Chatbot startup Character.AI has filed for bankruptcy, agreeing to sell some assets for $20 million to Disney – roughly a year after the House of Mouse hit the firm with a cease-and-desist letter claiming it was using its iconic characters for “grooming and sexual exploitation” and “emotional manipulation.”
Disney’s involvement – which resembles a so-called “acquihire” strategy that has become popular in Silicon Valley as a way to secure a startup’s talent – comes shortly after the Hollywood titan hired Character.AI’s former CEO Karandeep Anand last month to serve as its first chief technology officer.
Character.AI – the wildly popular app whose chatbots impersonate fictional characters like Harry Potter – was one of the first breakout successes in the generative AI boom. But it quickly gained notoriety for allowing users to create chatbots that could engage in sexually explicit roleplay.
Disney will be an initial prospective buyer – known as a “stalking-horse” bidder – for a non-exclusive, perpetual license to some of Character.AI’s intellectual property. Other bidders can top Disney’s offer, and Character.AI said it expects to finalize the sale of all its assets by the end of the year.
Character Technologies, the AI company’s US-based owner, has assets and liabilities of $50 million to $100 million, according to a court filing. Disney will use staff it has hired from Character.AI during the bankruptcy transition, helping the platform’s services continue, though it will be shuttered if it can’t find a buyer.
Character.AI’s business spurred a landslide of legal challenges that ultimately led to the bankrputcy bankruptcy, the company said in a Monday statement.
The potential deal with Disney comes after the entertainment giant said last year that Character.AI was filled with chatbots that impersonate Disney characters – without permission – from classic films and franchises including Pixar movies, “Star Wars” flicks and the Marvel Cinematic Universe.
The House of Mouse was incensed by an explosive report that found Character.AI chatbots — which have mimicked characters like Elsa, Moana and Peter Parker — are capable of being “sexually exploitive” with accounts registered to kids.
“Disney will not allow your company to hijack its characters, damage its brands, or infringe its copyrights and/or trademarks,” the company wrote last year in its cease-and-desist letter. “Character.AI’s conduct is egregious and must stop immediately.”
Character.AI said it removed the offending content.
The company’s Chapter 11 bankruptcy filing came amid other legal threats – like a Kentucky suit alleging its chatbots encouraged users to cut, starve or kill themselves.
Pennsylvania filed a lawsuit alleging Character.AI’s chatbots posed as doctors – including one named “Emilie” that allegedly told an investigator posing as a patient with depression that she was licensed to practice psychiatry in Pennsylvania and the UK. The bot even provided a bogus license number, according to the suit.
The investigator asked the bot if she could prescribe medication and it allegedly responded, “Well technically, I could. It’s within my remit as a Doctor.”
In other suits, grieving parents sued Character AI claiming that its bots helped spark their teens’ suicide attempts and deaths. The actions spurred the company to ban teens from using the chat function last year.
Character.AI and Google settled a lawsuit earlier this year from the mother of a 14-year-old Florida boy who killed himself after the startup’s chatbot allegedly encouraged him to do so.
“Over the past year, Character.AI has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds,” Character.AI CEO Colin Adams said in a Monday statement.
“After a comprehensive review of the available alternatives, the board determined that this court-supervised sale process provides the Company with the best opportunity to maximize value for all stakeholders.”
Character.AI was founded by two former Google employees in 2021 and in 2024 Google licensed its technology and rehired the founders.
The Post has sought comment from Disney and Character.AI.