10-14-2015 3-48-13 PMThe latest issue of our Socially Aware newsletter is now available here.

In this issue of Socially Aware, our Burton Award-winning guide to the law and business of social media, we highlight five key social media law issues to address with your corporate clients; we discuss when social media posts are discoverable in litigation; we identify six important considerations in drafting legal terms for mobile apps; we take a look at the clash between bankruptcy law and privacy law in RadioShack’s Chapter 11 proceedings; we examine a recent federal district court decision finding “browsewrap” terms of use to be of benefit to a website operator even if not a binding contract; we outline best practices for employers’ use of social media to screen and interact with employees and conduct workplace investigations; we explore a Washington state court’s refusal to unmask an anonymous online reviewer; and we discuss Facebook’s recent update of its “Notes” feature.

All this—plus an infographic illustrating the growing popularity of video on social media.

Read our newsletter.

 

150728SociallyAware_Page_01The latest issue of our Socially Aware newsletter is now available here.

In this issue of Socially Aware, our Burton Award-winning guide to the law and business of social media, we present a “grand unifying theory” of today’s leading technologies and the legal challenges these technologies raise; we discuss whether hashtags can be protected under trademark law; we explore the status of social media accounts in bankruptcy; we examine the growing tensions between content owners and users of livestreaming apps like Meerkat and Periscope; we highlight a recent discovery dispute involving a deactivated Facebook account; we discuss a bill before Congress that would protect consumers’ rights to post negative reviews on websites like Yelp; and we take a look at the Federal Trade Commission’s crackdown on in-store tracking activities.

All this—plus an infographic exploring the popularity of livestreaming sites Meerkat and Periscope.

Read our newsletter.

07_15_ONEWAYiStock_000016745483LargeWhen a bankrupt company’s most valuable assets include consumer information, a tension arises between bankruptcy policy aimed at maximizing asset value, on the one hand, and privacy laws designed to protect consumers’ personal information, on the other. Such tension played out recently in the Chapter 11 bankruptcy case of RadioShack, where the bankrupt retailer’s attempt to sell customer data invoked objections from 38 state attorneys general, the Federal Trade Commission (FTC) and others who claimed the sale would violate RadioShack’s stated privacy policy of never selling customers’ personal information. These issues are not new.

Consumer Data in Dot Com Era—Toysmart

Back in the dot-com era, online toy retailer Toysmart sought bankruptcy court approval to sell customer data. Toysmart’s privacy policy expressly told customers that they could “rest assured” that their information would “never be shared with a third party.” Nevertheless, once it ceased operations and entered bankruptcy in May 2000, Toysmart solicited bids for the sale of such personal information, including its customers’ names, addresses, billing information, shopping preferences and family profile information. The FTC opposed the sale, arguing that the breaking of the promise to never share information would be deceptive, in violation of Section 5 of the FTC Act.

The FTC and Toysmart reached a deal that, along with other restrictions, would limit the sale of customer data to a family-friendly company that would agree to be bound by Toysmart’s privacy policy. Even so, 46 states objected to such a resolution, arguing that any sale of customer data that did not provide an opt-out for customers would violate Toysmart’s privacy policy and, as such, would constitute an unfair or deceptive business practice, in violation of state “little FTC Acts.” Ultimately, Toysmart withdrew the customer information from the auction and destroyed it.

RadioShack—Following the Toysmart Example

RadioShack’s sale process replayed several of the Toysmart themes and similarly met a negotiated—not judicially determined—resolution. Following the sale of its 1,743 store leases this spring to General Wireless, an affiliate of hedge fund Standard General, RadioShack initiated an auction process for the sale of its intellectual property, including the RadioShack name and a collection of customer information.

During the course of its long tenure as a consumer electronics retailer, RadioShack collected names, email addresses, physical addresses, telephone numbers, credit card numbers and purchase history data for over 117 million customers. All such information had been collected under a privacy policy that promised RadioShack would “not sell or rent your personally identifiable information to anyone at any time.” Indeed, in a privacy policy on display in RadioShack’s retail stores, the company noted: “We pride ourselves on not selling our private mailing list.”

RadioShack’s customer information, however, is a valuable asset. Accordingly, as part of the bankruptcy process, the RadioShack trustee sought court approval to sell a subset of such information in its database, including 67 million complete customer names and physical addresses, and around 8.3 million email addresses, to General Wireless for $26.2 million dollars.

The proposed sale drew objections from state attorneys general, the FTC and companies such as AT&T and Verizon. Fundamentally, the FTC and state objectors argued that the sale would contradict RadioShack’s privacy policy and, as such, would constitute a deceptive business practice. AT&T, Verizon and others asserted that the sale would violate the agreements signed between RadioShack and each of the objectors, as well as RadioShack’s own privacy policy.

The debtor and various objectors mediated these issues and ultimately reached a deal modeled on the Toysmart approach. In the end, Bankruptcy Court Judge Brendan L. Shannon approved the parties’ settlement, authorizing the sale subject to certain conditions, including that General Wireless must:

  • Send emails to all included email addresses notifying customers of the purchase and offering them seven days to opt-out of the transfer of their personal information;
  • Mail those customers for whom it has a physical address, but no e-mail address, a notification that it has purchased the assets of RadioShack and offering such customers 30 days to opt-out of the transfer of their information;
  • Provide a notice on the RadioShack website, with both an online opt-out option and a toll-free telephone number to call to exercise the option; and
  • Agree to be bound by the existing RadioShack privacy policy with regard to purchased customer information.

Furthermore, the deal prohibits RadioShack from transferring sensitive information, such as debit or credit card numbers, dates of birth, Social Security numbers or other government-issued identification numbers.

Commentary

In the intervening 15 years since the Toysmart brouhaha, very little legal guidance has developed to define the contours of pre-bankruptcy privacy promises in bankruptcy sales. As in the Toysmart situation, the privacy-related objections raised to the RadioShack sale were consensually resolved, leaving parties without a judicial resolution to these issues. Nevertheless, certain themes are emerging.

First, by virtue of settling, the FTC and states seem to recognize that consumer privacy rights are not absolute—they must be balanced with the best interests of a debtor’s estate and creditors in bankruptcy.

Second, a theme in both settlements is honoring consumers’ original expectations—that is, requiring the purchaser to adopt the privacy policy in place at the time the information was collected.

Third, the ability for customers to opt-out of the transfer of their personal information seems to be key. This was a sticking point in the Toysmart matter, leading to the ongoing controversy even after resolution with the FTC.

More broadly, however, perhaps the main lesson from RadioShack is this: Privacy policies ideally should anticipate bankruptcy scenarios and alert consumers that their information may be sold in bankruptcy or other divestitures. Such a direct acknowledgement would serve consumers by advising them of the possible fate of their personal information, thereby allowing them to make an informed decision about what information to volunteer. It would also serve the eventual debtor and its creditors, simplifying the sale process and maximizing the sale value of collected information.

 

 

iStock_000038943470_MediumSocial media accounts can be “property of the estate” in a bankruptcy case of a business, and thus belong to the business, even when the contents of the accounts are intermingled with personal content of managers and owners. This principle was recently confirmed by the Bankruptcy Court for the Southern District of Texas in In re CTLI, LLC (Bankr. S.D. Tex. Apr. 3, 2015), which featured a battle among equity holders over Facebook and Twitter accounts promoting a business called Tactical Firearms.

Tactical Firearms was a gun store and shooting range. Prior to filing for bankruptcy, the business had used Facebook and Twitter accounts in its marketing. The original majority shareholder and managing office, Jeremy Alcede, had mixed his quasi-celebrity personal activities and personal politics with the promotion of the business, frequently taking to Facebook and Twitter for both personal purposes and for the promotion of the business. When the company filed for bankruptcy, Alcede ultimately lost ownership and control of the company to another investor through a Chapter 11 plan of reorganization.

Despite the loss of the business, Alcede fought to retain control over the Facebook and Twitter accounts. However, although he had changed the names of the accounts to reflect his personal name rather than that of the company, the Bankruptcy Court held that the accounts belonged to the business. The court applied Bankruptcy Code § 541, which provides that a bankruptcy estate includes “all legal or equitable interests” of a debtor, in holding that the social media accounts belonged to the debtor and thus constituted property of the bankruptcy estate.

As the court recognized, Alcede had originally created the Tactical Firearms business, and the accompanying social media accounts, as “an extension of his personality” and, “like many small business owners, closely associated his own identity with that of his business.” The court, however, rejected Alcede’s definitions of “personal” versus “business related” media posts, finding that the best marketing for business through social media is “subtle” and can involve the use of celebrities to promote the business.

The core results of the CTLI decision were as follows:

  1. Rejecting Alcede’s property and privacy arguments, the court determined that the social media accounts were property of the bankruptcy estate, much like subscriber or customer lists, despite some intermingling with Alcede’s personal social media rights. The court then exercised various remedies and contempt powers to protect the successor-owned business from Alcede’s further interference and to assure that the successor could take control of the assets, including requiring delivery of possession and control of passwords for the accounts.
  2. The court concluded that the “likes” that the Facebook page received belonged to the bankrupt entity, even though Alcede had registered as a Facebook user and page administrator with his personal Facebook profile. The court noted that Tactical Firearms had a Facebook page that was (a) directly linked to the Tactical Firearms web page, (b) used by Alcede and certain employees to post status updates for promoting the business, and (c) created in the name of the business rather than (until it was later improperly changed) in the name of the individual. Personal content interjected into the business page content did not change that result. Additionally, business messages to customers were communicated through the Facebook page and business-related posts.
  3. The court noted that, while the business content on Tactical Firearms’ Facebook page had to be accessed through Alcede’s personal Facebook profile, which he had created as the registered administrator, that fact was not controlling. The business pages could be managed by multiple individuals with their profiles, and access to personal information was not necessary to manage those business pages.
  4. The court also held that the Twitter account belonged to the business, given that the Twitter handle was “@tacticalfirearm” and that the account description included a description of the business.
  5. The court also rejected Alcede’s privacy concerns by analogizing to cases finding that parties had waived the attorney-client privilege by sharing privileged information with non-clients, or to cases where an employee used the employer’s computer system and thereby waived privacy rights as to personal emails. Because the social media accounts were for the benefit of the business, Alcede lost any personal privacy right in his content and was forbidden to modify either the Facebook or Twitter account by adding or deleting any material.

Therefore, the court ordered Alcede to transfer control of the account to the new owner of the reorganized business.

The decision is noteworthy because disputes regarding social media assets, like many other rights newly created in the digital age, have generally been addressed below the public radar in bankruptcy cases and other commercial settings. This is changing, and parties in bankruptcy cases and related proceedings are increasingly focused on capturing the value of these kinds of assets.

CTLI also highlights the need to properly structure and document the various rights associated with social media accounts, as is customarily done with the intellectual property rights of inventors, authors and other creators of content or employees who are providing innovation to the business that employs them. The decision illustrates that equity holders and managers should discuss and plan for how to deal with their separate assets in advance of bankruptcy or other litigation.

Even if an individual wishing to preserve and shield his or her personal social media assets from related business entities has properly structured the use of the assets, a variety of other issues may arise in that individual’s personal bankruptcy. In such a case, most of his or her personal social media assets would be subject to the bankruptcy and could be lost in sales for the benefit of creditors. Other social media issues that arise in bankruptcy cases of individuals are also worth considering. For example:

  • Exempt Assets. Only individuals (as opposed to business entities) can have personal assets that are exempt from the reach of creditors in bankruptcy. A social media account or blog and its copyrighted material could be argued to be a “tool of the trade” for a blogger and thus be exempt; however, even if that argument were to succeed (perhaps unlikely), most exemptions in bankruptcy are capped at a very low value, and the statutory exemptions are usually narrow and predate more modern classes of assets. Exemptions are thus unlikely to protect these accounts.
  • Automatic Stay. When a bankruptcy case is filed, all acts against a debtor or its assets, including litigation against a debtor or efforts to take control of its property, are automatically stayed. However, secured lenders, who often have blanket liens on all of a borrower’s assets (including social media assets), may have the ability to get relief from the automatic stay in order to foreclose on assets or pursue other remedies.
  • Rights of Publicity. In a bankruptcy of a high-profile individual, his or her social media assets will become part of the bankruptcy estate and may be sold. However, the individual may still be able to use his or her “persona,” or in the words of the CTLI court, “the interest of the individual in the exclusive use of his own identity, in so far as it is represented by his name or likeness, and in so far as the use may be of benefit to him or others.” While that “persona” interest, particularly of celebrities in states like California, has value as a type of intellectual property, there are questions as to the extent to which the assets could be marketed, particularly at the exclusion of the individual from using his or her own name and likeness in the future. Additionally, it will be inherently awkward for both the buyer and that person to compete using the same assets. Nevertheless, those assets may have strategic value to the debtor’s adversaries.

As social media assets become increasingly valuable, such assets will mean more to both the owner and to the owner’s creditors. Valuable assets are always in play in bankruptcy cases. A bankrupt debtor may face significant challenges in starting over without the use of those social media assets in which so much was invested. These assets will increasingly be a source of disputes and will require close scrutiny.