Undergoing Bankruptcy Proceedings? Here’s How to Make Sure PII Maintains Its Value

Farella Braun + Martel LLP
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Farella Braun + Martel LLP

Due to the COVID-19 pandemic, some businesses are considering potential liquidation or restructuring through bankruptcy. Companies in this situation should keep privacy concerns in mind, because the handling of personal data in bankruptcy proceedings poses some unique challenges. 

The issue of whether or not personally identifiable information (PII) can be sold (and under what terms) is a common way privacy issues come into play during liquidation and reorganization proceedings. As further discussed below, there are many factors to consider to ensure that data does not lose its value as part of the bankruptcy process.

The Bankruptcy Code, GDPR and CCPA

When a company files for bankruptcy, it must obtain court approval to sell its assets outside of the ordinary course of business. A company may use, sell, or lease property of the estate, including customers’ data, unless its privacy policy prohibits “the transfer of personally identifiable information about individuals to persons that are not affiliated with the debtor.” U.S. Bankruptcy Code Section 363(b)(1). If the company’s privacy policy prohibits this transfer, a consumer privacy ombudsman (CPO) must be appointed to review the facts of the sale and the applicable non-bankruptcy law. Id.

Bankruptcy sales in the new digital age have become increasingly complicated by privacy laws that require a more stringent level of protection of users’ data. Under the European Union General Data Protection Regulation (GDPR), companies are now required to have privacy policies that include information regarding the recipients of customers’ personal data, whether there is intent to transfer such data, the right to withdraw consent to the processing of such data, and more. Under the California Consumer Privacy Act (CCPA), companies are required to have privacy policies that include a description of the customers’ rights under the new privacy law and information about the business purposes for which the customers’ data are being collected.

In response to the GDPR and the CCPA, many companies are updating their privacy policies. Drafters should keep a few considerations in mind as they update privacy policies to comply with new laws, maximize the value of data assets, and ensure there is minimal disruption to the bankruptcy process in the event that the company finds itself going down this road.

Lessons from the Toysmart, Borders and RadioShack Bankruptcies

In general, bankruptcy courts and regulators are unlikely to allow data-asset sales that are inconsistent with a company’s privacy policy. Toysmart faced this issue due to a privacy policy had promised that consumer data would “never be shared with third parties.” The Federal Trade Commission permitted the sale of the data, but only with significant restrictions. The State Attorneys General added an additional obligation to obtain the opt-in consent of consumers. As a result, the limitations were so burdensome that the consumer data was destroyed prior to Toysmart’s formal dissolution.

Borders Bookstore endured similar obstacles during its bankruptcy in 2011 due to a privacy policy that promised customer data would not be shared without consent. The FTC again asked the bankruptcy judge to require customer consent or impose significant restrictions on the transfer and use of that data as part of the bankruptcy estate.

RadioShack also faced this issue due to the company’s privacy policy which promised: “we will not sell or rent your personally identifiable information at any time.” The FTC and various State Attorneys General intervened to block the sale of this data as an unfair and deceptive business practice, but later negotiated a settlement allowing the sale to proceed with restrictions on the type and scope of data to be included in the transaction. These restrictions, however, stripped the data of significant value, and most of the data was destroyed prior to the sale.

With the CCPA enacted, restrictions on data transfer during bankruptcy is bound to become even more complicated. Under the CCPA, a “sale” of personal information is defined broadly to include “selling, renting, releasing, disclosing, disseminating, making available, transferring, or otherwise communicating orally, in writing, or by electronic or other means” such information to another business or third party “for monetary or other valuable consideration.” CCPA, Section 1798.140(t)(1). However, a transfer of personal information during bankruptcy is largely excluded from being regarded as a sale. See CCPA, Section 1798.140(t)(2)(D). Additional restrictions may depend on each individual exercising their right to access, delete, obtain information about a sale/transfer of, and opt-out of a sale of PII under the CCPA.

When businesses receive requests to exercise individual rights under CCPA, they must verify the requests and comply with them within 45 days of the request. CCPA, Section 1798.130(a)(2). Therefore, what was mandated by the FTC and State Attorneys General in the bankruptcy proceedings mentioned above is somewhat individualized under the CCPA, but could lead to the same result – stripping data of its value. This may have a serious effect on bankruptcy proceedings during present times where, for many companies, data is the most valuable asset.

Takeaways

To comply with the GDPR and CCPA, companies looking to sell, transfer or buy personally identifiable information via bankruptcy asset sales should confirm that the transfer is consistent with the debtor’s privacy policy. If it is not consistent with the privacy policy, companies will have to provide notice of the policy change to consumers prior to the transaction. Additionally, the Federal Trade Commission and State Attorneys General may seek to block the sale until the debtor agrees to comply with the privacy policy.  Companies may also want to specifically assess their privacy policies to confirm that they provide notice to consumers of the right to transfer data in the event of a bankruptcy.

Additionally, to cover all bases, companies should analyze the privacy policies and disclosures of companies targeted for acquisition as a result of bankruptcy to determine if the acquiring entity may freely use the PII as expected. Companies should also assess their obligation to notify customers of any changes to the use or sharing of their PII.

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