All posts by J. Mitchell Carrington II

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Big Data Bankruptcy Sale Derailed – RadioShack’s Customer Information Draws Objections

On March 20, 2015, the State of Texas filed an objection to the sale of customer information in the In re RadioShack Corporation, et al., Case No. 15-10197, case pending in Delaware. According to the objection, the customer information up for sale includes consumer names, phone numbers, mailing addresses, e-mail addresses and activity data. Texas’s objection asserted that RadioShack’s proposed sale of personal information of 117 million RadioShack customers violates the Texas Deceptive Trade Practices Act and other federal and state consumer protection laws. The objection was joined by Oregon, Pennsylvania and Tennessee and twenty additional state consumer protection agencies wrote letters of support for the Objection.

Why is this such a big deal? An obvious reason is because the objection has the potential to delay the sale of RadioShack’s assets and, in bankruptcy, time is often more valuable than money. The less obvious reason is that RadioShack’s customer information may be one of the most valuable stand-alone assets in the bankruptcy estate. If the objection is granted, this value could disappear and result in a dramatic reduction of funds potentially distributed to creditors. On the other hand, is the customer information really RadioShack’s property to sell? Welcome to the world of bankruptcy.

Technology is not only a major disruptor of traditional business models; it has and will continue to unsettle established legal norms as well. One example is the rise of e-discovery, with most Fortune 1000 companies currently spending between $5 million to $10 million annually on e-discovery alone. Bankruptcy courts are no stranger to disruption. They are constantly faced with state and federal laws intersecting with the policies underlying the bankruptcy code. The tension stems from bankruptcy’s “fresh start” policy, which usually involves a debtor shedding obligations imposed by state and federal law through a bankruptcy sales process. If you throw technology into this mix, well, you might end up derailing RadioShack’s bankruptcy auction involving over $100 million in assets, or worse.

Almost 15 years ago, the online retailer entered bankruptcy and attempted to publicly auction its assets, including its customer information. The Federal Trade Commission (FTC) objected to the sale of customer information. In re, LLC, No. 00-13995-CJK (Bankr. D. Mass. filed June 9, 2000). Toysmart and the FTC settled the dispute, resulting in Toysmart being restricted to sell its customer information to a family-oriented buyer only and the buyer had to agree to follow Toysmart’s privacy policy. The problems didn’t end there. Multiple states also objected to the sale of Toysmart’s customer information (sound familiar?). In the end, Toysmart removed the customer information from the assets for sale and one of Toysmart’s largest investors actually paid $50,000 for the customer information to be destroyed.

The difference between the Toysmart case and what RadioShack now faces is the advent of “Big Data.” According to the International Data Corporation, a global technology research company, the Big Data market will be valued at $125 billion worldwide in 2015. This value comes from technological advances that allow companies to utilize Big Data in incredibly valuable ways, like predicting business trends, consumer preferences and targeted advertising, among others. Due to Big Data, things like customer information lists have gone from an after-thought, like in the Toysmart case, to highly coveted information assets by strategic and outside buyers alike. Facebook, for example, possessing more personal information than many companies in the world, has used Big Data to monetize that personal information by selling predictive consumer analytics and targeted advertising. Deserved or not, Facebook has a current market capitalization of approximately $231 billion. Big Data is big business. Consequently, RadioShack’s data for 117 million customers could be one of the most valuable stand-alone assets for sale.

The enterprise value of information has changed immensely since 2000 and the days of the Toysmart case. As the International Data Corporation has predicted, this value is likely only to increase for the foreseeable future. This may place pressure on bankruptcy courts, debtors and prospective buyers on preserving the value of information assets while also complying with state and federal consumer protection laws. Bankruptcy practitioners will need to adapt to these changes and find an approach that facilitates information asset transactions balanced with respecting the privacy rights of consumers.