FTC Files Suit to Bar Sale of Toysmart's Customer Data

(July 10, 2000) The FTC filed a complaint in federal court against Toysmart to prevent it from selling customer data in violation of its privacy policy.

The Federal Trade Commission (FTC) filed its original complaint in U.S. District Court for the District of Massachusetts on July 10. The complaint names as defendants Defendants Toysmart.com, Inc. and Toysmart.com, LLC.

The complaint alleges that Toysmart is a web based toy store that is now in bankruptcy that is planning to sell personally identifiable customer data in violation of its privacy policy. The complaint alleges that this is an unfair or deceptive act in violation of Section 5 of the Federal Trade Commission Act.

The FTC requests that the Court "Permanently and preliminarily enjoin defendant from violating the FTC Act ... [and] Declare Toysmart's transfer of the Customer Lists to any third party to be a violation of the FTC Act ..."

"Even failing dot-coms must abide by their promise to protect the privacy rights of their customers," said FTC Chairman Robert Pitofsky in a press release. "The FTC seeks to ensure these promises are kept."

Toysmart is a business which until May of 2000 sold children's toys and related products through a web site located at http://www.toysmart.com/. The complaint alleges that Toysmart then "began soliciting bids for the purchase of its assets. Bids have been sought for the purchase of all of the company's assets or for individual assets. Among the individual assets offered for sale by Toysmart.com are its Customer Lists (on either an exclusive or non-exclusive basis)." [Parentheses in original.]

Creditors of Toysmart filed a petition for involuntary bankruptcy on June 9, 2000 in U.S. Bankruptcy Court for the District of Massachusetts.

The complaint further alleges that Toysmart had previously adopted and published on its web site a privacy policy which stated that "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."

The complaint contains a single count which alleges that Toysmart's proposed sale of personal customer data in violation of its posted privacy policy constitutes a violation of Section 5 of the Federal Trade Commission Act.

An FTC release also states that the FTC has not filed an appearance in the bankruptcy proceeding.

The FTC's attorneys of record include Laura Mazzarella and Ellen Finn.

The FTC has determined to date that it does not have authority under the FTC Act to take action solely on the basis of the privacy practices of an online business. However, it has determined that if an online business posts a privacy policy, and then violates that policy, this constitutes an actionable violation of the FTC Act.

In addition, the FTC has recently recommended to the Congress that it pass legislation expanding the FTC's authority to regulate online privacy practices.

There are several pending bills, with different proposals, that would give the FTC new authority to regulate online privacy.