FTC Takes Toysmart to Court

Toysmart.com Inc.‘s descent into oblivion became a little more painful Monday as the Federal Trade Commission filed a complaint against the failed e-tailer in the U.S. District Court for the District of Massachusetts.

Toysmart.com, which is majority controlled by Walt Disney, filed for Chapter 11 bankruptcy on June 23 after its creditors filed an involuntary bankruptcy petition on June 9. It was the company’s strategy for appeasing its creditors that prompted FTC scrutiny.

On May 22, the company closed its operations and announced it would sell its assets. Toysmart.com then posted an advertisement in The Wall Street Journal putting its assets — including its URL, inventory, office furniture and its list of more than 250,000 customers — up for sale. Such sales are commonplace, but the catch is that Toysmart.com is a licensee of the TRUSTe Privacy Program, which certifies Web sites’ privacy policies.

Toysmart.com’s privacy policy states: “At toysmart.com, we take great pride in our relationships with our customers and pledge to maintain your privacy while visiting our site. 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.”

Toysmart collected detailed personal information about its customers, including names, addresses, billing information, shopping preferences and family profiles, which included names and birth dates of children.

The FTC complaint alleges that Toysmart’s attempt to sell its customer information was a violation of Section 5 of the FTC Act because the company misrepresented to its customers that personal information would never be shared with third parties.

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

The FTC complaint seeks an injunction to prevent the sale of Toysmart’s customer list. The commission voted 5-0 to authorize the complaint.

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