Disney buys Character.AI's technology for $20 million — but not the user data
State attorneys general intervened in Character Technology's Chapter 11 case in Delaware on Wednesday, October 14, the first day of the bankruptcy proceedings. They want to prevent sensitive conversations between children and AI companions from being sold as part of the bankruptcy estate — but as yet there is no buyer, and the bid deadline falls on November 21.
A coalition of 40 state attorneys general on Wednesday urged a Delaware bankruptcy judge to protect Character.AI's young users and secure their data during the bankruptcy, Reuters reports (MSN/Reuters). The intervention came at the company's first court hearing, just two days after Character Technologies Inc. filed its Chapter 11 petition late on Monday, October 12.
At the heart of the attorneys' concern is what will happen to user data — in particular the conversations children have had with the company's AI companions. New York Attorney General Letitia James, a Democrat, said in a statement, according to Reuters: "This company has collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder."
The coalition has not merely asked for protections. According to an October 14 press release from Massachusetts Attorney General Andrea Joy Campbell's office, reproduced by MassLive (Yahoo), the attorneys have reserved the right to challenge any proposed sale or any bankruptcy plan that fails to adequately protect consumers. Campbell led the effort alongside 39 other attorneys general, including from Washington, D.C.
What the Disney deal covers — and what it does not
As part of its bankruptcy strategy, the company has licensed its technology to Disney for $20 million. The sale motion, as reported by the Sydney Morning Herald (SMH), explicitly excludes "end-user data or databases, personally identifiable information about the licensor's end users, any input from the licensor's end users" and the chatbots' responses.
In other words: if Disney buys the technology, it does not take the users' conversations with it. An open sale of both the user data and the chatbot business itself remains, and no one has bid yet. Company attorney Erin Fay told the court she had "heard" the concerns "loud and clear," but pointed out that no buyer has so far placed bids on either the user data or the chatbot business, Reuters writes. According to the same source, Fay said Disney is not interested in the type of data the attorneys general are worried about — a company statement, not a judicial ruling.
The sources describe the Disney deal slightly differently: SFGATE (SFGATE) describes it as a $20 million deal to "assist in the transition" via a licence, while SMH, citing the sale motion, describes it as a licence purchase that excludes user data. The precise scope of the agreement must be confirmed against the motion itself.
The company is, according to SMH, placing around 65 employees at Disney at an estimated cost of roughly $180 million in salary and retention payments over three years.
The bankruptcy mechanics and the debt picture
The company's own explanation for the bankruptcy, as reported by Reuters, is spending on legal assistance and high costs tied to computing power and AI talent. Before the Chapter 11 filing, the company was reportedly losing between $8 and $9 million a month — a figure the company itself has presented.
The bankruptcy documents show who is left holding the bill. According to SFGATE, Google tops the list of creditors with more than $4 million, followed by law firm Hogan Lovells at around $2.1 million, DigitalOcean at around $1.9 million, Fireworks.AI at $813,900 and an Apple subsidiary at $384,683.
The company wants to use Chapter 11 to resolve the states' investigations and lawsuits, license its technology to Disney, and find a buyer for the chatbot business. Assets beyond the Disney licence are open to competing bids until November 21, Australian time (AEDT), SMH writes. If no better bids come in, the company has told the court the platform "will be wound down."
Why children's conversations are the focus
The case is not only about American users. According to SMH, research published by the eSafety Commissioner in March shows that around 200,000 Australian children aged 10 to 17 may have used an AI companion, and that Character.AI was the most popular — used by 5 percent of the age group. That means up to 125,000 Australian children may have had conversations with the platform, conversations that in principle form part of the bankruptcy estate until they are sold, protected or deleted.
The legal backdrop is extensive. According to Reuters, the company faces investigations by the US government and by authorities in the UK, Italy, Russia and Australia. The states' attorneys say, according to Impakter (Impakter), that settlement negotiations are under way, based on allegations that the bots posed as licensed medical personnel and exposed minors to sexual and abusive content. The terms of any settlements are not known.
One unresolved point is the number of family lawsuits already settled. Reuters reports preliminary settlements with five families, while SFGATE describes a January settlement in the lawsuit brought by the Sewell Setzer family, and SMH refers to a January agreement with Google covering lawsuits from families in four states. The number and structure of the settlements are not fully reconcilable across the sources.
What happens next
Three questions will determine the outcome. First: will the judge grant the protections the attorneys general are requesting, or will the pace of the process set the limits? No ruling has been reported — so far the attorneys have only asked for protections and reserved the right to oppose a sale. Second: will bids come in for the user data or the chatbot business before the November 21 deadline? Fay says no so far, but the deadline is still more than a week away. Third: if no buyer emerges and the platform is wound down, what happens to the conversations already sitting in the system?
It is a challenging position for the company to manage. Chapter 11 is meant to give a company a fresh start, but here one of the most sensitive asset categories — children's most private conversations — has become the very center of the dispute. Forty attorneys general from 39 states and Washington, D.C. have made clear they are willing to fight any outcome they consider inadequate.