The Wall Street Journal reported this week that Judge Martin Glenn of the U.S. Bankruptcy Court in Manhattan approved on September 26th the $13.9 million sale of Borders’s intellectual property to Barnes & Noble. Intellectual property assets include personal information (PI) that Borders collected from 48 million customers. This PI includes customer’s email addresses, but also records of books and videos they have purchased.
The issue of the privacy rights of Border’s customers was debated during the process. At a September 22 hearing, Judge Glenn had hesitated to approve the sale over concerns about customer’s privacy. The two sides, working with the Consumer Privacy Ombudsman (CPO) appointed by the court overseeing the Borders bankruptcy, agreed to email Border’s customers within a day of the sale’s closing to ask them if they wish to opt out of Barnes & Noble’s email list. Records about specific titles bought in the past at Border’s won’t be included in the sale.
The CPO had contacted the Federal Trade Commission (FTC) requesting it to provide a written description of its concerns regarding the possible sale of the PI collected by Borders during bankruptcy proceeding.
Bureau of Consumer Protection Director David Vladeck answered in a letter to the CPO on September 14, which was submitted to the court.
Borders and Its Privacy Policies
Selling PI during bankruptcy is regulated by section 363(b) of the Bankruptcy Code, 11 U.S.C. § 363(b), which provides that: (our emphasis)
(b) (1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate, except that if the debtor in connection with offering a product or a service discloses to an individual a 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 case, then the trustee may not sell or lease personally identifiable information to any person unless —
(A) such sale or such lease is consistent with such policy; or
(B) after appointment of a consumer privacy ombudsman in accordance with section 332, and after notice and a hearing, the court approves such sale or such lease —
(i) giving due consideration to the facts, circumstances, and conditions of such sale or such lease; and
(ii) finding that no showing was made that such sale or such lease would violate applicable nonbankruptcy law.
“Circumstances may arise where for strategic or other business reasons, Borders decides to sell, buy, merge or otherwise reorganize its own or other businesses. Such a transaction may involve the disclosure of personal or other information to prospective or actual purchasers, or receiving it from sellers. It is Borders’ practice to seek appropriate protection for information in these types of transactions. 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.”
However, Mr. Vladeck wrote that the FTC “views this provision as applying to business transactions that would allow Borders to continue operating as a going concern and not to the dissolution of the company and piecemeal sale of assets in bankruptcy” and that “[e]ven if the provision were to apply in the event of a sale or divestiture of assets through bankruptcy, Borders represented that it would “seek appropriate protection” for such information.”
Privacy Policies and Unfair Practice
Mr. Vladeck wrote that the FTC was concerned that any sale or transfer of the PI of Borders’ customers “would contravene Borders’ express promise not to disclose such information and could constitute a deceptive or unfair practice.”
Mr. Vladeck wrote that the “Toysmart settlement is an appropriate model to apply” in the Border’s case. The FTC entered a settlement with Toysmart allowing the transfer of customer information under certain limited circumstances:
1) the buyer had to agree not to sell customer information as a standalone asset, but instead to sell it as part of a larger group of assets, including trademarks and online content;
2) the buyer had to be an entity that concentrated its business in the family commerce market, involving the areas of education, toys, learning, home and/or instruction;
4) the buyer had to agree to seek affirmative consent before making any changes to the policy that affected information gathered under the Toysmart policy.
Mr. Vladeck concluded his letter by offering these guidelines:
– “Borders agrees not to sell the customer information as a standalone asset;
– The buyer is engaged in substantially the same lines of business as Borders;
– The buyer agrees to obtain affirmative consent from consumers for any material changes to the policy that affect information collected under the Borders’ policy.”
It seems that Mr. Vladeck’ s letter had a significant impact on the ruling. Curiously, only a small percentage of customers understand the value their PI may have for a company, even though PI may be sold as assets.