The Examiners: Balance Shoppers’ Privacy With Need to Maximize Value...

Do shoppers suffer too much in bankruptcy, or should they be expected to share the pain?

As a general rule, shoppers do better than other unsecured creditors in bankruptcy because companies want to take care of their loyal customers. Warranty programs, return policies, gift cards and other similar customer loyalty programs are usually assumed and honored in a restructuring. The one area where shoppers have a realistic concern is in the area of data collection. Many companies today collect and hold significant data on their customers that, in the event of a sale in bankruptcy to a third party, can increase recoveries to creditors and other stakeholders. Not surprisingly, shoppers often do not want that data sold.

Coming to the right answer requires a balancing of the legitimate privacy expectations of a shopper against the goal of maximizing the value of the estate for all stakeholders. On balance, I believe the sale of this information along with the rest of the business to a third-party buyer should be permitted so long as the sale in bankruptcy ensures that there are certain necessary checks in place.

While not an exhaustive list, the following protections may help:

• Under the FTC’s settlement with Toysmart, an online toy retailer that filed for bankruptcy and sought to auction personal information it collected from its customers, the buyer was required to comply with the seller’s privacy agreements. If the buyer decided to change the privacy policy, it first had to obtain shoppers’ affirmative consent.
• An additional requirement coming out of the Toysmart settlement was that the purchaser be an entity similar to the seller. Particularly in a going-concern sale where the buyer will essentially become a new owner of the existing business, there isn’t a strong argument that data is being used in a way that consumers wouldn’t have approved of had they foreseen the bankruptcy and sale to a third party.
• The bankruptcy code provides for the appointment of a consumer privacy ombudsman, as was done in the RadioShack case, who can assist the bankruptcy court in assessing whether consumers’ rights are being adequately protected.
• When a sale occurs in bankruptcy, the bankruptcy court acts as yet another level of oversight. It can ensure that information of a sensitive nature, like credit or debit card numbers, isn’t included in the sale.

Some may argue that a company’s ability to amass significant personal data is intrinsically linked to its privacy policy and promise to, for example, never sell that data to a third party. But is this really the case? In an era when online shopping has become the norm, and each online transaction requires the customer to hand over his name, billing address and credit card details at a minimum, how much is the average consumer actually focused on the privacy policy?

In the end, it is a balancing act—balancing, on the one hand, the “legitimate privacy expectations” of the shopper and on the other hand, the goal of maximizing the value of the estate in bankruptcy for all stakeholders. Done properly, all parties’ legitimate interests can be satisfied.

Jay Goffman is the global leader of Skadden, Arps, Slate, Meagher & Flom’s corporate restructuring practice. He is based in New York.