Editorial - Privacy and Toysmart

     Among the top stories in the world of e-commerce recently has been the courtroom saga concerning the future of the Toysmart customer data. Toysmart was one of the companies which had contracted with TRUSTe to display its seal and comply with its standards for protection of consumer data. Toysmart had posted a privacy policy on its web site promising its customers that their privacy would be maintained. But alas, things do not always work out as expected. Recently Toysmart filed for bankruptcy protection, and the battle was joined.

     In a bankruptcy context, the goal is to maximize the assets of a company to pay off creditors to the greatest extent possible. Federal bankruptcy law has been enacted and developed largely with this primary purpose in mind. Thus, in a bankruptcy context many, if not most existing contracts of the debtor, can be voided. And this leads to the Toysmart dilemma.

     In this "new economy" we have all learned that information is valuable. Indeed, it is so valuable that new businesses have rapidly sprung up to deal in it. What, before the advent of cheap computing, was not worthy of a glance has become a hot commodity. The hottest commodity in the "new economy" is customer data. And this is a commodity that Toysmart has quite a bit of. In classical bankruptcy behavior, the process began to find the highest bidder for this asset of the Toysmart estate.

     But Yikes! How about all those promises to people that their privacy would be maintained. And Gee Whiz! We're talking children here. Well, those promises are just contracts - the sort that bankruptcies have typically erased. Be they promises to customers or TRUSTe.

     First TRUSTe announced it would fight the sale of Toysmart's customer data in court. Then the Federal Trade Commission (FTC) intervened. Not to be outdone most of the state attorneys general have now intervened in the bankruptcy court proceeding on behalf of the hapless customers. The FTC announced it had struck a deal with Toysmart concerning the sale of data. Then the attorneys general announced they would oppose the deal.

     My sympathies are with the judge. Though I've not studied the case details, I suspect that under traditional bankruptcy law the sale should go through. Federal bankruptcy law classically trumps state contract law - where the privacy promises are grounded. Maximizing the bankruptcy estate would call for the sale of a valuable asset. Judges are not supposed to ignore clear existing law. But in this controversial arena, the poor judge will catch (insert expletive of your choice) if the data is turned loose.

     It is ironic that for some years the FTC has been contemplating whether or not federal privacy legislation is needed in this age of the Internet. Only a few months ago, did the FTC abandon its position that self-regulation was not adequate - and that in a split decision. Toysmart has made that myopia apparent.

     Many Americans would be surprised to learn that the U. S. Constitution provides no right of privacy. The only real constitutional protection is found in the Fourth Amendment's prohibition of unreasonable searches and seizures in a criminal context. The U.S. Supreme Court has inferred a right of privacy in some cases, but it has generally been limited to government intrusion into bedroom activities - contraception and reproductive rights. There is no constitutional privacy protection whatsoever from private business interests, what little there is applies only to governmental intrusions. In a business context, privacy rights exist only in a patchwork of state and federal legislation and regulation - and that patchwork has more holes than patches.

     So what's the answer? It is time for a truly considered debate on privacy in this country. And that debate cannot be held in a vacuum. Bankruptcy reform legislation has been a major congressional battlefield for some years, and powerful lobbies are lined up on all sides. The European Union has adopted strict privacy protection laws, which have been the subject of exceedingly intense negotiation for some time with American business interests wanting looser privacy regulation. Polls show that most Americans value privacy. However, there are many business interests which have consistently opposed privacy legislation because it would limit their ability to use customer data to sell. Fortunately this is an election year. Americans need to become aware of privacy issues and insist on specific answers from candidates. Candidates do not like giving real answers to real questions. This time, if they duck, don't vote for them.

© 2000 Daniel A. Krohn