United States: Privacy Policies And The Sale Of Corporate Assets: It Pays To Plan Ahead To Preserve The Value Of Your Data Assets

Personal data is a valuable corporate asset.  At times, the personal information collected from customers (such as email address, mailing address, phone number, etc.) can be a company's most valuable asset.  Unfortunately, when a company attempts to sell this asset, it can find the value of the data significantly diminished due to promises made in a privacy policy the company implemented years before it ever contemplated such a sale.

A company's privacy policy sets forth the company's promises to its consumers as to how it will collect, store, maintain, and share the consumers' personal data.  In an attempt to appeal to customer privacy concerns, it is common for a company to proclaim in such policies:

"We share your personal data only in the ways described in this policy,"

or

"We care about our customers and we will never sell or share your personal data."

Most companies include these statements to highlight their promise not to capitalize on a consumer's data by selling to third party marketers.  However, many companies do not realize that statements such as these could also severely restrict the company's ability to sell data as a corporate asset in a company sale, merger, bankruptcy, or similar corporate transaction, unless there is also a clear statement within the policy which permits data to be transferred during the course of such events.

There are steps a company can take leading up to the corporate transaction to smooth the transfer of customer data, such as updating its privacy policy, providing additional notice to consumers, requesting opt-out or opt-in consent to the revised policy and/or the data sale.  Companies that fail to take these steps and attempt to transfer data in a manner that conflicts with promises made in its privacy policy may face regulatory scrutiny or litigation, both of which would ultimately diminish the value of their data assets in any eventual sale.

Enforcement actions for violations of privacy policies

Most consumers are accustomed to seeing (and, often, ignoring) these privacy policies, which are usually accessed via hyperlink displayed in small font at the bottom of a webpage.  But, while consumers may be ignoring these policies, state and federal regulators—most importantly the Federal Trade Commission (FTC) and state attorneys general—are not.  In fact, these regulators consider a company's privacy policy to be a binding obligation to its customers.

The FTC and state attorneys general can investigate and bring enforcement actions against companies that engage in unfair or deceptive acts and practices,1 and routinely use this power to investigate whether companies act contrary to the promises made in their privacy policies.  Citing breaches of company privacy policies, the FTC has initiated enforcement actions alleging deceptive acts and practices against Google, Snapchat, and MySpace, among others.  When regulators prevail in their enforcement actions, they may impose a range of penalties upon companies, including injunctions against proposed data use or the deletion of improperly obtained data, customer redress in the event of customer harm, the imposition of a government-written data privacy and security program, recordkeeping requirements, and bi-annual third party audit and reporting requirements for up to 20 years.

Enforcement actions involving data sales

The FTC and State AGs keep an eye on companies engaged in high-profile corporate transactions to make sure consumers' privacy rights are not trampled in the companies' haste to consummate deals.  The FTC's letter to Facebook and WhatsApp, for example, warned the companies to exercise caution in integrating WhatsApp data into the Facebook family of companies, as WhatsApp's promises to its consumers under its privacy policy were far more restrictive than Facebook's.  The FTC further admonished the companies that they must get affirmative consent of WhatsApp users before making any material changes to the WhatsApp privacy policy, lest the companies commit a Section 5 violation.

The Toysmart.com bankruptcy precedent

Toysmart.com's Chapter 11 bankruptcy was the first time a federal privacy regulator publicly intervened into a company's bankruptcy.  Toysmart was attempting to sell its consumer data, including names, addresses, and shopping preferences of consumers as well as family profile information and names of children, to a third party purchaser as part of the liquidation  of its corporate assets.  The FTC sued Toysmart for a Section 5 violation in federal court, seeking to enjoin the sale of the data because Toysmart's privacy policy promised that the information it collected would "never be shared with third parties."  The parties eventually reached a settlement to permit the sale of the data, but not as a stand-alone asset.  The data could be sold as part of the sale of other corporate assets, but only to a "qualified buyer" in a related market that would continue the business as a going concern.  Under the settlement, the buyer was required to abide by Toysmart's privacy policy and to obtain opt-in (i.e., affirmative) consent before making material changes to the privacy policy.2  These restrictions substantially reduced the pool of potential buyers and significantly limited the ways in which the eventual purchaser could use the data.  Ultimately, the restrictions proved to be too onerous, and Disney Corp., one of Toysmart's major investors, paid the debtor $50,000 to destroy the data prior to Toysmart's dissolution.

In response to the Toysmart case, Congress enacted section 363(b)(1) of the Bankruptcy Code.  This provision restricts debtors' ability to sell personal information outside the ordinary course of business unless the sale is in compliance with relevant non-bankruptcy law and the sale is either: (i) consistent with the debtor's privacy policy terms, or (ii) the court approves the sale after the sale is reviewed and approved by a court-appointed consumer privacy ombudsman.  Pursuant to section 332(b) of the Bankruptcy Code, the consumer privacy ombudsman is appointed "to appear and to be heard at [the sale hearing] and [to] provide the court information to assist the court in the consideration of the facts, circumstances and conditions of the proposed sale or lease of personally identifiable information...."  The consumer privacy ombudsman is often a bankruptcy practitioner or an attorney from the FTC.

RadioShack's sale under Section 363 of the Bankruptcy Code

As RadioShack recently discovered when it attempted to sell its customers' data in Chapter 11, Section 363 of the Bankruptcy Code can pose significant challenges to debtors who fail to exercise foresight when drafting their privacy policies.

Like Toysmart, RadioShack's online privacy policy promised consumers that:

"We will not sell or rent your personally identifiable information to any one at any time,"

and

"Information about you specifically will not be used for any purpose other than to carry out the services you requested from RadioShack and its affiliates.  All of our affiliates have agreed to maintain the security and confidentiality of the information we provide to them."

To make matters worse, RadioShack displayed signs in its brick-and-mortar stores declaring:

"We respect your privacy"

and

"We do not sell mailing lists"

Thus, when RadioShack proposed the sale of consumer personal information in bankruptcy, state and federal regulators intervened to block the sale.  The FTC warned the court-appointed consumer privacy ombudsman3 that the proposed sale would violate the FTC Act's prohibition against unfair or deceptive trade practices.  The Attorneys General of Texas, Oregon, and Tennessee also formally objected on the basis that the sale would violate their state consumer protection statutes, and 36 other states joined Texas's objection.  Each regulator asserted that RadioShack's proposed sale would violate the explicit terms of its privacy policy, and thus constitute an unfair and deceptive practice in contravention of applicable non-bankruptcy law.

To prevent any such violation, the FTC proposed restrictions on the sale similar to those applied in the Toysmart.com case.  After months of collateral litigation, the consumer privacy ombudsman recommended that the sale go forward under limited conditions.  The ombudsman recommended that the sale:

  • include seven data points, as opposed to the 170 data points originally contemplated,
  • not include customers' credit or debit card numbers, Social Security numbers, telephone numbers, or dates of birth,
  • only include email addresses from customers active within two years prior to the sale,
  • provide an opt-out option to consumers prior to transfer, and
  • require the buyer to agree not to sell or share email addresses with any third-party and to abide by RadioShack's privacy policy.

While the sale was ultimately consummated based on the terms set forth above, the majority of the data was destroyed, stripping away much of the data's value to the purchaser.

Quirky's attempts to sell data assets in bankruptcy

At the beginning of October 2015, a U.S. Bankruptcy Trustee objected4 to bankrupt online marketplace, Quirky's, motion to sell the data assets belonging to Wink, Inc., a Quirky subsidiary that focused on Internet of Things technology that controls basic household systems. While Quirky's privacy policy permits the company to sell user data in connection with a corporate sale or reorganization, that provision of the privacy policy was not added until 2011. The U.S. Trustee expressed concern that users who provided data under the pre-2011 privacy policy may not be bound by the revised terms unless they logged-in after Quirky changed the policy, and recommended that the Bankruptcy Court appoint a consumer privacy ombudsman.

Conclusion

These cases highlight the crucial importance of sound privacy policy drafting.  Privacy-protective statements which seem innocuous at the drafting stage could—and do—present significant obstacles to the sale of data at the very time the company is under pressure to complete a major corporate transaction.  The result could be a loss of significant value for creditors when data assets cannot be sold in bankruptcy; a depreciation of the value of corporate assets to be transferred under corporate sale; litigation or additional legal costs to sort out data transfer issues; and even the imposition of penalties for a data sale that violates the terms of a company's own privacy policies.  Companies must think about their long-term data needs, and should consider all possible contingencies, such as a future asset sale, restructuring, bankruptcy, and other corporate transactions.  Any company considering a corporate transaction or facing financial difficulties should review its existing privacy disclosures and act quickly to modify privacy statements, and if needed, to provide notice and seek consent for such policy changes well in advance of the date of the corporate event or bankruptcy filing.  Swift, intelligent action may help companies to preserve the value of their data assets.

Footnotes

1 The FTC exercises broad jurisdiction to bring enforcement actions against companies that engage in unfair or deceptive acts or practices under Section 5 of the Federal Trade Commission Act ("FTC Act").  15 U.S.C. § 45(a).  Many states have similar consumer protection legislation, commonly known as the "Baby FTC Acts."

2In re Toysmart, LLC, Consent Decree, Ex. A, Stipulation & Order Establishing Conditions on Sale of Customer Information, Case No. 00-13995-CJK (July 21, 2000). https://www.ftc.gov/sites/default/files/documents/cases/toysmarttbankruptcy.1.htm

3 In RadioShack, the court-appointed consumer privacy ombudsman was Jessica L. Rich:  the director of the FTC's Bureau of Consumer Protection.

4 See Objection, In re: Quirky, Inc., No. 15-12596 (MG) (Bankr. S.D.N.Y. 2015).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
21 Sep 2018, Conference, Florida, United States

Employment partner, Michael Weil will be participating in The Intellectual Property Law Institute’s 2018 Conference.

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions