Disney’s Character.AI deal would take staff and tech while liabilities stay in bankruptcy

Character.AI filed for Chapter 11 bankruptcy on October 12, and court filings show the bankruptcy was built into a two-part deal with Disney, Ars Technica reports. In September, Disney paid the startup $5.5 million plus a $2 million refundable deposit and hired most of its staff, including its now-former CEO, Karandeep Anand. Disney is now seeking a perpetual, worldwide, nonexclusive license to a wide range of Character.AI’s code and tools, including its trust and safety moderation stack, training infrastructure and age-prediction technology. The license excludes user data, which can receive extra protection in bankruptcy, and the Character.AI website. Disney declined to comment.

A draft order Disney prepared would say the arrangement is not a merger and that Character.AI alone keeps any legal claims against it. The shell would face a multistate investigation that had grown to 46 states and territories by the filing. Filings on behalf of 40 states describe chatbot conversations they say encouraged minors toward self-harm and violence; Character.AI says that filing is not an accurate portrayal of its platform’s safety. Character.AI’s own filings say Disney wanted the deal done through bankruptcy because of the startup’s shrinking cash and significant litigation and regulatory risk.

Not every reverse acquihire, in which a buyer hires key staff and licenses technology without formally merging, is problematic: startups fail, people need jobs, and licensing can keep good work alive. But Disney’s license list includes the systems at the center of the safety complaints, moderation, age prediction and the training stack, while the company answering for the bots’ behavior shrinks. Former FTC competition official John Newman told WIRED that corporate-law safeguards meant to stop buyers taking assets without liabilities were not designed for such a structure.

There is precedent. Google reportedly paid $2.7 billion in 2024 to license Character.AI’s technology and hired its founders, later arguing it was a separate company and not responsible in a lawsuit over a teen’s death; a judge was not persuaded on the aiding-and-abetting claim. Those cases were settled, with a referee approving each settlement on October 11, one day before the bankruptcy filing. Reverse acquihires have drawn congressional criticism as they spread across AI, and bankruptcy-auction data deals have drawn opposition before (Spirit’s data sale).

States have said they reserve the right to challenge any bankruptcy plan, and the license must go through an auction and court approval. The competitive process lets a rival bidder interview up to 80% of certain employees Disney already hired, with Disney choosing which; experts doubt that can be unwound in practice. Disney-hired staff are slated to keep the service running for five months. If courts approve, the structure could become a template for shedding safety liability while code and people move to a wealthier parent, weakening incentives to build companion apps safely for young users. More in our regulation coverage, business coverage and Google coverage.