UPDATE: FTC Kicks Toysmart.com When It's Dow

The Federal Trade Commission’s decision to sue recently demised Internet retailer Toysmart.com should send a message to bankrupt or failing e-businesses: Don't count on the sale of consumer databases to help bail you out of debt.

The FTC’s suit alleges that Toysmart has attempted to sell its consumer database to other firms, even though the Web retailer told its customers that their personal information would never be shared with third parties.

Through its Web site, the company collected an array of personal information about its visitors. This information included names, addresses, billing information, shopping references and family profiles, such as children's birthdays.

The FTC and Toysmart are expected to reach a settlement in the case, possibly allowing the toy retailer to sell its database to a single company that would use the list in the toy market sector.

It may be prudent for Toysmart to settle the suit before Congress votes on a bill introduced this week by Rep. Spencer Bachus, R-AL. Under the measure, an online business that sells customer information — after promising consumers it wouldn't — would be subject to civil penalties.

Ultimately the suit may force some e-tailers on shaky ground to re-think their privacy policy – particularly if they plan on filing chapter 11.

“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.”

Officials at Toysmart, Waltham, MA, did not comment on the suit this week.

The online retail company announced May 22 that it planned to fold after majority owner Walt Disney Co. decided not to inject extra funds to reposition the online toy seller. It had been reported that on June 8 Toysmart advertised the sale of its customer databases, as well as its other assets, in The Wall Street Journal. The company filed for bankruptcy the next day.

These events drew the attention of Truste, San Jose, CA, a nonprofit agency that certifies the privacy policy of online retailers. Truste asked the FTC to start an investigation.

Toysmart's bankruptcy followed the high-profile failure of other e-tail firms such as boo.com, a multinational online retailer of trendy sportswear apparel and accessories. As was the case with Toysmart, Boo's shareholders refused to continue financial support.

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