisement in the Wall Street Journal.

At its Web site, the retailer of children’s toys collected detailed personal information about its visitors, such as billing information and family profiles that include the names and birth dates of children. The once-popular site attracted 1.6 million visitors in December 1999, but that number fell to 284,000 in January 2000, according to Media Metrix. The number of visitors continued to decline until the company filed for Chapter 11 bankruptcy protection in June. In comparison, more than 5.5 million visitors logged on to the eToys.com site that December.

David Medine, associate director for financial practices for the FTC, was optimistic that a settlement could be reached before the scheduled sale of the company’s assets, July 26. One possibility was the sale of the data to a company that planned to take over and “stand in the shoes of Toysmart,” he says.

“The bottom line would be to make sure privacy promises made to consumers are kept,” he adds. “And that the expectations about how the data was handled would be honored.”

Harry Murphy, Toysmart’s bankruptcy lawyer, says he had hoped the case would be settled within a few days from the FTC filing.

Waltham, MA-based Toysmart closed its operations and began selling its assets in May. Its creditors filed an involuntary bankruptcy petition in June and Toysmart filed for bankruptcy protection shortly thereafter.

Walt Disney Co. reportedly owns 60% of Toysmart stock and had provided the retailer with $20 million in cash and $25 million in advertising.

Should legal action be taken, the case could prove precedent-setting for the sale of data that contradicts privacy statements, as the first wave of dot-coms shutters its Web sites and scrambles to sell off assets. In addition, Rep. Spencer Bachus (R-AL) last month filed legislation that would define such an act as an unfair business practice.

The sale of the data was brought to the attention of the FTC by industry privacy group Truste, which had certified Toysmart’s compliance with privacy guidelines by allowing Toysmart to license and display Truste’s privacy seal on its Web site. Truste’s licensee base totals 2,000.

“The state of trust online is founded on the belief that what is private will remain so,” says Truste spokesperson David Steer.

“If companies are able to say one thing and do something completely different, we are irreparably damaging the potential for trust online,” he adds. “Everyone has a vested interest here to make sure that companies that hoodwink their consumers – like Toysmart – don’t exist.”