Promises to sell

When Toysmart.com filed for bankruptcy in May, the demise of the online toy retailer was dismissed by the Internet industry as merely an inevitable casualty of the transforming economy. The company’s slash-and-burn tactics – its blatant breaking of a pledge to protect customer privacy – suggests that the bankruptcy extends beyond accountancy to ethics.

Toysmart collected a lot of information from its customers. Not just the name, mailing address and credit card number of the purchaser, but the names, ages, birth dates, hobbies, interests and wish lists of the customer’s children. This was done, the company said, to provide better service, to keep customers apprised of new products, sales, special offers and contests. And it came with th explicit promise, on the Web site’s privacy statement, that this information “is never shared with a third party.

Toysmart was, after all, a member of TRUSTe, a self-regulatory industry group dedicated to enhancing consumer confidence. Toysmart’s view changed when it went belly-up. That database is for sale, along with computers, inventory and other assets. It may, in fact, be the company’s most valuable asset. And that promise? Toysmart’s lawyers say it was just that – a promise, not a binding contract.

Since then, two more failed e-retailers – Boo.com and CraftShop.com – that made grand assurances of customer privacy put their databases on the auction block, demonstrating that their promises are as defunct as their business plans. Their lawyers argue that personal information is a valuable asset these companies have the right to sell and that the nation’s bankruptcy laws, written before the Digital Age, address the financial interests of creditors but are silent on the privacy interests of customers.

Such legal hair-splitting is hardly new, but it is a position the Internet industry will take at its own peril. Americans are increasingly concerned that their privacy is at risk on the Internet – a recent survey by Forrester Research found that more than two-thirds of respondents either refused or were very reluctant to shop online for precisely that reason. The lost sales last year from this consumer unconfidence is estimated at nearly $3 billion; Internet shoppers are browsing but not buying.

The Federal Trade Commission is suing Toysmart for violating the commitment it made to customers. That case is likely to be settled out of court, leaving unsettled the legal question of what privacy rights consumers have when an e-retailer flops.

It is a question that can only be answered in Congress. Legislation is in the works that would prohibit using bankruptcy to violate stated privacy policies. The Internet industry is responding with the familiar refrain that government regulation would cause this powerful economic engine to sputter and die; the industry is capable of, and dedicated to, effectively regulating itself. And that’s a promise.