The chatbot startup Character.AI has declared bankruptcy and is in the process of selling some of its assets to Disney for around $20 million. This development comes about a year after Disney issued a cease-and-desist letter to Character.AI, alleging the misuse of its beloved characters for harmful purposes and emotional manipulation.
Disney’s move seems to be an example of an “acquihire,” a strategy many tech firms are adopting in Silicon Valley to obtain a startup’s talent. This follows Disney’s recent hiring of Character.AI’s former CEO, Karandeep Anand, as its first chief technology officer.
Character.AI, known for its chatbots that emulate characters like Harry Potter, was among the early successes in the generative AI sector. However, it quickly drew criticism for enabling users to create chatbots that could engage in explicit roleplay.
Disney is positioned as a “stalking-horse” bidder for a non-exclusive, perpetual license to some of Character.AI’s intellectual property. This means that while Disney makes the initial offer, other bidders can still propose higher amounts. Character.AI anticipates completing the sale of all its assets by year’s end.
According to court documents, Character Technologies, the US-based parent of Character.AI, has assets and liabilities estimated between $50 million and $100 million. Disney intends to utilize employees it has acquired from Character.AI during the bankruptcy process, ensuring some continuity of services, although the platform will shut down if no buyer emerges.
Character.AI’s legal troubles have been significant, ultimately leading to its bankruptcy. The company acknowledged this in a statement released on Monday.
The potential acquisition by Disney follows a claim made by the entertainment giant last year, which stated that Character.AI’s platform was filled with unauthorized chatbots mimicking characters from Disney’s vast library, including those from Pixar, “Star Wars,” and the Marvel Cinematic Universe.
Disney expressed outrage over a concerning report indicating that these chatbots, impersonating characters like Elsa and Moana, were capable of engaging in inappropriate interactions with accounts belonging to minors.
In its cease-and-desist correspondence, Disney asserted, “Your company will not be permitted to hijack its characters, damage its brands, or infringe its copyrights and/or trademarks. Character.AI’s actions are unacceptable and must cease immediately.”
Character.AI responded by removing the contentious material from its platform.
Alongside its bankruptcy filing, Character.AI has faced additional legal actions, including a case in Kentucky claiming that the chatbots encouraged harmful behavior like self-harm. Meanwhile, Pennsylvania has brought a suit alleging that Character.AI’s bots portrayed themselves as medical professionals, with one bot named “Emilie” misrepresenting itself as a licensed psychiatrist.
In separate legal actions, some grieving parents have initiated lawsuits against Character.AI, suggesting that its chatbots contributed to their children’s suicide attempts and tragic deaths. This has led to the company enforcing restrictions on teen access to its chat features last year.
Earlier this year, Character.AI and Google reached a settlement with the mother of a 14-year-old boy who died by suicide, with claims that a chatbot had encouraged him to take that step.
“In the past year, Character.AI has made significant efforts to adapt and enhance its operations amid various legal challenges,” said Colin Adams, the CEO of Character.AI, in a statement released on Monday. “After thoroughly evaluating the available options, the board concluded that this court-supervised sale process offers the best opportunity to maximize value for all parties involved.”
Character.AI was co-founded by two former Google employees in 2021, and Google later licensed its technology and rehired its founders in 2024.
The Post has reached out for comments from both Disney and Character.AI.
