A US bankruptcy judge on Friday allowed chatbot platform Character.AI to move ahead with the sale of its assets, overruling objections from attorneys general in 41 states who argued the auction unfairly favors Disney.
Judge Brendan Shannon approved the company's bidding procedures at a hearing in Wilmington, Delaware, saying Character.AI needs to move quickly to find buyers before its financial condition deteriorates. Disney's $20 million offer stands as the opening bid for a non-exclusive license to Character.AI's chatbot technology — not a purchase of the platform itself, and not a purchase of user data, including chat history.
If no rival bids emerge, Disney would win the auction, though any final transaction still needs court approval. Character.AI expects to return to court on November 30 to seek approval of asset sales.
Why the states objected
The states argued Disney stacked the deck before the bankruptcy filing by hiring most of Character.AI's workforce, including its former chief executive, and by negotiating legal releases that could shield Disney and former Character.AI employees from lawsuits over the company's conduct. Disney hired 66 of the company's 86 employees and expects to pay them $180 million over the next three years — a sum that dwarfs its $20 million license bid.
An attorney for a coalition of 40 states told the court other buyers are at a disadvantage, and questioned what value remains in the chatbot business after Disney hired away most of its staff. Objections were also filed by a parent who sued over a child's interactions with a chatbot, and by the US Department of Justice's bankruptcy watchdog.
Shannon did not approve the disputed legal protections at Friday's hearing, saying they could still be challenged later, separately from the asset sales.
A privacy watchdog for children's chats
The judge said he would likely appoint a privacy ombudsman — an independent expert to review how sensitive information is handled — and strongly encouraged Character.AI to hire one. States have raised concerns about the possible sale of children's chat records in the bankruptcy, and private lawsuits and state attorneys general have alleged that Character.AI chatbots harmed children.
The company has faced lawsuits and regulatory probes over its chatbots' interactions with minors, part of the pressure that pushed it into bankruptcy. Character.AI filed for Chapter 11 protection on October 12, blaming lawsuits, regulatory probes, high AI talent and computing costs, and a business model that never turned profitable. It was losing $8 million to $9 million a month, with employee and computing costs far outweighing revenue from advertising and user fees.
What happens next
Character.AI's investment banker told the court the company has been receiving interest from buyers, including companies interested in acquiring the chatbot platform and other assets Disney does not want. Disney's involvement, the banker said, has helped prove to the market that the technology is valuable, and Disney has helped keep the platform running during bankruptcy by allowing Character.AI to keep working with its former employees.
The company lost fundraising momentum after Google hired away its founders instead of investing in it, an episode Reuters highlighted as an example of how AI talent deals can strip smaller firms of key people and technology. The fast sale process now underway will test whether other bidders value what remains — and whether the court will sign off on the final terms when Character.AI returns on November 30.
