This post was written by Mark S. Melodia, Paul J. Jaskot, and Frederick Lah.
On September 15, Barnes & Noble ("B&N") acquired several of Borders’ intellectual property assets, including a database of customer information, as part of Borders' bankruptcy auction. The sale of those assets hit a potential roadblock on Thursday, though, when a New York bankruptcy judge refused to approve the transaction, saying that he needed more time to think about the potential privacy concerns. This decision came on the heels of a Report issued by a court-appointed ombudsman who recommended certain privacy restrictions to be taken with respect to the customer information.
This is certainly not the first time that would-be buyers of information-based assets have faced FTC or judicial scrutiny and concerns about the privacy implications of such a transfer. For example, last year, a former publisher of a magazine and dating website for gay youth had declared bankruptcy, which resulted in the dispute over ownership of various business assets, including the subscriber database. The FTC warned that any transfer or use of the database could potentially result in a violation of the FTC Act. The New Jersey Bankruptcy Court eventually ordered the buyer to destroy the subscriber database.
Similarly, in 2000, the FTC brought an action against Toysmart, in which the Commission sued an online toy retailer which had filed for bankruptcy and sought to auction the personal information it collected from customers. The Commission eventually entered into a settlement with Toysmart allowing the transfer so long as the buyer adhered to certain restrictions, many of which were similar to the ones recommended in the FTC's letter to Borders.
In today’s information age, consumer information is essential to business efficiency and can be a very valuable asset for those companies who are forced to liquidate their assets to mitigate debt (as evidenced by the $13.9 million dollar price tag B&N agreed to pay for the IP assets). While databases containing consumer information can be valuable, transferring such databases can be a risky process, subject to judicial and regulatory scrutiny. This case teaches us that companies looking to perform these transfers need to be mindful of the privacy implications involved in the process. Reed Smith can help companies that are contemplating such transactions, whether in a bankruptcy proceeding or a negotiated transaction, with evaluating the transferability of those assets and identifying and analyzing associated risks — before the government or another third party does.