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Toysmart.com wants better offer for customer data it hoped to sell

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BOSTON — Toysmart.com on Wednesday withdrew from auction a controversial packet of customer information it had hoped to sell to pay off its debts, saying it had yet to receive a good enough offer.

It was the latest twist in an increasingly convoluted dispute arising from the bankruptcy of the online toy retailer, which had promised customers it would never sell their names or personal information but is now trying to do just that.

The company, majority-owned by Walt Disney Co., closed down in May and in June filed for protection under Chapter 11 of U.S. bankruptcy law. It then solicited bids for its assets, including about 250,000 customer names, addresses and credit card numbers.

The attempted sale drew a lawsuit from the Federal Trade Commission. That suit was settled earlier this month, allowing the Waltham-based company to sell the data under certain restrictions. But 38 states, led by Massachusetts, said the settlement didn't go far enough to protect consumers, and on Tuesday filed legal papers to block it.

On Wednesday, U.S. Bankruptcy Judge Carol Kenner granted Toysmart.com's request to withdraw the information from auction. So far, the highest offer for the information had come from Disney, which offered $50,000 for the information and promised to destroy it.

Lawyers representing Massachusetts, as well as Texas and New York, who are also contesting the FTC settlement, said in court Wednesday that the sale of the information — even if the buyer were to agree to destroy the information — would establish a dangerous precedent.

"The proposal by Disney to purchase the list, even if it destroys the list, gets to the right solution in the wrong way," said Pamela Kogat, a lawyer with the Massachusetts Attorney General's Office.

Hal F. Morris, a Texas assistant attorney general, said the states would fight any settlement that did not inform consumers that their information could be transferred and give them the chance to opt out.

"We're saying never means never, and when you promise that you will never sell this to a third party, you must abide by that," Morris said.

Kenner granted Toysmart.com's request to withdraw the items from auction for the time being, but strongly indicated she felt the states had a strong case in contesting Toysmart.com's settlement with the FTC.

"Had the debtor not withdrawn the sale today, I would have sustained the attorneys general's objections," Kenner said.

She said the FTC settlement was unlikely to be approved, in part because it is contingent on Toysmart.com still existing in one year — an unlikely scenario given that it now has just four employees, who are managing its disassembly.

Wednesday's hearing, where some of Toysmart.com's other assets were auctioned off even as the matter of the consumer data was postponed, drew a phalanx of lawyers representing bidders, public interest groups, the states and the FTC. Many believe the case will set precedents in an area of the law that is so far uncharted — whether dot-coms can be held to promises about keeping customer data private after they go bankrupt.

"Now's as good a time as any (to establish guidelines)," Morris said in court. "It's very important to the public, to my constituents, that these issues are heard."

Toysmart.com attorney Harry Murphy said he tried to get Disney to increase its $50,000 offer for the data, but the company declined. Another company, Digital Research Inc. of Kennebunk, Maine, offered $15,000 for the data. The market research firm said it would also auction off Toysmart.com's Internet domain name, which is for sale, and use some of the proceeds to fund Internet privacy studies.

It is Disney which perhaps finds itself in the most unusual position in the increasingly complex tale of Toysmart.com's demise. Disney, through a subsidiary, is Toysmart.com's majority owner, but it is also a creditor. Its attorneys say Disney is being generous to offer $50,000 for information it intends to destroy. But now it is being asked by the estate of its own subsidiary to pay more.