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Toysmart Runs Afoul of FTC

The FTC is suing the bankrupt e-tailer to keep it from going back on its promise not to sell its former users' information. One Fool wonders whether the government won't use this case as a stepping stone to turn up the heat on 'Net privacy -- and what this might mean to the "value" of a company's customer list.

By Dave Marino-Nachison (TMF Braden)
July 10, 2000

Failed "good toy" e-tailer Toysmart.com appears to have fallen into the ill graces of the Federal Trade Commission (FTC), which, according to Bloomberg, moved to sue the bankrupt company to keep it from selling its customer list.

Toysmart.com, majority owned by Disney's (NYSE: DIS) Buena Vista Internet Group, issued its "final" press release in May. Financing plans that would have kept the company afloat broke apart at the last minute: The company no longer takes orders but the site is still up (and collecting personal information) and its privacy "promise" remains. "Personal information voluntarily submitted by visitors to our site," it reads, "is never shared with a third party."

But Toysmart.com's bankruptcy filings clearly shows its customer list as on the block as it looks to repay creditors by selling off assets. (If you've never read a document like that, it's oddly depressing and vaguely reminiscent of the scene in Slap Shot where Joe McGrath puts his hockey team's massage table, skate sharpener, and bus up for sale.)

The government didn't like that too much, and now wants to get an injunction stopping the company from making that particular sale. The government and Toysmart.com were working to settle the matter but talks broke off Friday, The Wall Street Journal said. A last-ditch effort failed today. The agency believes the sale of the information is at odds with the company's previously stated policies -- but it might accept a transaction with carefully detailed terms.

While the efforts of a bankrupt e-tailer might not amount to much of a bean hill, it's certainly worth noting that a significant precedent could be set here. As more online ventures fall by the wayside, it is likely that their customer data -- for some, the only real value they managed to create -- will be among their more appealing assets.

Some companies still holding on by tooth and nail to their going-concern status might have similarly hoped they would be bought out on the basis of the names, e-mail addresses, and spending habit info they were able to collect. Take buyout-hopeful (but not bankrupt) CDNow (Nasdaq: CDNW), for example. It pledges not to sell customer information without permission, but to some observers that information is perhaps its key asset. This, potentially, raises the question of whether some customer lists are assets at all.

Companies could circumvent this by having weaker "privacy promises," but the current online environment certainly seems to indicate a consumer preference for more security and discretion rather than less as consumers look for e-tailers they can trust. And it might simply be that companies will be able to do as they please with their information if they offer their customers an opt-out.

All Toysmart.com wants to do is get its hands on some cash. The FTC has bigger fish to fry, though, and if this heads to court we'll find out how big. "Even failing dot-coms," said FTC Chairman Robert Pitofsky in a statement, "must abide by their promise to protect the privacy rights of their customers."

What began as one company's play to repay its creditors now seems potentially a landmark case that could go a long way toward establishing a whole new set of valuation parameters for consumer-focused Internet companies. It could be a story worth watching.

Your Turn:
Is this story just the first ripple before the whirlpool, or is it much ado about nothing? Post your thoughts to our Retail discussion board or check out what other Fools are saying.

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