Evan Schuman's StorefrontBacktalk

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

It’s widely understood that when a retailer such as Borders goes bankrupt, customer data—including data protected by the retailer’s privacy policy—is up for grabs. Forget about privacy; a bankruptcy court can auction off that personal information to the highest bidder, and there’s nothing the retailer has to say about it, right? Not so fast. Federal bankruptcy law says a retailer’s privacy policy can still protect that data, but only if the policy is in force at the time of the bankruptcy.

And failing to take customer privacy into account can have serious consequences—the Federal Trade Commission has a decade-long history of going after retailers with unfair or deceptive trade enforcement actions—enforcing customer privacy even in some cases where a retailer has gone belly up.

Federal bankruptcy law does have provisions for protecting that private customer information, including appointment of a consumer privacy ombudsman, but that’s only if there’s a strong privacy policy in effect. On the other hand, failing to take customer privacy into account can significantly diminish the value of a company, in addition to leading to both breach of contract litigation and Federal Trade Commission unfair or deceptive trade enforcement actions.

Whenever there is a change in a retailer’s status, either by merger, acquisition, dissolution, bankruptcy, reorganization or whatever, there is typically a change in the status of the retailer’s assets. This includes inventory, hardware and equipment, but it also increasingly includes the personal information of the merchant’s customers.

It may not be enough to simply say, as Borders does, that personal information is an asset in bankruptcy. The “asset” must be distributed in a manner that is consistent with the purpose for which it was collected. If I give my information to a bookseller, I certainly don’t expect it to be available to a political or religious organization (or the government) for proselytizing, embarrassing me or worse.

After filing for federal bankruptcy protection, Borders noted that it had as an asset available for sale: a “proprietary database of customer information tracked by customer E-mail address and including customer data captured at the point of sale on Borders.com and through the Borders rewards and Borders Rewards Plus programs,” which included records relating to more than 23 million customer interactions with the now-defunct bookseller.

But this is no ordinary asset. This is information that reveals the reading and purchasing habits of millions of people. It could reveal political philosophies, sexual orientations and religious beliefs—all types of sensitive information.

Indeed, merchants of all stripes collect information that consumers would consider sensitive. Although many women might not be sensitive at all about sharing the fact that they are a size 16 with their retailer (they kind of have to do this to buy clothes), they certainly do not want to advertise their size to the world. Thus, as a general rule, the collection and use of personal information must be consistent with the purposes for which the information was collected.

Whether a retailer has the right and authority to dispose of personal information about consumers that it has collected starts with (but does not end with) its privacy policy. Most privacy policies discuss what a merchant will do with personal data in the ordinary course of business. That’s either “we won’t sell it or share it” or “we will share it with business partners” or “we will use it for marketing.”

But what happens if the merchant goes bankrupt?