Last month Restructuring Perspectives highlighted crucial issues at the intersection of privacy and distress presented by the Chapter 11 case of 23andMe. Specifically, “Data for Sale” discussed the recent appointment of a “Consumer Privacy Ombudsman” (CPO) charged with assisting the Court in its consideration of the facts, circumstances, and conditions of the company’s proposed sale of personal consumer data.
The ensuing weeks were full of activity. The CPO filed his report (CPO Report) with the United States Bankruptcy Court on June 11. Then, after authorizing the reopening of the auction process, the Court held a sales hearing with various parties presenting arguments regarding the potential sale. Finally, just last Friday the Court issued an order approving the sale. Set forth below is a brief synopsis of key developments in the sale process and a short summary of the sale order.
CPO Report
The CPO Report sets out the applicable factual background including the company’s privacy representations along with a summary of posted terms of service and privacy statements provided to consumers. The CPO Report also discusses applicable non-bankruptcy privacy law and analyzes whether the contemplated sale would violate such laws. The CPO also sets forth the CPO's assessment of the potential losses or gains of privacy to consumers if a sale were approved as well as potential costs or benefits in the event of a sale.
On the key question of whether the potential sale was in compliance with the company’s privacy policies, the report concludes as follows: “the CPO cannot conclude with certainty that the sale of the Company’s data in bankruptcy is otherwise consistent with its privacy policies, particularly for those customers who created their accounts before the 23andMe Privacy Statement was amended in June 2022 to expressly note the potential for a sale of customer data in bankruptcy.”
The CPO Report offered the view that the “optimal solution from a consumer privacy perspective” would be to compel obtaining separate, affirmative consent from customers to the sale of their respective data. That perspective was sharply challenged by the debtor through the filing of a report by another privacy expert, Professor Fred H. Cate, who argued that seeking affirmative consent is neither necessary nor appropriate. The State of California, in turn, filed an objection seeking to strike the Cate report as inadmissible from an evidentiary perspective and thus improper for the Court’s consideration.
Additional Bidding
Last month’s Restructuring Perspectives blog noted that Regeneron Pharmaceuticals had submitted the highest bid. Thereafter, however, the Court allowed one final round of bidding to occur. As of the date of the CPO Report, the two bidders consisted of Regeneron as well as a nonprofit entity known as TTAM Institute, which was recently formed by the debtor’s co-founder and former CEO. Accordingly, the CPO Report included an analysis of the differences between the two bidders when evaluating the privacy considerations presented by the potential sale.
On June 13, just two days after the filing of the CPO Report, the debtor announced that TTAM emerged as the winning bidder with a bid of $305 million, topping the previous Regeneron offer of $256 million, with the bid subject to a final bankruptcy Court approval at a sale hearing scheduled to occur the following week. Regeneron, for its part, declined to bid further.
The debtor also announced that pursuant to its purchase agreement with TTAM, it was exercising its right to structure the transaction as an equity transfer. Under that structure, the debtor intended to (i) transfer target assets to a newly-formed and wholly owned Delaware limited liability company then (ii) sell all of the issued and outstanding limited liability company equity interests in the newco to TTAM.
Sale Hearing
The Court held two full days of hearings to consider the potential sale then took the matter under advisement for a week. In addition to absorbing the oral argument, the Court digested numerous pleadings filed in support of – and in opposition to -- the sale. The objecting parties included The National Association of Attorneys General acting on behalf of 28 states as well as the states of Alaska, California, Tennessee and Texas. Many objecting parties argued that express affirmative consent was required from consumers in certain jurisdictions in order for the sale to proceed.
TTAM filed an omnibus response to numerous objections arguing that its bid was the highest and best offer both in terms of economic value but also regarding consumer protection and privacy. Specifically, TTAM highlighted the following attributes of its bid:
- Customer Data Rights: commitment to honor in perpetuity the debtor’s existing policies on account and genetic data deletions and research opt-out;
- Customer Notification: commitment to email all customers at least two business days before the closing with details on instructions for data deletion or opting out of research;
- Data Transfer Restrictions: commitment not to sell or transfer genetic data in connection with a subsequent bankruptcy or change of control unless the recipient is a qualified domestic entity that adopts TTAM’s privacy policies and complies with all laws;
- Privacy Advisory Board: commitment to establish a Consumer Privacy Advisory Board within 90 days of the closing;
- Privacy Procedures and Reporting: commitment to implement privacy procedures, notify customers of material changes, mitigate data breaches, and prepare annual reports to be made available to Attorneys Generals upon request;
- Identity Theft Monitoring: commitment to offer two years of free Experian identity theft monitoring; and
- Research and Donations: commitment to continue the debtor’s policy of licensing aggregate data for scientific and biomedical research to research scholars at academic universities and other nonprofits, and refuse donations from individuals or companies in specified countries
TTAM argued that federal bankruptcy law preempts any contrary state law purporting to bar the sale and that, in any event, such state laws apply only to asset sale and not to an equity sale as now proposed. The Creditors’ Committee filed a statement expressing full support of the sale noting in part that the contemplated sale would balance consumers’ privacy interests with the goals of Chapter 11.
Sale Order
On June 27, the Court issued its order approving the sale to TTAM. The sale order contains very straightforward conclusions on the privacy issues including the Court’s determination that the sale “complies with the terms of the Debtors’ privacy policies regarding the transfer of such personally identifiable information” as of the petition date and, thus, the sale is permitted pursuant to section 363(b)(1)(A) of the Bankruptcy Code.
The Court further held that “To the extent, if any, that the Sale Transaction is not authorized pursuant to section 363(b)(1)(A) …. no showing has been made that the sale would violate applicable nonbankruptcy law” and thus the Court concluded that the sale was permitted pursuant to section 363(b)(1)(B).
The Court ordered that TTAM give notice of and ensure that customers retain the ability to “easily and promptly delete” their account information “in perpetuity.”
Finally, the Court ordered that TTAM comply with independent external audits and make a summary of each audit available (on a highly confidential basis) to state regulators who request such results.
Conclusion
In typical fashion, the sale order includes customary language noting that neither reversal nor modification on appeal of the sale authorization will affect the validity of the sale unless a stay is obtained prior to the sale closing. Given the numerous objections to the sale process it will be interesting to observe whether any party seeks and obtains a stay.
Whatever the ultimate outcome in the 23andMe case, it will also be worth tracking whether the bipartisan “Don’t Sell My DNA Act” introduced in May by Senators Chuck Grassley (R-Iowa), John Cornyn (R-Texas) and Amy Klobuchar (D-Minn.) advances. That legislation can be tracked at https://www.congress.gov/bill/119th-congress/senate-bill/1916/text. If enacted, that legislation would require, among other things, affirmative consumer consent before a transfer of genetic information could occur in a bankruptcy sale.
