The past year has consisted of a series of “watershed” moments in the world of retail. A long – and still-growing – list of retailers have faltered in the face of the COVID-19 pandemic, and the already-existing trends and consumer purchasing behaviors that it has accelerated, prompting no shortage of big names – from J. Crew and Neiman Marcus to Topshop-owner Arcadia Group and Ann Taylor-parent Ascena Retail Group – to look to Chapter 11 bankruptcy protection as they reorganize, while others have sought to liquidate their operations entirely (or certain segments of their operations) in some cases. 

The past several months, in particular, have been noteworthy, as they have not only seen long-standing high street retailers like Arcadia’s Topshop and co. collapse into administration (the UK equivalent to Chapter 11 bankruptcy), but they have also prompted digitally-native fashion groups to jump at the chance to expand their own portfolios in order to further scale their operations, and in some instances, to better target the robust beauty market.  

ASOS, for example, has emerged as an eager buyer, with the London-based e-commerce titan announcing on Monday that it will acquire Arcadia’s marquee Topshop brand, as well as Topman, Miss Selfridge and sportswear brand HIIT for £295 million ($403 million). Administrators for the Philip Green-run Arcadia Group – which fell into administration in late November as a result of “the impact of the Covid-19 pandemic” – said that ASOS will acquire “the brands, goodwill, and stock on hand, and will also take on certain liabilities for forward committed stock orders” in furtherance of the deal. While ASOS is set to acquire the brands’ intellectual property and inventory, the relevant brick-and-mortar network of 70 leases is not part of the equation, which speaks volumes to the state (and future) of mass-market retail strategy.

ASOS, an online pure-player that generated more than £3 billion in revenue last year, says that the acquisition marks a “strategically compelling opportunity to acquire four strong, iconic fashion brands” that appeal to “our core customer base,” with CEO Nick Beighton noting that it “will help accelerate our multi-brand platform strategy” and the company’s goal to become “the number one destination for fashion-loving 20-somethings throughout the world.”

The Rise of Boohoo

Not the only digital entity looking to scoop up former high street darlings, PrettyLittleThing, NastyGal, and Boohoo.com-owner Boohoo Group is among the main players looking to acquire cash-strapped brick-and-mortar brands that made their names as staples of the British high street. Founded in 2006 and known for its uber-fast – and dirt-cheap – take on the fast fashion model pioneered by the likes of H&M, Zara, and Forever 21, among others, Boohoo announced on January 25 that it had acquired “all of the intellectual property assets, including the website, customer data, related business information, and selected contracts of Debenhams” for £55 million. 

“The acquisition represents an exciting strategic opportunity to transform our target addressable market through the creation of an online marketplace that leverages Debenhams’ high brand awareness and traffic through the development of beauty and fashion partnerships connecting brands with consumers,” Boohoo CEO John Little stated late last month. Jefferies analysts echoed that sentiment, noting that the acquisition will give Boohoo “substantial scale and a low-risk route into building an online marketplace and entering the strategically significant prestige beauty market.”

The beauty aspect of the Debenham’s brand has been similarly highlighted as a central element of the acquisition, as Boohoo asserted that the 243-year-old Debenhams – which offers up cosmetics and beauty products from brands ranging from Elemis and Clarins to Givenchy, Yves Saint Laurent – has six million beauty shoppers and 1.4 million members in its Beauty Club program. At the same time, the Debenhams deal has been hailed as giving Boohoo the opportunity to build upon the retailer’s department store format and thus, offer up third-party products, while also enabling “small fashion brands to access Boohoo’s sophisticated digital technologies and the ability to tap into huge markets,” according to the Evening Standard.

This could be appealing to small brands that may opt to partner with Boohoo, particularly in light of the increased investments that are being made by larger players in the digital space, which have served to further skew the playing field in their favor. “Small labels that do not have the money to build their own distribution system will find it harder to keep tight ownership of this important sales channel,” the Wall Street Journal’s Carol Ryan stated in December. As a result, she says that “small brands may face little choice but to sign up with a third-party seller,” whether that be an Amazon or an ASOS … or a Boohoo.

The same is not necessarily true across the board, though. It is worth noting that at least some experts have wondered how willing more established brands, particularly those in the premium space, will be to continue to do business with Debenhams under its new ownership, not terribly unlike how luxury brands are expected to push back against inclusion in Sephora and Ulta’s respective new shop-in-shop partnerships with mass-market chains Kohl’s and Target.

Either way, the deal “marks a changing of the guard in UK retail prompted by a radical acceleration towards buying clothes, beauty products, and homewares online during the pandemic,” according to the Guardian, and that change is only expected to escalate further, as Boohoo is now in talks to buy Dorothy Perkins, Wallis, and Burton from Arcadia. The Boohoo-Arcadia deal – which is said to be in advanced stages but not yet done – would follow from Boohoo’s previous acquisition of the intangible assets of high street staples Karen Millen, Warehouse and Oasis, with all of its M&A activity going towards its publicized goal of becoming “the UK’s largest marketplace.”

The Lure of Customer Data

“Tellingly, neither Boohoo nor ASOS are taking over the physical stores of the brands that they are buying,” according to Regina Frei, an associate professor in Operations and Supply Chain Management at the University of Southampton and Lisa Jack, a professor of accounting at the University of Portsmouth. This reiterates the prevailing point that the value-drivers in this enduring wave of bankruptcy deals are intangible assets like intellectual property far more than any formerly-attractive real estate holdings. And more than the most obvious forms of intellectual property (i.e., trademarks, etc.), the sizable pools of trade secret-protected data at play are certainly proving a huge draw for bankruptcy bidders. Consumer data – from customer addresses and emails to their purchase histories – is a potential goldmine for acquiring parties and a valuable asset for bankrupt brands. 

The newly-announced deals also “inevitably confirm the closure of hundreds of shops and the loss of thousands of jobs,” according to Frei and Jack, who state that this further compounds existing issues on the high street, namely, a 75 percent drop in employment that took place in this segment of the fashion market between 2015 and 2018. The academics assert that the main reason for retail decline is, of course, the widespread adoption of e-commerce, which “helps to explain the buying power of Boohoo and ASOS.”

“One of the reasons for their success – and the failure of high-street rivals to compete – is business rates, they say. “Retailers with a presence on the high street paid £7.2 billion in business rates between 2018 and 2019, while online traders paid only £457 million on their out-of-town warehouses.” Then COVID hit, and as a result of government-mandated lockdowns, “The retail industry’s shift to digital has become even more marked, with online sales now predicted to grow to $6.5 trillion (£4.7 trillion) worldwide by 2022, up from $3.5 trillion in 2019.” 

“With automation also threatening the loss of many retail jobs in the future,” they note that at least “some are predicting that as much as 95 percent of shopping will be online by 2040.” 

Against that background and in light of budding intra-industry consolidation, one of the biggest challenges, per Frei and Jack, “is finding a social experience that can work on the high street but fits around online shopping.” They cite Amazon’s foray into Amazon Go showrooms, “where people can view goods and pick-up orders, and their accounts are debited without even having to go through a checkout.” Meanwhile, CNBC noted that COVID has prompted retailers to “rethink the role of the brick-and-mortar store,” citing a report from commercial real estate services firm CBRE, which revealed that “curbside pickup, mini warehouses in stock rooms, and more space for handling in-store returns are just a few of the components that more retailers will be looking to make permanent in their shops” in order to embrace an omni-channel model. 

As for surviving traditional retailers, Frei and Jack state that “they will increasingly need to offer an experience that people cannot get online or on their phone if they want to keep attracting customers.” 

UPDATED (February 8, 2021): Boohoo has acquired the Dorothy Perkins, Wallis and Burton brands from Arcadia for £25.2 million ($34.64 million). According to the BBC, “The deal includes the brands and online businesses, but not the 214 shops nor 2,450 workers employed in them, and it completes the sell-off of Sir Philip Green’s once mighty Arcadia group which fell into administration last year.”

British fashion group Arcadia announced on Monday that it has fallen into administration, leaving 13,000 jobs at risk. The downfall of the London-headquartered company has been creeping up in recent years, as its extensive portfolio of brands – which includes British high street staples like Topshop, Dorothy Perkins, Burton, and Miss Selfridge – have come to feel outdated compared to the likes of faster, digitally-native mass-market names, such as Boohoo and ASOS, and Arcadia Group’s market share, as a whole, has slumped from around 4.5 percent in 2015 to 2.7 percent in 2020

Yes, Arcadia’s hold on the high street has waned over the years with dozens of outlets closing nationwide, and many industry experts and past employees, alike, laying the blame at Arcadia owner and chairman Philip Green’s feet, citing lack of investment in online retailing and outdated ways of sourcing product. And against that background, Topshop, a stalwart of teen and 20-something fashion, and the jewel in the Arcadia crown, has become the latest fatality of this crumbling empire and undoubtedly the one that tipped it into administration. 

Topshop’s Legacy

The legacy of the Topshop women’s fashion chain started in Sheffield and London in 1964, in the basements of the Peter Robinson department stores. The aim was to sell fashion made by young British designers. Crucial to the brand’s early success was Topshop’s buyer Diane Wadey, who was known in the business for having a keen eye for young talent. 

In 1974, parent company Burton Group made Topshop a standalone store. Within two years, the brand’s primary target market became 13 to 24-year-olds, it opened 55 standalone stores and garnered £1 million in profit. The brand was so successful that Burton launched its male equivalent, Topman, in 1978.

The 1980s and early 1990s saw a fragmentation of the UK mass market as the emergence of value retailers – such as Matalan, New Look and George at Asda – put pressure on price reductions for fashion retailers. To maintain a competitive advantage, Topshop handed its reins over to Jane Shepherdson, who was hailed as the “most influential person on the British high street” during the mid-1990s. Credited with democratizing women’s style and changing the way they buy and wear fashion, under Shepherdson reign, the Topshop brand was transformed into a style mecca, known for offering up well-designed, style-savvy clothing. 

By the early 2000s, the retail landscape was changing again. The advent of the internet meant that designer catwalk collections, which had previously been a closely guarded secret, now became readily available at the touch of a button. Clever high street design and buying teams were able to use these catwalk images, interpret them swiftly for production, and cut down the six-month wait for high street “versions” of much-desired designs. Shepherdson and her team excelled in exploiting this opportunity by delivering up-to-the-minute and competitively priced fashion to the masses in a matter of eight weeks

After 20 successful years at the helm, and with turnover more than £100 million per year, Shepherdson abruptly departed Topshop in 2006. The press blamed a fall out between her and Green over decisions to allow supermodel Kate Moss to design lines for the chain. However, industry insiders and Shepherdson, herself, deny such speculation. 

What is without debate, from the moment that Shepherdson left, the road ahead for Topshop – now under new management – was a tough one.

Where it all went wrong

Ironically, Topshop’s unique selling point as “the closest a high street shopper got to catwalk fashion” was its demise. The more fashion lines the retailer gave to its consumers, the more demanding they became. The competition was also becoming fierce as the high street exploded with world-class international retailers, including online upstarts like Boohoo and ASOS, and extra value retailers like Primark, which combined low prices and savvy digital marketing techniques. 

As more people started to shop online, Green failed to invest in digital retail channels leaving them unable to compete with competitors. Online sales are increasing year on year, driven by Topshop’s key demographic – the 14-24-year-old market.

As people have increased their dependence on e-commerce, foot traffic to local high streets has massively decreased in the last ten years and dropped massively during the pandemic, in particular, with a whopping 80 percent drop nationwide in the UK in April. Topshop’s fixation on physical retail and its unwillingness to let go of its network of brick-and-mortar shops was also a setback. As of June 2020, Arcadia’s rival Inditex, for example, maintained 107 stores in the UK, including those for Zara, Massimo Dutti, and Pull and Bear, among several other brands. By contrast, Topshop, alone, has more than 300 physical locations across the UK.

At the same time, Topshop suffered following Shepherdson’s departure, as under her watch, Topshop had been nimble in its reaction to catwalk styles, and the company seemingly lost this ability after her departure. Fashion companies need to react quickly to emerging trends. Bringing suppliers of products closer to home ensures that companies can capitalize on what’s “hot” in a speedy manner. The closer the supplier, the shorter the lead time, making a retailer more flexible in its stock turnover. 

Zara’s parent company Inditex, for example, has mastered this method, whereas Green’s lack of strategic supplier relationships and his proclivity for buying from Asia, on the other hand, have meant that it takes a relatively long time for Topshop to get a product from concept to shop floor. 

Still yet, the group’s sales also took a hit in 2018 when shoppers boycotted Topshop after Green was accused of sexually harassing and racially abusing staff. The boycotts went so far that activists pressured mega-star Beyoncé, who had launched her popular activewear brand Ivy Park under Topshop in 2016, to cut ties with Green and Arcadia. (The star’s company Parkwood ultimately bought out Green’s 50 percent stake in Ivy Park, and has since relaunched the venture with adidas).

The collapse of the Arcadia group marks the UK’s largest corporate casualty of the pandemic so far. However, Topshop’s is unlikely to disappear altogether. Strong heritage and high brand awareness in the UK – two keys elements that investors and acquiring companies look at in instances of retail bankruptcies – means it will probably continue to exist, even if that means only online. 

Julie Hodson is a Senior Lecturer in Fashion Business at Manchester Metropolitan University. (This article was initially published by The Conversation).

For the past several months, business headlines have been dominated by news of ailing businesses, as U.S. bankruptcies pile up, surpassing the 500 mark last week, and thereby, exceeding the number of filings during any comparable period since 2010. The impact of COVID-19 has pushed retailers – such as J. Crew, Neiman Marcus, Lord & Taylor, Brooks Brothers, Lucky Brand, John Varvatos, True Religion, and growing list of other well-known brands – over the edge, with many of those companies already wracked with debt from leveraged buyouts and suffering from the effects of largescale changes in consumption trends even before the health pandemic took hold. 

The onset and continued effects of COVID-19 have seen many brands look to Chapter 11 of the U.S. Bankruptcy Code for protection from creditors as they seek to reorganize their operations and get a handle on their debut. In no small number of instances, the result of such proceedings has been investors sweeping in to purchase these companies’ assets (from their real estate but more importantly their intellectual property and large swathes of consumer data), in some cases, at a notably discounted rate. This is precisely what mall giant Simon Property Group and Authentic Brands – the owner and licensor of over 50 well-known brands, ranging from Juicy Couture and Judith Leiber to Jones New York and Barneys New York – have been doing over the past few years.

Together, Simon and Authentic Brands – which formally established their SPARC Group joint venture in early 2020 – acquired Brooks Brothers, the 202-year old American retailer, for $325 million in August. That same month, they acquired Lucky Brand in a deal worth more than $191 million ($140.1 million in cash, $51.5 million in credit from vendors, and a trade receivables adjustment). Before that, SPARC, together with Brookfield Property Partners, acquired Forever 21 out of bankruptcy for $81 million in February. All of this comes after the two companies very first venture together, which saw them take ownership of Aeropostale in September 2016 for $243.3 million, just months after the mall retailer filed for bankruptcy. Seemingly far from finished, the partners are currently in the midst of discussions in connection with JC Penney’s bankruptcy. 

“In the short-term, these acquisitions should prove to be lucrative for both Simon and Authentic Brands,” according to Goulston & Storrs PC attorneys Vanessa Moody and Yara Kass-Gergi. “As a result of SPARC’s acquisition of these retailers, Simon – the largest shopping mall operator in America – is able to better control the occupancy rates at its shopping centers, helping to ensure their continued viability,” they note, “while Authentic Brands benefits by having its retail business partner also be the landlord of many of its brick and mortar store locations.” 

Speaking specifically about their acquisition strategy, SPARC CEO and former CEO of Aeropostale Marc Miller told CNBC in August that “there are scale advantages [and] sourcing power” to be gained from acquiring these retailers, as SPARC is able to spread expenses across its multiple brands, ones that he says have “good real estate and international recognition,” which “puts the individual retailers – and the group as a whole – in a better position to succeed in the consumer marketplace.” 

As for their prospects for longer-term success, both for SPARC and the companies it is readily taking ownership of, Moody and Kass-Gergi say that is less obvious. “The future impact of COVID-19 on retail, including retailers’ ability to ride out any significant second or third rounds of governmentally mandated store closures, remains entirely uncertain.” As a result, they claim that “any expansion of retail holdings and physical store locations comes with some inherent risk,” including potential issues over “whether SPARC will be able to retain the high quality of the brands it acquires as it continues to acquire more and more companies is another question.” 

Additionally, Moody and Kass-Gergi note that at least “some competitors and other interested parties are already starting to quietly wonder whether the growing list of retailers under the Simon and Authentic Brands umbrella does or should at some point raise antitrust concerns,” which could prove interesting. 

One budding theory as to the motivation behind SPARC’s acquisition spree is that the group might be making itself too big to fail. In May, the New York Times reported that the havoc being wreaked on the private sector by COVID “has broadened the elite status” held by Wall Street banks and other big financial institutions that were deemed “too big to fail” during the 2008 financial crisis. It now extends “to a significant swath of the American private sector.” The Times noted that Fed chair Jerome H. Powell “has signaled that the central bank will continue to [buy assets with freshly created money],” and that there is “really no limit” to what the central bank could do with its emergency lending facilities, including looking to America’s retail sector.

Since then Web Smith, the thinker behind 2pm, a newsletter that analyzes the “connections between media, brand, retail, and data,” has said that “the largest and most vulnerable mall industrialist (Simon Properties)” is “literally angling to become too big to fail,” and he predicted that the mall giant will, in fact, “be bailed out by Congress by 2024.”

Time will be the ultimate judge of the wisdom of Simon’s strategy in partnering with Authentic Brands and engaging in a quest to become “the world’s leading brand operator,” as Miller put it, but “at least for now,” Moody and Kass-Gergi agree that “it seems like a creative way for commercial real estate owners to weather the retail bankruptcy storm brought to a head by the COVID-19 pandemic.” 

In late September 2018, the Board of Directors of the Neiman Marcus Group Ltd. received a letter. In the correspondence, Marble Ridge Capital – the New York-headquartered investment firm and significant Neiman Marcus creditor – accused the 113-year old department store chain of engaging in a fraudulent scheme intended to harm its creditors and its employees. According to Marble Ridge, Neiman Marcus’ transfer of its European e-commerce division, namely, buzzy e-commerce company Mytheresa, to private equity owners, Ares Management and Canada Pension Plan Investment Board (“CPPIB”) was at the center of the alleged fraud. The purpose of the transaction, the fund alleged? To shield those assets from existing creditors in case of bankruptcy. 

The letter came on the heels of Neiman Marcus Group Ltd. (“Neiman Marcus”) transferring approximately $1 billion in assets to a corporation held by Neiman Marcus owners Ares and CPPIB – a corporation that is quite notably separate from the retailer’s corporate entity Neiman Marcus Group LTD – in a September 2018 transaction. Given that Neiman Marcus allegedly transferred the valuable European arm of the company without receiving anything in exchange, Marble Ridge and its bankruptcy attorney-turned-distressed debt fund founder Daniel Kamensky called foul: “CPPIB and Ares are looking to line their own pockets at the expense of [Neiman Marcus’] other stakeholders and employees,” Marble Ridge asserted in its September 18, 2018 letter.

The since-liquidated Marble Ridge argued that such actions “threaten the viability of a storied franchise that includes marquee brands such as Neiman Marcus and Bergdorf Goodman,” and went on to slam the company’s board for not engaging in “a strategic review to maximize value for the benefit of all of the Company’s stakeholders.” Despite having well-established fiduciary obligations, the fund alleged that the Neiman Marcus board simply “allowed the theft of assets by CPPIB and Ares.” 

The Court Battle Begins

What started as a strongly-worded letter to Neiman Marcus’ board turned into a public-facing legal battle a few months later when Marble Ridge filed a lawsuit against the Dallas, Texas-based retailer’s various domestic and international corporate identities centering on the $1 billion transfer and seeking upwards of $1 million in damages. In a 25-page petition, which was filed in a state court in Dallas on December 10, 2018, Marble Ridge set forth various claims of fraud in connection of Neiman Marcus’ transfer of the Mytheresa assets in a scheme it orchestrated to benefit Ares and CPPIB, and “hinder, delay and defraud [Neiman Marcus’] creditors.” 

In addition to transferring the assets “for no consideration whatsoever,” the transfer was problematic, per Marble Ridge, because Neiman Marcus was allegedly insolvent at the time of the transfer or made insolvent as a result, the transfer ran afoul of U.S. federal bankruptcy law, which prohibits asset transfers by insolvent entities. 

Ultimately, the issue, in Marble Ridge’s eyes, was that the transfer took Mytheresa’s assets off of the table, and with it “any claims that creditors might have on Mytheresa as collateral – a problem if the company ever went bankrupt,” per Bloomberg, which it eventually did.

Within a week, Neiman Marcus has filed a lengthy answer to Marble Ridge’s complaint, complete with claims of its own, including defamation and business disparagement. According to Neiman Marcus, in a September 2018 press release detailing its letter to Neiman Marcus’ board, Marble Ridge cited “theft of assets by” Neiman Marcus’ private equity sponsors and a potential “default” by Neiman Marcus. Those statements – and others – “were false and defamatory, and with regard to the truth of the statement, Marble Ridge acted with actual malice or negligence,” the retailer argued. 

Beyond merely filing a countersuit, Neiman Marcus went on a PR campaign, telling the media that “for the last three months, Marble Ridge has made numerous false statements in the press, and has repeated them in [its] complaint,” and clarifying that “Neiman Marcus is not and has never been in default, and is in full compliance with the terms of its debt agreements.”

By March 2019, the court had tossed out Marble Ridge’s case in its entirety with prejudice (meaning that the fund cannot not refile a case against Neiman Marcus on the same grounds). In a brief order, Judge Tonya Parker of the 116th Civil District Court simply cited a lack of subject matter jurisdiction, leaving Neiman Marcus to gloat – “From the beginning, we have said Marble Ridge’s lawsuit lacked merit,” a rep for the group said in a statement on the heels of the ruling – and Marble Ridge to publicly reiterate its position that “the transfer of MyTheresa to the retailer’s shareholders, who led a $6 billion leveraged buyout of the company in 2013, impairs all other Neiman Marcus stakeholders.” 

In terms of its own claims, Neiman Marcus – which ultimately filed for Chapter 11 bankruptcy in a Texas court in May – was served a better hand. Just a month later, despite attempts by Marble Ridge to get the court to declare Neiman’s countersuit a Strategic Lawsuit Against Public Participation (“SLAPP”) and dismiss it as against public policy, the court refused to dismiss Neiman Marcus’ counterclaims. (A SLAPP is a lawsuit that is filed in retaliation for a party speaking out on a public issue or controversy). 

While the case is still underway in Texas, Neiman Marcus announced on Friday that it has completed its Chapter 11 bankruptcy protection process, emerging from what has been coined “one of the highest-profile retail collapses during the COVID-19 pandemic.”

As for the implosion of Mable Ridge Capital, its founder was arrested and charged with fraud, extortion, and obstruction of justice in connection with Neiman Marcus bankruptcy on September 3.

UPDATED (February 4, 2021): Marble Ridge founder Daniel Kamensky entered a guilty plea for bankruptcy fraud with the U.S. District for the Southern District of New York. A sentencing hearing is set for May 7, with a suggested sentence of up to 18 months in prison currently on the table.

*The case is Marble Ridge Capital LP v. Neiman Marcus Group Inc., et al, DC-18-18371, 116th Judicial District (Dallas). 

Why have companies been scrambling to snatch up bankrupt retailers like Forever 21, Brooks Brothers, and Barneys, and in many cases, paying tens – if not hundreds – of millions of dollars to do so? Brand recognition – which is directly linked to companies’’ intellectual property rights (namely, their trademarks) – and prime brick-and-mortar real estate is certainly a draw. As Authentic Brands Group head Jamie Salter told CNBC this summer, he is on the hunt “for crippled businesses with good real estate and international recognition” to add to his swiftly growing portfolio, which consists of Barneys, Forever 21, Aeropostale, and Brooks Brothers, among other fashion/retail properties. 

But real estate and intellectual property are only part of the draw. A driving force that is enticing bidders to put up cash for ailing businesses goes beyond that. In many of these big bankruptcy sales, a significant asset that changes hands is a slew of customer data points – from shoppers’ physical addresses and their email addresses to things like demographic characteristics and their purchase histories with that particular company. That is what experts say is at stake in a lot of these headline-making acquisitions. 

“Lists are not hard to get, but lists that are connected to a brand that I own, I can’t go buy that as easily,” Ramez Toubassy, brands president with Gordon Brothers, which acquired Laura Ashley in April, told NBC News. “You gain tremendous value by having conversations with customers who already have a relationship with that brand.” More specifically, “Knowing somebody has bought my product and knowing what they bought and knowing when and why they bought it puts me in a better position to sell them more products.” 

Given the value tied to such customer data, especially in light of ever-increasing reliance on e-commerce by consumers across the globe, it should not be surprising that bankruptcy bidders are focusing their attention there. “In a digital economy, information can be more valuable than tangible assets,” Covington partner Michael Baxter asserts. (According to the U.S. Chamber of Commerce, as reported by the Wall Street Journal, “Intangible assets accounted for more than 80 percent of the total $25 trillion in assets of S&P 500 companies as of 2018, with the value of intellectual property in the U.S. amounting to about $6.6 trillion).

“Personal information about consumers,” in particular, Baxter says, “is highly valued, as businesses and marketers increasingly seek ways to target consumers with specific demographics and interests.” At the same time, there is an inherent push-and-pull at play when dealing with this type of information. He notes that “when a debtor wishes to sell off the personal information it has collected from consumers,” including as part of a bankruptcy sale, “a tension is created between the debtor’s interest in maximizing the value of its assets and the consumer’s interest in privacy.” 

As for whether that tension means that companies are – or are not – able to freely sell off consumer data, the legality of the situation is not always straightforward. “When a business becomes a debtor, the sale of personal information can be problematic,” according to Céline M. Guillou, a corporate attorney at Hopkins & Carley in Palo Alto.

The legality of selling data

There are a few key ways that such a scenario could play out. In the simplest potential situation, a company’s privacy policy – which serves as the primary guide for determining whether consumer information can be legally sold – will include a provision stating that consumer information may, in fact, be sold.

As NBC’s Leticia Miranda reports, “Lord & Taylor includes a clause in its privacy policy that tells customers their information is considered a company asset and may be sold or transferred to third parties.” While the company initially sets out in its terms that it “will never sell or rent your personal information to third parties,” the caveat comes later in the company’s terms when it states that “during the normal course of our business, we may sell or purchase assets. If another entity acquires all or a part of a business owned or operated by us or [our parent company] Le Tote, information we have collected about you may be transferred to such entity.” In short: newly-bankrupt Lord & Taylor is well within its rights to take the information provided to it by its customers, and sell or transfer it to a third party (or parties) as part of an acquisition.

Moving beyond that type of case, there is a likelihood that a company’s ability to sell off consumer information is not so clear-cut. After all,  Guillou states that “while most technology companies, which are accustomed to doing business online, have been more proactive about ensuring that they have privacy notices and the proper disclosures posted to their websites, this is often not the case with [primarily] brick-and-mortar businesses, such as retailers.” 

With that in mind, there is a chance that a company’s policy contains a provision that prohibits it from selling consumer data, or that fails to explicitly reserve the right to sell such data. If that is the case, a retailer may not be entirely out of luck should it want to sell off data as part of its bankruptcy deal (and it will likely want to given that such data is playing a large part in these bankruptcy valuations). Pointing to Section 363(b) of the U.S. Bankruptcy Code, Guillou says that “ a debtor that has a privacy notice prohibiting the transfer of personally identifiable information may not use, sell or lease such information other than in the ordinary course of business unless: (1) the use, sale or lease is consistent with the terms of the privacy notice or (2) after a consumer privacy ombudsman appointed by the court finds that … the sale would not violate applicable non-bankruptcy laws.”

Additional issues when it comes to the terms set out in a company’s policy may arise in connection with how “the sale language is specifically worded, the nature of the purchaser, and, importantly, the number of prior versions of the privacy notice,” all of which could become impediments to effortlessly transferring users’ personal information in a sale, per Guillou.

The number and the content of prior versions of a company’s privacy notice becomes important if a company’s current privacy policy explicitly gives it the right to sell data, but prior versions maintained conflicting language. What then?

Baxter states that in such a scenario, “the Federal Trade Commission has made it clear that a debtor’s privacy policy on the bankruptcy petition date is not the only privacy policy that matters, [and] there are circumstances in which the personal information collected by the debtor may be subject to representations in prior privacy policies.” For example, he suggests that “if a consumer has submitted personal information [to a company] pursuant to a privacy policy that either prohibits its sale or fails to disclose that such information may be sold or transferred, the consumer’s information may not be sold unless the consumer has consented to any subsequent change in the privacy policy to permit such a sale. 

Muddy waters

The waters can still be muddied further because companies are not only bound by their own privacy policies (both current and pre-existing ones); privacy-specific laws, including the European Union’s GDPR, and the California Consumer Privacy Act of 2018 (“CCPA”), are also relevant considerations.

The CCPA, for instance, not only gives consumers the right to “ask businesses to disclose what personal information they have about them and to delete [any] personal information” they have; it also requires that data-collecting businesses alert consumers if they plan to sell that data. Under the CCPA, consumers can opt-out of having their information sold. However, it is worth noting that the CCPA enumerates certain exceptions to that opt-out, according to a Skadden note on the CCPA, including in cases when “the personal information is an asset that is part of a merger, acquisition, bankruptcy or other transaction in which the third-party assumes control of all or part of the business,” assuming, of course, that the business complies with CCPA disclosure requirements.

These are not necessarily novel issues faced by businesses. “Over a decade ago, Congress addressed the privacy of personal information in bankruptcy sales in the 2005 amendments to the Bankruptcy Code,” and imposed binding “conditions on the sale of personally identifiable information if the debtor has a privacy policy ‘in effect on the date of the commencement of the case’ that prohibits the transfer of [such] personally identifiable information,” Baxter notes. At the same time, “there are some existing decisions” – from courts and regulators, such as the Federal Trade Commission, alike – “discussing these consumer privacy protections,” per Guillou.

Nonetheless, “because privacy has only [relatively] recently become such a ‘hot topic,’ especially when compared to the last big round of corporate bankruptcies,” Guillou says that “these restrictions are now much more likely to come up in the context of bankruptcy sales.”