By Bob Sullivan Technology correspondent
msnbc.com
updated 7/7/2004 6:17:48 PM ET 2004-07-07T22:17:48

The makers of the popular reading education program Hooked on Phonics were fined Wednesday by the Federal Trade Commission for sharing private consumer information -- including information about children -- with outside marketing firms, despite promises made in its privacy policy.  

Gateway Learning Corp. agreed to settle the FTC charges on Wednesday, consenting to pay a $4,600 fine and stop sharing the data. The company admitted no wrongdoing.

The FTC alleges that the California-based Gateway promised consumers it would keep their personal information private, but then turned around and offered the information to direct marketing firms anyway.  An estimated 30,000 consumers who signed up for the product using the Hooked on Phonics Web site were impacted, FTC Director of Consumer Protection Howard Beales said.

Beales said the Hooked on Phonics privacy policy clearly stated that personal information would not be shared with third parties. The firm then changed the policy, but didn't notify customers, and shared a variety of information about them -- including names, addresses, and phone numbers of adult consumers, along with age ranges and the gender of their children. Children's names were not shared. 

"Changing the rules after the game is played is unfair," Beales said.  "You can't retroactively apply changes to your privacy policy.... This is a particularly eggregious case in terms of the kind of information shared and the explicit promises not to share it."

The settlement only applied to information the company gathered online. Beales said he didn't know if data the firm collected from customers who purchased the product through other means -- such as over the telephone -- were also included in the information sale.  Consumers who were impacted have already received phone calls or direct mail offers, he said.

The company was ordered to stop selling the information, and to pay the $4,600 profit it made from the sale of the information as a fine.  The FTC says sale of the data ended last July.

Video: Privacy online The incident came to light last year when a Washington Post reporter spotted an advertisement in a marketing trade publication offering the customer list for "rent," at a price of $95 per 1,000 names.  By renting the information, Gateway would allow the firms to contact its consumers, while still maintaining control over the data.

Gateway Learning could not immediately be reached for comment.  The firm is part owned by venture capital firm Rosewood Capital, said Rosewood director Chip Adams.  He said the incident was merely the result of the Web site being slow to update its privacy policy. He also stressed that only limited information about the children was shared.

But Beales argued that it was obvious the information was sensitive.

"The company thought it was important enough to consumers that it made a separate and express promise to consumers not to share it and did it anyway," he said.  "This is information a lot of consumers would likely have cared about.

And child advocate Parry Aftab, who runs Wiredsafety.org, said companies that deal with children are held to a higher standard, and should be.

"The real thing here is kids privacy is crucial. A lot of companies that play free and loose with adults' personal information are now learning the hard way you can't do that with kids," she said.  "Parents go to Hooked on Phonics, it has a great reputation, it's a trusted brand, and you abuse that trust by saying we have kid customers and we're going to make money off them, well, you've betrayed that trust.  When you play in the kids space you have to be holier than thou, that's the cost of playing with kids. If you betray that trust people are very unforgiving."

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