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A consent agreement between the Federal Trade Commission and Toysmart.com has run aground in a federal bankruptcy court in Boston, with dozens of states and a privacy watchdog group arguing that the settlement doesn’t go far enough to protect consumers’ privacy. Last week, the FTC voted 3-2 to accept the agreement, which forbids Toysmart from selling its customer data as a separate asset during bankruptcy proceedings, as the company has been trying to do. The settlement would allow Toysmart to transfer its data only to a qualified buyer, defined as an entity in the “family commerce market” that buys the entire company — not just the data — and becomes Toysmart’s “successor in interest.” Separately, the FTC charged Toysmart with violating the Children’s Online Privacy Protection Act by collecting personal data from children under 13 years of age. Lawyers for Massachusetts, Texas and New York, as well as TRUSTe, the online watchdog group that accredited Toysmart’s privacy policy, all told U.S. Bankruptcy Judge Carol Kenner that the settlement should require notifying Toysmart’s customers that their personal data is for sale and giving them a choice as to whether their data is sold. Massachusetts and Texas lawyers argued that the choice should be “opt in,” meaning that Toysmart would be required to get specific permission before it can sell customer data, such as names, addresses and order histories. Lawyers for TRUSTe and New York, however, prefer an “opt out” choice, arguing that it would be enough to require Toysmart to give customers the opportunity to bar the sale of their data. Toysmart’s lawyers did not return telephone calls to comment, and an FTC spokesman declined to comment. The FTC moved against Toysmart after TRUSTe complained that the defunct company’s attempts to sell its customer data violated the Toysmart site’s privacy policy, which promised never to share customer information with third parties. The FTC, Massachusetts, Texas, New York and 36 other states agreed, filing various complaints in federal court. (Massachusetts has been representing itself and the other 38 states.) Kenner is expected to quickly schedule another hearing on the matter, and to receive written briefs from the parties, and perhaps others, before making a final decision. Separately, Toysmart removed its data list from the auction block, in the wake of bids from Disney and another company, Digital Research, which were apparently too low. Toysmart’s move takes pressure off Kenner to rapidly decide what has shaped up to be a key test of whether failing Internet companies will be allowed to treat customers’ personal data as a commodity. Related Articles from The Industry Standard: Toysmart Settles With FTC Disney Vows Not to Share Toysmart Data FTC to Toysmart: Define ‘Never’ Copyright � 2000 The Industry Standard

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