By Dietrich Knauth

NEW YORK (Reuters) -Genetic testing company 23andMe agreed on Tuesday to allow a court-appointed overseer to take charge of ensuring customers’ genetic data remains protected during the company’s bankruptcy, settling a dispute with several U.S. states.

Those states had argued the company was not taking data security seriously enough.

U.S. Bankruptcy Judge Brian Walsh approved the agreement at a court hearing in St. Louis, Missouri, ordering the appointment of a consumer protection ombudsman who will be empowered to review 23andMe’s handling of customers’ genetic information and its security policies.

The ombudsman will also review any sale of 23andMe’s business or data during the company’s bankruptcy, and report to the court about how any sale would impact customers’ data.

23andMe had initially proposed hiring a "customer data representative" who would have had a more limited focus on ensuring that a future sale of the company or its data complied with the company’s existing privacy policies. But a group of more than 25 states objected, saying that 23andMe simply wanted to hire someone who would "tell this court everything is fine."

23andMe has collected genetic data from 15 million customers who ordered DNA testing kits online and provided saliva samples to the company. The company has said it won’t go through with a sale that imperils customers’ genetic data, but the bankruptcy has drawn scrutiny from state attorneys general and lawmakers who warn that customer data could be sold to unscrupulous buyers.

The consumer protection ombudsman will have an initial budget of $300,000 for their work, with the ability to ask the court for more money if needed.

23andMe filed for bankruptcy last month, seeking to sell its business after a drop-off in consumer demand and a 2023 data breach that exposed millions of customers’ genetic data.

The company is still negotiating with potential buyers for its business. It had hoped to name a bidder last week to serve as a minimum bid for other companies to compete against in a future auction. But those talks remain ongoing, and 23andMe has pushed the deadline to April 30, Chris Hopkins, a lawyer for the company, said at Tuesday’s hearing.

23andMe founder Anne Wojcicki has also expressed interest in buying back the company.

During the hearing, attorneys representing a class of more than 6 million customers affected by the 2023 data breach raised concerns about the bankruptcy’s impact on a $30 million settlement reached last year. 23andMe’s attorneys said the value of the class action settlement is in dispute now that the company is in bankruptcy.

Walsh said he will address potential disputes about the class action settlement at a later date.