Character.AI has filed for Chapter 11 bankruptcy and agreed to a $20 million deal with Disney for a non-exclusive license to some of its intellectual property.
The AI chatbot company will continue operating while it looks for a buyer, with other companies still able to submit higher bids for its assets.
A U.S. bankruptcy judge approved the proposed sale process despite objections from attorneys general representing 41 states, moving the company closer to a possible change in ownership.
The bankruptcy comes after months of legal pressure and financial challenges for Character.AI. The company has about 12 million active users but has been losing between $8 million and $9 million each month because of the cost of computing power and AI talent, with court documents putting its estimated assets and liabilities between $50 million and $100 million.
Disney’s $20 Million Bid
Disney has agreed to act as the initial bidder in a court-supervised sale process for some of Character.AI’s assets.
The $20 million offer is for a non-exclusive, perpetual license to selected Character.AI intellectual property, which means Disney would not automatically take over the entire Character.AI platform, and other companies can still submit higher offers.
The proposed deal also does not include Character.AI’s app or user data. Disney has, however, already hired most of Character.AI’s workforce.
Before the bankruptcy filing, Disney hired 66 of the company’s 86 employees, including former Character.AI CEO Karandeep Anand, who became Disney’s chief technology officer.
The sale process is expected to move toward a final decision in the coming weeks, with Character.AI expected to seek approval for asset sales in late November or early december.
Legal Problems Have Followed the Company
Character.AI’s bankruptcy also comes as the company faces lawsuits and investigations over the safety of its chatbot platform, particularly its interactions with children.
Several U.S, states have sued the company, while regulators in other countries have also opened investigations. Just like with OpenAI’s ChatGPT, some private lawsuits have alleged that interactions with Character.AI chatbots contributed to suicide and self-harm involving teenagers.
Back in January, the company reached preliminary settlements in five private wrongful-death and harm lawsuits filed by families regarding minor users., although the settlements had not been finalized at the time of its bankruptcy filing.
State attorneys general have also raised concerns about children’s private conversations on the platform during the bankruptcy process. They want protections in place for user data and additional safeguards if Character.AI’s assets are transferred to another company.
What Happens to Character.AI Now?
Character.AI is still operating while the bankruptcy process continues. The company has said it hopes the sale process will produce a buyer that can keep the platform running.
However, the company has also acknowledged that the platform could eventually be shut down if it cannot secure a suitable buyer or investment.
