Non-Decision On Toysmart.com

A bankruptcy judge has refused to prohibit Toysmart.com's customer information from being sold as an asset against its debts. See the New York Times or the AP wire (CNET) version. Judge Kenner notes that objections may be raised later, and believes that in the absence of a buyer, any decision now would be premature. This case is key because, if the web's privacy policies are not guaranteed after a company goes belly-up, they're mostly toilet paper. But the lawyer for the now-bankrupt company argued that the privacy contract between TRUSTe and Toysmart, allegedly guaranteeing visitors' privacy, "like others in a bankruptcy proceeding, may have to be broken in order to realize the highest value for creditors in a sale."

That lawyer went on to say that the "adverse publicity" raised about the auctioning-off of your privacy made it hard to find a buyer for your personal information. A shame. "Now we're back where we started."

Why is he so worried about not finding a buyer? Because information about customers is valuable. Don't let corporations pretend otherwise. Selling who you are and what you buy can be a substantial source of revenue; as far as these companies are concerned, that's just one of their assets, like their cash in the bank or their real estate. Toysmart will continue to try to auction off those databases, probably after media attention dies down and it becomes easier to make the sale quietly.

And sadly, even if privacy prevails this time, it may not be important enough to set precedent, since the presence of childrens' information makes the Toysmart case "unique."

Update: 08/18 04:09 AM by J : For background info on the dot-com going-out-of-business process, check out this PlanetIT article. Note in particular that it can be hard for many dot-coms to find any tangible assets to sell, thus, customer data becomes more important.

Comments

new .com idea

[titus-g]

Well I guess the directors/employees won't be allowed to benefit directly if they have filed for bankruptcy.

But, if you had an 'arrangement' with your creditors would it be possible to create a new site offering [something popular & useful] for nothing but registration (with cast iron privacy policy), wait till you have several 100K users and fold the company, flog the database, and get your cheque sent to your hotel in Manilla?

Hey, it's a better idea than let's buy it dot com anyway :P

Re:new .com idea

[rgmoore]

Sure. All you have to do is to be your own creditor. Imagine the following steps:

1. You set up two companies, popularandusefulinfo.com and The Dot Com Loan Company, Inc.
2. Dot Com Loan loans popularandusefulinfo.com a big stack of money at an unreasonable interest rate.
3. popularandusefulinfo.com sets up their web site with an iron-clad privacy guarantee and starts gathering customer info.
4. Any income from popularanduseful winds up going to pay the outrageous interest on their loan, shoveling any potential profit back to Dot Com Loan.
5. popularanduseful goes bankrupt because they have no prayer of making money and they eventually pay all their money back to Dot Com Loan in the form of interest. Their assets (read customer info) are sold to cover their debt, namely the principal on the interest.

Bingo, you've now managed to get big piles of customer info under false pretenses and profit from it.

Would you call this dirt farming?

[human bean]

The net is not the only way to keep track of folks info. What about supermarkets that track your every purchase through card entry? What about your doctor, in the form of his or her personal corporation's medical records?

Suppose I find a doctor that has gone bankrupt, make an offer to the trustees to take all those old musty files off their hands for cash. Wonder how much I could make off of that in a medium sized community?

"Yes sir, Mr. Vinkman, I have your medical records right here, including notes about the time you were treated for herpes duplex after visiting Ms. Wong's Hottub Parlour. I can mail the originals to your home for free, in an envelope addressed to Mr. or Mrs. Vinkman, or I can deliver them personally to you for a small fee..."

Is ANYONE really surprised?

[satch89450]

Call me a grouch, but I've read what the law has to say about bankruptsy (I was involved with the Hayes Microcomputer one, and a couple of smaller ones, as a creditor) and I believe the judge had no choice but make the ruling she did. Absent clear guidance in the statutes to the contrary, the judge's job is to preserve assets and generate revenues for the creditors.

The problem I have with the whole thing is that there is precedent with regards to non-disclosure agreements between companies. I consider that the disclosure and privacy statement made by toysmart.com represents a contract between the customer and the company, and represented a contract just as binding as any NDA signed in blood.

I wonder if a class-action suit against the receivership and creditor's committee of toysmart.com would send the proper message?

Alternatively, release of information under promise of non-disclosure could set a counter-precedent that would negate non-disclosure agreements in general in the event of bankruptsy. Knowledge for sale during bankruptsy -- now that's a hell of a way to raise money!

Re:Is ANYONE really surprised?

[radja]

Things like this best show why self-regulation doesn't work. the US needs privacy laws.

//rdj

Contracts?

[danderson]

If I understand correctly, if toysmart does sell their customer information they will have broken quite a few contracts: The one with TRUSTe and the ones between the customers and toysmart. I don't know all the legal details about the situation, but I would think that the threat of a lawsuit could put pressure on toysmart to not sell the info. Could anyone with more laywerly knowledge shed some light on this?

Re:Contracts?

[bighead_wong]

I would think that the threat of a lawsuit could put pressure on toysmart to not sell the info.

First off, they have nothing to lose, really. They are bankrupt so another lawsuit wouldn't lead to anything (nor the threat of one).

Secondly, a contract involving money is considered much more important than the ones between a single person and the company that isn't.

I was about to go as far as 'a digital contract isn't worth the paper it's signed on' but that isn't true as UCITA states . . . unfortunately, it seems that the only party that is helt to digital contracts is the party and not the companie$.

Gotta love capitalist societies.

Re:Contracts?

[Shanti]

I always thought it was pretty clear:

US Constitution Article I, Section 10

No state shall ... pass any ... Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Now, it's well known that this document doesn't apply in California ;), ToysMart is in Massachusetts.

But what if another company buys ToysMart, thus assuming its contracts, obligations and debt? Then it would legitimately own the customer list. And, since all the company has is its customer list, maybe selling the list isn't all that different.