Even When Retailers Die, They Have To Protect Privacy

Attorney Mark D. Rasch is the former head of the U.S. Justice Department's computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

It's widely understood that when a retailer such as Borders goes bankrupt, customer data—including data protected by the retailer's privacy policy—is up for grabs. Forget about privacy; a bankruptcy court can auction off that personal information to the highest bidder, and there's nothing the retailer has to say about it, right? Not so fast. Federal bankruptcy law says a retailer's privacy policy can still protect that data, but only if the policy is in force at the time of the bankruptcy.

And failing to take customer privacy into account can have serious consequences—the Federal Trade Commission has a decade-long history of going after retailers with unfair or deceptive trade enforcement actions—enforcing customer privacy even in some cases where a retailer has gone belly up.

Federal bankruptcy law does have provisions for protecting that private customer information, including appointment of a consumer privacy ombudsman, but that's only if there's a strong privacy policy in effect. On the other hand, failing to take customer privacy into account can significantly diminish the value of a company, in addition to leading to both breach of contract litigation and Federal Trade Commission unfair or deceptive trade enforcement actions.

Whenever there is a change in a retailer's status, either by merger, acquisition, dissolution, bankruptcy, reorganization or whatever, there is typically a change in the status of the retailer's assets. This includes inventory, hardware and equipment, but it also increasingly includes the personal information of the merchant's customers.

It may not be enough to simply say, as Borders does, that personal information is an asset in bankruptcy. The "asset" must be distributed in a manner that is consistent with the purpose for which it was collected. If I give my information to a bookseller, I certainly don't expect it to be available to a political or religious organization (or the government) for proselytizing, embarrassing me or worse.

After filing for federal bankruptcy protection, Borders noted that it had as an asset available for sale: a "proprietary database of customer information tracked by customer E-mail address and including customer data captured at the point of sale on Borders.com and through the Borders rewards and Borders Rewards Plus programs," which included records relating to more than 23 million customer interactions with the now-defunct bookseller.

But this is no ordinary asset. This is information that reveals the reading and purchasing habits of millions of people. It could reveal political philosophies, sexual orientations and religious beliefs—all types of sensitive information.

Indeed, merchants of all stripes collect information that consumers would consider sensitive. Although many women might not be sensitive at all about sharing the fact that they are a size 16 with their retailer (they kind of have to do this to buy clothes), they certainly do not want to advertise their size to the world. Thus, as a general rule, the collection and use of personal information must be consistent with the purposes for which the information was collected.

Whether a retailer has the right and authority to dispose of personal information about consumers that it has collected starts with (but does not end with) its privacy policy. Most privacy policies discuss what a merchant will do with personal data in the ordinary course of business. That's either "we won't sell it or share it" or "we will share it with business partners" or "we will use it for marketing."

But what happens if the merchant goes bankrupt?But what happens if the merchant goes bankrupt or is otherwise acquired? When online toy seller Toysmart went belly up, it had made no provision for the disposition of personal information as an asset. The FTC sued Toysmart in 2000 for sharing personal information as a bankruptcy asset, alleging that this constituted an unfair and deceptive trade practice. Even a decade ago, the FTC was concerned about the disposition of personal information as an asset in bankruptcy.

As a result, lawyers writing privacy policies have included provisions like that in the Borders' privacy policy.

The Borders policy says explicitly that the retailer and its subsidiaries and affiliates "believe that your personal information—including your purchase history, phone number(s), E-mail and residential addresses, and credit-card data—belongs to you. We collect this type of information to serve you better when you provide it to us, but we do not rent or sell your information to third parties."

After starting with that laudable goal, Borders (like many retailers) goes on to say that it can collect and share information with third parties to "improve your experience" and provides that users can "opt out" of certain uses. Borders also tells its customers that, in the event of an "acquisition or divestiture" customers' personal information may be an asset transferred, stating explicitly, "In the event that Borders or all of its assets are acquired in such a transaction, customer information would be one of the transferred assets."

So Borders is cool, right? It has effectively told its customers that, hey, if we go belly up your data is up for grabs—right? Almost, but not quite.

A privacy policy is the starting point, but not the ending point for the data relationship between a retailer and a customer. The real question should be, "is the transfer of this asset fair and reasonable?"

The federal bankruptcy law, 11 USC 363 (b)(1) provides that if a bankrupt company has a privacy policy "prohibiting the transfer of personally identifiable information about individuals to persons that are not affiliated with the debtor and if such policy is in effect on the date of the commencement of the [bankruptcy] case, then the trustee may not sell or lease personally identifiable information to any person" unless the sale is consistent with the privacy policy or if the court appoints a consumer privacy ombudsman who allows the sale or transfer under certain conditions.

So here is the $64,000 question: Does the Borders policy "prohibit the transfer of personally identifiable information?" Yes. And no.So here is the $64,000 question: Does the Borders policy "prohibit the transfer of personally identifiable information?" Yes. And no. The main policy essentially says, we won't sell this data—typical stuff. But the bankruptcy part says that the data is an asset, and we can do what we want with it. So if Borders' customer data is sold to the highest bidder, would that be "consistent with the privacy policy" that allows the data to be disposed of? Technically, yes; but as a practical matter, no.

Take the case of the online magazine xy.com, which catered to gay and lesbian teens. Certainly its subscriber base contained sensitive information that the magazine told its customers would never be shared. When the magazine went bankrupt and its assets transferred to a new owner (even one who intended to continue publishing the magazine), this could not be done unless and until approved by a bankruptcy privacy ombudsman.

Imagine if the online magazine—and its assets, including subscriber information—were sold to anti-gay-rights organizations or organizations that wanted to "out" the subscribers or even organizations that wanted to target subscribers for mailings about curing their homosexual tendencies. I suggest that any transfer of personal information be consistent not only with the letter of the policy but with the purpose for which the data was given in the first place.

A number of years ago, a non-profit group called the Cult Awareness Network (CAN) provided help and support for families of members of what they considered cults. They had a mailing list of former cult members, resources to help family members and a lot of sensitive information.

The Church of Scientology sued CAN for other reasons and won the lawsuit, forcing the tiny non-profit into bankruptcy. CAN's only assets were its Web site and mailing list, both of which were acquired by the Church.

Thus, the combination of civil litigation and bankruptcy law could make what consumers believe to be personal information accessible by entities that they would never want to have it.

Retailers collecting personal information should take care to protect it even after their demise. Simply saying "your personal information becomes an asset if we declare bankruptcy" is not a privacy policy. It places almost no limitation on the use of the data. Anyone who acquires the company or its assets acquires the personal data. And that's not what your customers signed up for.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.