September 12, 2000 2:05 PM PDT

Toysmart creditor targets Disney in lawsuit

Disney can't seem to clean up its toys.

Arnold Communications, the former advertising agency for Toysmart, which was backed by Disney, has filed a lawsuit against the entertainment giant in Boston, saying it was led to believe that it would be compensated for advertisements placed on Toysmart's behalf last holiday season.

Boston-based Arnold is asking for $2.5 million in damages. One of the largest ad agencies in New England, Arnold said it has a policy that requires clients to pay in advance for ads, but waived the rule when Disney sent word, via Toysmart, that "Disney was in the picture and they shouldn't worry about getting paid," said Erik Lund, Arnold's lawyer.

For Disney, the company has been stung yet again by the prickly situation that has become Toysmart.com, a failed online toy store that Disney invested an estimated $40 million in last year.

Disney spokeswoman Michelle Bergman said the company would not comment on the suit.

Toysmart, which ceased operations in May, filed for Chapter 11 bankruptcy protection in federal court in June and has attracted a wave of controversy ever since.

After closing down, Toysmart touched off a firestorm of protest from Internet privacy advocates as well as from state and federal officials in June after CNET News.com reported that Toysmart had placed the personal information of its former customers up for auction.

The Federal Trade Commission and attorneys general from 41 states filed suit against Toysmart in an effort to halt the sale of consumers' private information. The FTC also accused Toysmart of violating federal laws protecting children's privacy online.

The privacy issues that Toysmart ran afoul of and ensnared Disney are unprecedented in the offline world and underscores how difficult navigating the Net has been for many brick-and-mortar retailers. Dominating the Net-version of their industries has proven tricky for stalwart offline companies such as Toys "R" Us, Wal-Mart and Barnes & Noble.

Disney has tried to jump in and fix some of the problems regarding Toysmart's privacy troubles. In July, Disney offered to buy back Toysmart's customer information and "retire the list." Toysmart's creditors did not like the offer, which sources said was near $50,000.

Disney also made good on a college scholarship that Toysmart had previously promised to award to a young boy.

 

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