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FTC, Toysmart.com settle
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July 21, 2000: 4:15 p.m. ET
Now-defunct e-tailer agrees to refrain from selling customer data as an asset
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NEW YORK (CNNfn) - The now-defunct Web site Toysmart.com agreed to refrain from selling data that it collected on consumers as a stand-alone asset, the Federal Trade Commission announced Friday.
The agreement settles FTC claims that the Internet-only toy retailer, which is majority owned by Walt Disney Co. (DIS: Research, Estimates), attempted to sell information that it collected from consumers in violation of its own privacy statement. The statement, posted on Toysmart's Web site, stated that such information would never be shared with third parties.
The agreement also settles new FTC charges filed Friday accusing Toysmart of collecting personal information from children without a parent's consent in violation of the Children's Online Privacy Protection Act of 1998, which took effect April 21. Toysmart agreed to destroy all such data.
The settlement comes two weeks after the FTC filed suit against Waltham, Mass.-based Toysmart.com in U.S. District Court in Massachusetts.
Under the settlement, Toysmart will file an order Friday in Bankruptcy Court prohibiting it from selling the customer list as a stand-alone asset. The settlement only allows a sale of the list along with a sale of the entire Web site, and only to another retailer in a related market. The buyer must also agree to uphold Toysmart's original privacy policy.
In May, Toysmart shut down saying it was going out of business after burning through most of its cash and being unable to raise more.
A bankruptcy sale of the company is scheduled for Wednesday. If the Bankruptcy court does not approve the future sale of the company's assets, Toysmart must destroy the customer list and all related data on its consumers.
"We think it's a fair balance between the needs of creditors and the customers," Toysmart attorney Harry Murphy said of the settlement.
Toysmart still disputes the allegations and says it never violated its privacy agreements, Murphy added.
 "Customer data collected under a privacy agreement should not be auctioned off to the highest bidder," said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. "This settlement protects consumers from a winner-take-all bid in bankruptcy court, ensuring only a family-oriented Web site, willing to buy the entire Toysmart Web site, has the ability to do so."
Toysmart.com marketed and sold educational and non-violent children's toys over the Internet. While in business, the company collected detailed personal information about its visitors, including names, addresses, billing information, shopping preferences, family profiles and even children's birthdays.
The FTC claims the company then offered to sell the customer information it had collected.
"We are pleased that the FTC and Toysmart agreed upon a strategy to protect the privacy of those included on the Toysmart customer list," said a company statement read by Disney spokeswoman Chris Castro. "Their objective with this agreement is the same as the one Walt Disney Co. sought to satisfy with its bid in the interest of protecting consumer information and privacy."
Disney last week offered to buy and retire the customer lists from Toysmart in an effort to protect the customer privacy, Castro said.
With its bankruptcy, Toysmart.com is among the first of the big-name dot.com toy retailers to fall victim to the shakeout forecast by analysts of many Internet retailers that bring in high revenue but at little or no profit.
Pressured by competition from other online toy retailers such as Smarterkids.com and zainybrainy.com, privately held Toysmart.com failed to build a unique brand that would keep parents coming back, Heather Dougherty, an analyst with e-commerce research firm Jupiter Communications said in May. 
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