Information privacy and Internet company insolvencies: When a business fails, does divestiture or bankruptcy better protect the consumer?

Fordham Journal of Corporate & Financial Law, 2003 by Usmani, Farah Z

INTRODUCTION

Between the Internet bubble burst1 and the current economic recession,2 corporate bankruptcy filings are increasing.3 Sales of substantially all of the assets of companies that have opted to close their doors or exit a particular line of business are also increasing." Of course, the creditors of these companies are desperate to maximize their recoveries.3 None of this is particularly surprising. However, a new problem has arisen in the cases of e-commerce companies seeking to liquidate their assets -their privacy promises to users could prevent the sale of customer lists compiled by the now floundering Internet companies.

The sale of customer lists is not a new method to increase the capital available to failing companies.6 However, the nature of the contact between consumer and retailer has changed with the advent of e-commerce.7 Moreover, the manner in which customer lists were compiled in the past and the way they are compiled by Internet companies today differs greatly.8 The terms under which such information is collected has also changed.9 Because of these changes in the interactions between buyers and sellers, all customer lists are not treated equally when a company chooses to sell its assets due to bankruptcy or failure.10

This Note further explores this conflict. Part I provides an overview of the goals of bankruptcy law and presents the relevant statutes, in both the brick and mortar and Internet business contexts. The section concludes that the goals of bankruptcy law favor the sale of customer lists.

Part II defines the term customer list, discusses the use and sale of customer lists for both traditional brick and mortar businesses" and Internet retailers, explains the current legal protections available to e-commerce customers, and considers policy concerns about data privacy and Internet commerce. Part II concludes that there exists a clear conflict between the treatment of customer lists for brick and mortar businesses and e-commerce businesses.

Part III discusses the conflict between the goals of bankruptcy law and the problems of consumer privacy present in e-commerce, which does not generally exist in brick and mortar businesses. Specifically, the discussion focuses on the seminal Toysmart case and its consequences on other Internet businesses and concludes that while the Toysmart case has caused many Internet retailers to change their policies, the problem has not been permanently resolved. No one has addressed the differing outcomes possible between brick and mortar and Internet sales.

Part IV provides a discussion of currently proposed and pending legislation in the area of e-commerce privacy. This section concludes that while the bills under consideration may resolve the privacy issues of Internet business customers, they will not resolve the fact that different outcomes occur in the e-commerce and brick and mortar retail businesses.

This Note concludes that the treatment of customer lists in bankruptcies and acquisitions differs greatly. Additionally, the differing outcomes in the sale of customer lists in different types of bankruptcy have not been considered by courts, legislators, or even the Federal Trade Commission ("FTC"). Furthermore, this final section proposes that greater public awareness is needed by consumers, many of whom do not realize that their information is subject to divesture even when they conduct business with traditional brick and mortar businesses. As a result, any pending legislation should aim for a consistent outcome in bankruptcy proceedings and ideally should protect the privacy rights of all consumers, both Internet and traditional.

I. THE IMPLICATIONS OF BANKRUPTCY

When the Internet bubble burst, many e-commerce businesses went out of business, merged with other companies, or declared bankruptcy.12 For many of these companies, one of their most valuable assets was their customer list.13 Other valuable intangible assets included domain names,14 licensed technology,15 and human capital.16 In contrast, physical goods, such as computers, desks, stock, and other office equipment have not been in great demand or of great value.17 In fact, tangible assets are becoming more and more difficult to sell.18

Because of the diminishing value of tangible goods, companies looking to maximize the return for their creditors or shareholders are desperate to sell whatever they can-including customer lists that are protected by promises of privacy.19 These privacy promises and the goals of defunct companies to maximize the value of their estates have created a conflict that could result in either smaller estates or the sale and dissemination of customer information obtained under a confidentiality promise.20 Potentially, consumer privacy may be violated in an effort to increase the value of estates. Nonetheless, these days, "[c]ustomer information will likely be one of the most significant assets of a failed Internet business."21

A. Duties of Trustees

When a company declares Chapter 7 bankruptcy and seeks liquidation, the U.S. Trustee must appoint a trustee, or serve as trustee itself.22 "The trustee shall collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest."23 The basic goal of liquidation is to maximize the value of the estate.24 A responsible trustee will seek to sell the customer list of a defunct e-commerce business, especially where it has greater value than tangible items that are not realizing their true value at sale.