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Senate protects consumer data

In the wake of the Toysmart.com scandal, the Senate passes an amendment that would prohibit a company from violating its own privacy policy when it goes bankrupt.

    WASHINGTON--The Senate has voted to make it extremely difficult for bankrupt dot-coms to sell consumer data.

    The amendment, sponsored by Senate Judiciary Committee Chairman Orrin Hatch of Utah and top committee Democrat Patrick Leahy of Vermont, was added to a comprehensive bankruptcy bill that passed the Senate 83-15 on Thursday. That bill must be reconciled with a House version that does not contain the dot-com provision.

    Privacy advocates have pressed Congress to clarify what a dot-com can do with its consumer database when in bankruptcy protection ever since last summer, when Toysmart.com sought to sell its only real asset, its database, despite a privacy policy that said it would never distribute the information to others.

    "The Toysmart case showed customers could be hurt by a failed dot-com's sale of their personal information," said Boston Internet attorney Warren Agin of Swiggart & Agin. "The new legislation intelligently addresses the need to protect customer information and fairly balances the interests of consumers and the bankruptcy process."

    If the amendment becomes law, any dot-com that has a privacy policy saying it will not sell data to third parties must adhere to that policy even in bankruptcy. In addition, if the company said it would only distribute information to a certain type of company, say one in its field, it must stick to that agreement. More dot-coms are posting such policies, offering voluntary self-regulation as an alternative to government-mandated restrictions on the use of consumer data.

    However, the amendment also states that a bankruptcy judge could authorize a sale if an independent third party selected by the court deemed that privacy harm would be minimal. In addition, the third party is free to consider alternatives to outright sale or the sale of only portions of the information.

    "The new law protects customers while giving the bankruptcy court flexibility to allow a reasonable sale of customer information," Agin said.

    In the Toysmart case, the Federal Trade Commission and the states' attorneys general protested the company's proposed sale, and in the end all of the consumer data was destroyed before what was left of the company was purchased by Walt Disney for $50,000.

    The measure comes after members of the House and Senate have vowed to pass significant privacy legislation in 2001; they have hinted that it is more likely to come in bits and pieces than in one large bill.

    If the dot-com language survives in the House and Senate conference, it is likely to become law, as President Bush has said he will sign a new bankruptcy bill.