During these particularly trying times resulting from the COVID-19 pandemic, businesses of all sizes have been concerned about the future. As a result, considering potential liquidation or restructuring through bankruptcy is inevitably starting to become a reality for some. Companies in this situation should keep privacy concerns in mind, because the handling of personal data in bankruptcy proceedings poses some unique challenges.
By taking proactive measures, a business can transform the personal data it holds from a reorganization liability into an asset. However, 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, the GDPR and the CCPA, along with the prior positions taken by the FTC and various State Attorneys General, are all factors for companies to consider to ensure that data does not lose its value as part of the bankruptcy process.
The Bankruptcy Code, GDPR and CCPA
Bankruptcy sales in the new digital age have become increasingly complicated by privacy laws and complications due to privacy concerns. Recently, the legal landscape concerning data protection and privacy has shifted, largely toward a more stringent level of protection of users’ data. The European Union General Data Protection Regulation (GDPR) has been enforceable since May 2018. Under the 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.
In July 2018, the California Consumer Privacy Act (CCPA) was enacted, and has been enforceable since January 1, 2020. Under the 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.
Lessons from the Toysmart, Borders and RadioShack Bankruptcies
With the CCPA enacted, restrictions on the transfer of data during bankruptcy is bound to become even more complicated. Under the CCPA, a “sale” of personal information is defined broadly to include the “selling, renting, releasing, disclosing, disseminating, making available, transferring, or otherwise communicating orally, in writing, or by electronic or other means” to another business or third party “for monetary or other valuable consideration.” CCPA, Section 1798.140(t)(1). However, a transfer during bankruptcy is largely excluded from being regarded as a sale. As stated in the CCPA:
Consumer personal information may be part of business assets transferred to a third party in the course of a merger, acquisition, or bankruptcy when the third party assumes control of all or part of the business. In general, this type of transfer will not constitute a sale of personal information for the purposes of the CCPA. But, if the third party materially alters how it uses or discloses the consumer’s personal information and that use or disclosure is materially inconsistent with the notice provided to the consumer at the time of collection, the third party must provide the consumer with prior notice of the changed practices. Parties to the transaction should consider whether to address this issue in the purchase agreement. CCPA, Section 1798. 140(t)(2)(D) (emphasis added).
Because this the transfer of assets during bankruptcy generally does not constitute a sale under the CCPA, the heightened restraints applicable to the sale of data under this provision do not apply. However, the CCPA does seem to solidify in law the restriction that had been imposed by the FTC and State Attorneys General in the aforementioned cases by requiring customers receive notice of any policy change. Some additional restrictions may depend on each individual exercising the full extent of their rights under the CCPA. Under the CCPA, individuals have the right to access, delete, obtain information about a sale/transfer of, and opt-out of a sale of PII.
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.
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.