Character.AI has been embroiled in a series of private lawsuits alleging that its chatbots prompted minors to self-harm and even suggested violent actions against parents. The company also faces investigations by dozens of state attorneys general. In October, the firm entered chapter 11 bankruptcy, citing a desire to reach a consensual resolution with claimants while preserving shareholder value. Disney’s involvement is designed to acquire the startup’s assets without inheriting these legal exposures.
The arrangement consists of two linked transactions. In September, Disney transferred $5.5 million to Character.AI and added a refundable $2 million good-faith deposit. At the same time Disney hired the majority of the startup’s workforce, including its chief executive, and agreed to keep a portion of those employees on the Character.AI payroll for a five-month transition period.
After the bankruptcy filing on October 12, Disney sought a perpetual, worldwide, non-exclusive license covering a broad suite of Character.AI’s code, documentation, frameworks, moderation tools, training infrastructure and age-prediction technology. The license will be auctioned to the highest bidder; if Disney wins, it must deliver an additional $12.5 million at closing. Should another party prevail, Disney receives a refund of its deposit and a breakup fee.
Court filings include a draft “363 Free and Clear Order” that would label the transaction as not a merger and leave Character.AI responsible for any remaining liabilities, including the multistate investigations. A coalition of 40 states, represented by the National Association of Attorneys General, has filed a notice of interest, indicating it may contest the bankruptcy plan. The states allege the bots displayed screenshots encouraging minors to conceal self-injury and to kill parents.
Earlier, Google paid $2.7 billion to license Character.AI’s technology and recruited several founders and researchers, while most employees stayed. That deal did not shield Google from liability in a teen-death lawsuit, which a judge rejected. In January, Google and Character.AI reached a settlement framework for related claims, and a California probate court later approved individual settlements. Industry observers warn that moving staff between companies in a short span may be impractical and could attract antitrust scrutiny.