This story appeared on Network World Fusion at
http://www.nwfusion.com/columnists/2000/0724bradner.html

'Net Insider:

Toysmart, privacy dumb

By Scott Bradner
Network World, 07/24/00

It would have been hard to manufacture a more perfect test case to find out if companies have to tell the truth in their privacy policies.

Toysmart, a failed e-commerce company, put an ad in The Wall Street Journal offering to sell its customer database as part of its bankruptcy process even though the company had promised not to share the information with any third party. This caused most privacy advocates to go nonlinear, and the U.S. Federal Trade Commission filed a complaint in a U.S. federal court to stop the sale of the information.

The story of Toysmart was a sad tale even before the recent privacy-related developments. The company started out quite well, focusing on nonviolent and educational toys, and managed to get a major investment from Disney, which wound up owning 60% of the company. But things quickly deteriorated when Disney had trouble coming up with a rational Web strategy, and Toysmart had to file for bankruptcy protection in June. This was the case of a company with a great deal of promise wiped out because an old-line retailer could not come to grips with the new Web-based e-commerce environment.

As in all bankruptcy cases, the company's assets are being put up for sale to try to get some money for the creditors. But in this case, one of the items offered for sale was Toysmart's "customer files." These files were being offered in spite of a Toysmart privacy policy that is still on the company's Web site. It says, "When you register with toysmart. com, you can rest assured that your information will never be shared with a third party." Toysmart's Web site also displays the TRUSTe (www.truste.com) seal of approval indicating that Toysmart will abide by the stated privacy policy.

When TRUSTe heard about the attempted sale of customer information, it contacted the Federal Trade Commission, which has now challenged the sale on the grounds that Toysmart had engaged in deceptive trade practices by promising one thing in its privacy policy, then doing something different. Disney, in an apparent good-guy move, offered to buy and then "retire" the database, but the real effect of such a move would be to establish the precedent that this type of violation of a written promise is OK.

On the surface, this seems like a very simple case - written promises mean something or they do not. But the assumption that creditors will get the maximum return during bankruptcy processes makes the outcome hard to predict. The database has value, and at this point may be the most valuable thing the shell of Toysmart has to offer.

I sure hope the FTC succeeds in establishing the precedent that companies have to live up to their promises even in the face of bankruptcy. It is hard to overestimate the damage to the future of e-commerce if the commission fails. Meanwhile, I will not give my name and address to the clerk at Radio Shack when he asks for it.

Disclaimer: Harvard's promises are its students and they are unpredictable, but the above refusal to supply a name is mine.

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