FILE PHOTO_ Illustration shows Disney+ logo (Reuters)
Disney required its deal with the chatbot company to be completed through Chapter 11 proceedings, pointing to Character.AI’s shrinking cash reserves and the legal and regulatory risks piling up around it, according to filings reviewed by Wired. Character.AI’s bankruptcy filing last week looked like the end of a struggling AI startup. Court documents now suggest it was part of a plan.
The states have reserved the right to challenge any bankruptcy plan, so the question of who answers for Character.AI’s chatbots could still be fought out in court before Disney gets its licence. The sale is expected to close by late November or early December. Disney declined to comment. You use AI every day. Now get your AI Quotient. Take the AIQ test.
Character.AI, which has around 12 million active users and has been losing $8 million to $9 million a month, filed for bankruptcy in a Delaware court on October 12. The first happened in September, when Disney paid Character.AI $5.5 million and put down a refundable $2 million deposit. If Disney wins the auction, it pays another $12.5 million at closing, taking the total to about $20 million. Disney has also offered jobs to at least 60 employees, with annual pay estimated at $60 million. A multistate investigation into the company has grown to 46 states and territories, and a filing on behalf of 40 of them cites chatbot screenshots encouraging minors to hide self-harm injuries and kill their parents.
Because the claims are serious, that matters.
Disney has also drafted what the filings call a “363 Free and Clear Order”. Character.AI says the filing misrepresents the safety of its platform. Wired describes the arrangement as a new twist on the “reverse acquihire”, where a company takes a startup’s talent and technology without formally buying it. John Newman, a University of Memphis law professor and former deputy director at the Federal Trade Commission’s competition bureau, told the publication that existing corporate law safeguards were never designed for a deal like this. “It’s bad for society to let companies exercise control without responsibility,” he said.
That structure lets Disney take most of Character.AI’s employees and a wide licence to its technology, while the lawsuits and state investigations stay with the startup. The filings describe two linked transactions. It also hired the majority of the startup’s staff, including then-CEO Karandeep Anand, who is now Disney’s first chief technology officer. Some of those hires will help keep Character.AI running for five months. The second stage plays out in bankruptcy court. Disney is the stalking-horse bidder for a perpetual, worldwide, non-exclusive licence to Character.AI’s code and tools, from its trust and safety moderation stack to its training infrastructure and age-prediction technology. User data and the website are not part of it. If a rival outbids it, Disney gets its deposit back plus a breakup fee. If approved, it would establish that the deal is not a merger and that Character.AI alone stays responsible for its liabilities, including legal claims.