RadioShack filed for Chapter 11 bankruptcy in Delaware bankruptcy court in February, seeking a court-supervised sale of $1.2 billion in assets. Included in the sale is a database of customer information from about 1,700 stores regarding RadioShack’s 117 million customers.
RadioShack has sought a sale of certain IP assets under the Bankruptcy Code, 11 U.S.C. 363. Any sale outside the normal course of business requires court approval and is governed by section 363, which is often referred to as a “363 sale.” A 363 sale is a powerful tool for a debtor seeking to rapidly unwind. Most importantly, in a 363 sale, the assets are sold “free and clear” of any other creditor’s interests in the property. Such a sale can cut off theories of successor liability, liens, or leaseholds. This can greatly increase the sale value of a debtor’s property, which helps its creditors, but also dramatically affects the rights of any particular creditor with a special interest in that property. Section 363 is such a useful tool that many bankruptcy cases are now resolved by a 363 sale of a debtor’s assets rather than a traditional reorganization or liquidation process.
Procedurally, debtors will often seek to sell “free and clear” of all liability, and wait to see if any creditors object before narrowing the sale order to comply with statutory and decisional law on section 363. Here, a host of objectors have voiced concerns about the proposed sale.
Several state attorneys general have raised objections to the transaction to prevent the sale of customer information, including consumer names, phone numbers, mailing addresses, e-mail addresses, and purchase histories, pointing to the fact that RadioShack promised not to sell consumer information.
Earlier this month, Apple raised objections to the sale of information from RadioShack’s database of personal information gathered about customers who bought Apple products, including iPhones and iPads: “Apple oversees the collection and use of customer information collected by its retail partners, including RadioShack. The Reseller Agreement between Apple and RadioShack protects information collected by RadioShack regarding purchasers of Apple products . . . and prohibits the proposed sale of such information.” In particular, Apple argues its customer information cannot be sold pursuant to Section 363 of the Bankruptcy Code, which only permits a debtor to sell property of the estate, because RadioShack contractually disclaimed legal or equitable interest in Apple’s customer information, and that the sale of such information is barred under the confidentiality provisions of the Reseller Agreement.
Then, on Monday, the Federal Trade Commission dove into the dispute, recommending a number of specific conditions the court should impose to protect the privacy of consumer data. FTC Consumer Protection Director Jessica Rich wrote a letter to the bankruptcy court emphasizing the FTC’s concern about the potential sale of sensitive consumer data. The letter points to RadioShack’s extensive privacy promises both online and in its stores, including the promise to refrain from selling consumer information. The FTC urges placing similar conditions on the sale of RadioShack’s customer information to those conditions that were placed in the Toysmart case, a case in 2000 where the FTC intervened in a bankruptcy matter because the sale countered promises in the company’s privacy policies.
In the case of RadioShack, the FTC recommends that (1) consumers’ information not be sold as a standalone asset and be bundled instead; (2) consumer information be sold only to another entity that is in substantially the same line of business as RadioShack; (3) that the buyer agree to be bound by the RadioShack privacy policies that were in place when the consumers’ data was collected; and (4) the buyer provide consumers with notice and obtain affirmative consent before using data in a matter that materially differs from promises made to RadioShack customers. Given that hedge fund Standard General, hardly in the same line of business as RadioShack, made a winning bid of $26.2 million to be the new owner of the RadioShack brand and the customer data, it remains to be seen how the bankruptcy court will respond to the FTC’s recommendations.
Rich emphasized the potential unlawful nature of the sale: “We understand that RadioShack’s customer information constitutes a potentially valuable asset. We are concerned however that a sale or transfer of the personal information of RadioShack customers would contravene RadioShack’s express promise not to sell or rent such information and could constitute a deceptive or unfair practice under section 5 of the FTC Act.”
A final approval hearing is currently scheduled for May 20, which includes the question of the proposed data sale. Most 363 objections are resolved informally before a bankruptcy court is required to rule on the objection. It is likely that RadioShack will resolve at least some of the objections consensually prior to the sale hearing.