July 10 (Reuters) - A federal judge on Thursday declined

to block the bankruptcy sale of genetic testing company 23andMe

to its co-founder Anne Wojcicki pending the outcome of a legal

challenge by California.

U.S. District Judge Matthew Schelp in St. Louis, Missouri,

during a hearing said he would not pause the $305 million sale

while he reviews the state's bid for a declaration that 23andMe

cannot sell California customers' genetic data without their

consent.

A bankruptcy judge rejected those claims on Monday, and

California had appealed that ruling to Schelp, who on Tuesday

had briefly paused the sale ahead of Thursday's hearing.

23andMe, which filed for bankruptcy in March, is selling its

assets to TTAM Research, a new nonprofit founded by Wojcicki.

Schelp during the hearing said it was reasonable for

U.S. Bankruptcy Judge Brian Walsh to conclude that California

customers would not be harmed because they can opt to delete

their accounts and genetic information.

"A stay pending appeal threatens to derail the TTAM sale

altogether, and creditors and shareholders would likely suffer,"

the judge said.

Schelp extended the temporary stay until 11:59 p.m. on

Friday to give California time to seek a stay from the St.

Louis-based 8th U.S. Circuit Court of Appeals.

23andMe, TTAM and the office of California Attorney General

Rob Bonta did not immediately respond to requests for comment.

California argues the sale violates the state's Genetic

Information Privacy Act, which prohibits the transfer and

disclosure of genetic data or biological samples to third

parties without express permission for each transfer.

The state had sought to prevent California customers' data

from being transferred, a step that 23andMe said would

effectively kill the sale. California consumers represent about

1.8 million of the approximately 10 million genetic profiles in

23andMe's inventory, according to court filings.

Walsh, the bankruptcy judge, on Monday overruled

California's objections. Other states had also made similar

objections to the sale.

On Thursday, Bernard Eskandari of the California

Attorney General's office told Schelp that the state would have

investigated and brought an enforcement action against a company

that sold genetic information without consent outside of

bankruptcy. And 23andMe customers cannot now be stripped of

those protections, he said.

"Bankruptcy is not a hall pass to evade state law," he

said.

But Jeff Recher, a lawyer for the company, countered

that California's genetic privacy law only regulates the

transfer of data and not the sale of equity.

"This is not a transfer of genetic information, it's a sale

of an ownership interest," he said.

Schelp at the end of the hearing agreed the state law

does not apply to sales of ownership and said that California

likely lacked standing to challenge the sale.

TTAM has said it would continue to protect customers'

genetic data and maintain 23andMe's privacy policies, including

customers' right to delete their data.

Wojcicki was 23andMe's CEO before its bankruptcy filing, and

her new nonprofit's name is an acronym formed from the first

letters of the words "twenty-three and me."

TTAM won a bankruptcy auction for 23andMe's assets in June,

outbidding a $265 million offer from Regeneron Pharmaceuticals ( REGN )

.

23andMe filed for bankruptcy after a drop-off in consumer

demand and a 2023 data breach that exposed millions of

customers' genetic data.

The case is California v. 23andMe Holding Co. ( MEHCQ ), U.S. District

Court for the Eastern District of Missouri, No. 25-cv-00999.

For California: Bernard Eskandari and Daniel Nadal of the

Office of the Attorney General of California

For 23andMe: Jeff Recher, Chris Hopkins and Paul Basta of

Paul, Weiss, Rifkind, Wharton & Garrison

For TTAM: Joe Larkin of Skadden Arps Slate Meagher & Flom

Read more:

Judge briefly pauses 23andMe bankruptcy sale amid

California's appeal

California fails to stop 23andMe founder from re-acquiring

company

23andMe's founder Anne Wojcicki wins bid for bankrupt DNA

testing firm

DNA testing firm 23andMe files for bankruptcy as demand

dries up