Toysmart Flap Triggers Privacy Bill

Responding to defunct online toy retailer Toysmart.com’s attempt to sell its customer records, two U.S. Senators introduced legislation on Wednesday to block the sale of consumer information on the Internet.

Senators Patrick Leahy, (D-Vermont) and Robert Torricelli, (D-New Jersey) attached the proposal to a broader piece of legislation that seeks to reform bankruptcy laws. The new bill, called “The Privacy Policy Enforcement in Bankruptcy Act of 2000,” is similar to legislation introduced earlier in the U.S. House of Representatives.

Toysmart was dressed down by the U.S. Federal Trade Commission (FTC) earlier this week, when the agency filed a complaint in federal court charging that the e-tailer sold or shared information about its customers after promising not to do so.

The company had put all its assets, including its customers’ records — such as names, addresses and even credit card numbers — up for sale as part of its bankruptcy proceedings. The suit, brought in U.S. District Court in Massachusetts, sought to bar the sale of confidential, personal customer information collected on the Toysmart Web site.

Proactive Move

Yesterday’s action by Leahy and Torricelli was evidently a proactive move to prevent future attempts by other online merchants that might follow Toysmart’s lead.

“It is wrong to use our nation’s bankruptcy laws as an excuse to violate a customer’s personal privacy,” the Senators said in a letter seeking support for the new bill. “Customers have a right to expect a firm to adhere to its privacy policies, whether it is making a profit or has filed for bankruptcy. Our bill closes this loophole in the bankruptcy code and ensures that online and offline firms keep their promises to protect personal privacy.”

Meanwhile, a bill introduced on Monday in the House of Representatives by William Delahunt, (D-Massachusetts) and Spencer Bachus, (R-Alabama) would bolster the FTC’s power to take action against Web sites that violated their stated privacy policies. However, as promising as the legislation appears, some Capitol Hill insiders say passage will be an uphill battle with so little time left in the current legislative session.

Compromising Consumer Trust

Toysmart’s privacy policy had specifically stated, “Personal information voluntarily submitted by visitors to our site, such as name, address, billing information and shopping preferences, is never shared with a third party.”

TRUSTe, a San Jose, California-based nonprofit privacy seal organization, became suspicious early in June when Toysmart placed a newspaper advertisement announcing its intention to sell its assets. “In its advertisement, it essentially said ‘our customer lists are up for grabs,'” said TRUSTe spokesman David Steer.

Disney Makes Offer

Meanwhile, Walt Disney Company, the majority owner of Toysmart, has offered to purchase the customer list to ensure that the data remains confidential. “If the bankruptcy court allows us to purchase the list, we will do so and retire the list,” Disney said in a statement released on Tuesday.

“If we are not allowed to purchase the list, we will urge the court, as the Federal Trade Commission has, to permit a sale only to a purchaser of all the assets of Toysmart who will maintain the confidentiality of the information contained in the list,” Disney said.

David Medine, of the FTC’s consumer protection bureau, responded, “We certainly appreciate their efforts to see that the privacy of Toysmart’s customers is protected.” Medine declined to comment further because of ongoing settlement talks with Toysmart.

TRUSTe’s Steer said Disney’s move could be a quick fix in this instance, but that other companies may attempt to sell their customers’ information in the future if more decisive action is not taken now. “They’re trying to be the knight in shining armor,” Steer said. “I worry, though, about the precedent it sets.”