The 23andMe Court Got It Right; Is that Wrong?

The bankruptcy court approved 23andMe's motion to sell its assets in its chapter 11 case. Those assets include the genetic information its customers had entrusted to the company. Understandably, many customers and government regulators had concerns about the deal. In the end, Judge Walsh got it right on the law. 

All that was at issue in the motion before Judge Walsh was whether 23andMe satisfied the requirements to sell assets in bankruptcy. The consumer privacy ombudsman suggested restrictions on the transfer of its customers' genetic information. Those restrictions might serve the common weal, but Judge Walsh had to stick to the law Congress had given him. That law is a textual mess. The intentionalism and purposivism on display in the opinion cuts through the textual problems. There is a lot to the opinion, but for now I will just focus on the section 363 issue.

Section 363(b) says the court is to approve a sale of "personally identifiable information" (PII) if:

(1) The sale is consistent with the company's policy prohibiting transfer of PII,

OR 

(2) The court approves the sale after

(A) "giving due consideration to the facts, circumstances, and conditions of such sale or such lease;"

AND

(B) finding that the sale would not violate applicable nonbankruptcy law

The debtor first argued that it only had to meet one of the two requirements, and its policy allowed the transfer. The statute does use the word "or" giving the debtor a nonfrivolous argument, even if it a hyperliteralist one. Congress, however, added this language in 2005 over concerns the bankruptcy process could run roughshod over privacy protections. It is absurd to suggest that a law intended to increase those protections somehow accomplished the exact opposite. To the best of my knowledge, it was the first time anyone ever made that argument. The 2005 law was a technical disaster, and this language is just another example. Reading the statute in the debtor's hyperliteralist way leads to all sorts of illogical results such as a company with no privacy policy having more restrictions than a company with a privacy policy. 

The meatier argument was that the sale violated various state privacy laws, and at the end of the case, five state attorneys general had not settled their objections. The states' laws have different wording, but it comes down to whether the debtor was "transferring" the data. The deal structure, however, was a transfer of equity ownership, not a transfer of the data themselves. Before the sale, 23andMe dropped the data into a wholly owned subsidiary in exchange for a promissory note. The subsidiary's equity was then transferred by 23andMe to the buyer, TTAM. 

For my money, the whole case comes down to whether that initial drop down transaction to a wholly owned affiliate was a "transfer" within the meaning of the state statutes. Judge Walsh persuasively demonstrates the prohibition on "disclosures" of the data in the same state statutes cannot mean literally every "disclosure." Every time a 23andMe employee accesses the data, 23andMe has "disclosed" the data to a person other than itself. That act cannot possibly be within the state statutes, or they would be backdoor bans on the industry altogether. If "disclose" cannot mean every "disclosure," then the word "transfer" in the same statutes is similarly circumscribed. 

The next step is the weakest link in the opinion's reason. That the word "transfer" has some boundaries does not demonstrate on which side the matter at hand rests. Judge Walsh is certainly right, however, that it is unlikely the state legislatures intended to regulate corporate structures through the privacy statutes. The court would not further the purpose of the statutes by understanding them to limit transfers wholly within a corporate group. I agree. A strict textualist might not. 

It is unlikely we will get an appeal given section 363(m)'s protection for bankruptcy sales order. Judge Walsh did stay his opinion for ten days to give the parties a chance to appeal. If we do get an appeal, more will be at stake than just another bankruptcy issue. The decision largely rests on how judges think about the statutes they must apply. The specialist judges of the bankruptcy courts more easily see the larger statutory design and are drawn to interpretative approaches that ask what the legislature was trying to accomplish. A more textualist-minded Article III judge on an appeals court could see it differently.