Toysmart Will Not Sell Customer Names… For Now

Following an uproar over Toysmart’s intention to break the privacy promise it made to its customers, the defunct e-tailer has done an about-face, deciding not to sell its database of customer information, after all.

Before Toysmart’s collapse, the company had adhered to a strongly worded privacy policy, promising its customers that it would never sell their personal information — including shopping preferences and browser histories — to a third party. But when the company filed for bankruptcy, the customer database was included in its list of assets for sale.

Off the Auction Block

The decision unleashed a barrage of criticism against Toysmart, and earlier this week, the company buckled, asking a U.S. Bankruptcy court for permission to remove the customer database from its asset list. In approving the request, Judge Carol Kenner commented that if Toysmart had not acted voluntarily, she would have been inclined to disallow the sale of the customer information anyway.

The U.S. Federal Trade Commission (FTC) had sued the online toy store to block the controversial sale, and in a settlement reached last week, the two parties agreed to limitations on how the information could be sold. Although the FTC’s restrictions were intended to protect consumer privacy, the court apparently did not believe they went far enough.

Massachusetts assistant attorney general Pamela Kogut told the E-Commerce Times that a “key component” was missing from the FTC conditions for sale of the customer database. “Consumers should be given notice that their names and shopping preferences are going to be sold, and the opportunity to provide opt-in consent,” the attorney said.

Not Far Enough

In last week’s settlement, the FTC agreed to allow sale of the customer information if Toysmart were to sell the database to a merchant in a similar market who would agree to abide by Toysmart’s original privacy policy.

The purchaser would also have to obtain “opt-in” consent to sell the names yet again. The settlement also required that the sale could only be made to a company that would agree to purchase the entire Toysmart Web site, not just the list.

Thirty-nine attorneys filed objections, saying that consumers should have the opportunity to opt-out of the sale of their personal information before Toysmart sells their names and preferences.

Much Ado About Nothing?

Kogut told the E-Commerce Times that there are two important differences between Toysmart’s proposed sale of customer data gathered on the Internet, and the common practice of buying and selling customer lists in the brick-and-mortar environment.

“First,” she said, “Toysmart promised that the information would never be sold. Second, even if that promise had not been made, the Toysmart database has shopping preferences for its customers, including click streams and browser histories. That goes beyond the traditional customer list of names and addresses.

“Even if there were no promise, consumers have a reasonable expectation of privacy regarding that type of information,” Kogut said.

The attorney speculated that Toysmart will likely renew its request to sell the customer database after the company crafts a proposal it thinks the court will approve. Kogut said, “Presumably Toysmart is going back to the drawing board to restructure the sale.”

Offer Refused

Toysmart’s majority owner, the Walt Disney Company, also faced harsh criticism from privacy advocates and the press.

According to published reports, Disney offered to purchase the customer data for $50,000 (US$) with the intention of destroying it, but Toysmart asked the entertainment giant to pay a higher price, and no deal was reached.

Another hearing on the proposed asset sale is expected before the end of August.