Privacy Protection on the Internet. (Technology)

By Larson, Linda Lee; Larson, Robert K. et al. | Strategic Finance, June 2003 | Go to article overview

Privacy Protection on the Internet. (Technology)

Larson, Linda Lee, Larson, Robert K., Greenlee, Janet, Strategic Finance

It's Saturday morning, and you're looking forward to a leisurely weekend when you receive an urgent call from the office. Your company has been charged in a $500 million class-action lawsuit for violating customer privacy by selling the names (and other information) of those who have bought goods on your website. Your attorneys say the plaintiffs have a good chance of winning. And you may have even bigger problems with your European Union (EU) customers because of the strict privacy rules in the EU Privacy Directive. Besides penalties, the EU may prevent your organization from even transferring customer data from your own operations in Europe to the U.S.

Sound far-fetched? Well, in the past few years, several organizations have had significant lawsuits filed against them by customers claiming that their privacy was violated. Consumers are becoming increasingly angry when their personal information is used or released without their permission. As a result, new laws and regulations are being introduced that prohibit companies from releasing customer information to third parties without the consumer's express consent.


Disclosure: Consumers are afraid that businesses, including those on websites, will sell personal information to other organizations without their knowledge or permission. In 1999, a California lawyer filed a $500 million class-action suit against RealNetworks, charging that it shared customers' personal financial information with telemarketers in direct violation of its own stated privacy policy.

Prosecution in Minnesota of U.S. Bancorp on similar charges (also in direct violation of its stated privacy policy) led to new U.S. legislation. One section of the Financial Services Modernization Act of 1999 (also known as the Gramm-Leach-Bliley Act) requires that customers of financial institutions must not only be notified before any personal information is disclosed to any nonaffiliated third party, but they must have the opportunity to opt out of any disclosure. But these protections only apply to customers of financial institutions and don't prevent U.S. financial institutions from sharing customers' personal information with their affiliates.

Security: Consumers are afraid that businesses and their websites aren't adequately protected against outsiders. In 2000, someone calling himself Maxus hacked his way into the CD Universe website and stole 300,000 credit card numbers. When his attempts to blackmail CD Universe for $100,000 failed, Maxus posted 25,000 of these credit card numbers on his website, leading to untold lost business and mass cancellation of credit cards. The website was promptly shut down.


United States. In the U.S., the protection of an individual's information is governed by laws, court rulings, and self-regulation. While laws now cover financial institutions, in practice, a consumer's privacy is protected primarily by the goodwill of businesses. Most recent privacy concerns have centered on the Internet.

To address privacy on the Web, several organizations have set up website certifications and privacy seals, and many businesses have posted one or more of these seals on their websites. TRUSTe is by far the most popular Web privacy seal. At year-end 2002, the websites of more than 1,500 organizations displayed the TRUSTe seal, including Netscape, IBM, Yahoo!, Microsoft, AOL Time Warner, Adobe, and Disney. Another popular program is the Better Business Bureau's (BBB) Online Privacy Program (with seals on 706 company sites as of April 2003). The AICPA also has an Online Privacy Program (and Principle) as part of its WebTrust seal program. (See "Voluntary Privacy Seals.")

But critics have pointed out that organizations sponsoring these privacy seals are largely self-regulated. For example, both RealNetworks and U.S. Bancorp had posted privacy seals on their sites. Although TRUSTe did conduct an audit of RealNetworks once the violations were reported, certifying organizations rely on members' self-compliance. …

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