Disney’s $20 Million Bid Leaves Character.AI’s Lawsuits Behind

WILMINGTON, Del., Oct. 16 — ForFor more than a year, Character.AI looked for a buyer or a partner. An earlier investment bank approached about 28 parties and drew a single proposal, judged not actionable. The feedback was consistent, the company’s current banker swore in a filing here: although Character.AI’s product and users were impressive, “the litigation and regulatory overhang on Character was too great.”

Now the chatbot company is in Chapter 11, and the opening bid is Disney’s: $20 million for a perpetual, non-exclusive license to some of its technology. Disney has already hired most of its workforce, including its then chief executive. It would take on none of the company’s liabilities.

The case, No. 26-11603 before Judge Brendan L. Shannon of the U.S. Bankruptcy Court in Delaware, puts a price on a limited license to the technology of a consumer chatbot company that potential buyers judged too burdened by litigation and regulation. In 2024 Google paid about $2.7 billion to license Character.AI’s technology and rehire its co-founder Noam Shazeer, The Wall Street Journal reported, citing people with knowledge of the deal. The two deals cover different assets and terms, but Disney’s bid is less than 1 percent of that, though its hires will cost it far more. The liabilities stay with the company, along with what Disney chose not to take: the app, the brand, and its users’ accounts and chats.

The Terms

Disney and Character.AI signed their first agreements on Sept. 18, after a committee of independent directors weighed proposals from two parties. Disney agreed to pay $20 million in cash, $7.5 million of it before the company filed on Oct. 12, including a $2 million refundable deposit.The Stalking HorseA bidder whose agreed offer sets the floor that rival bids must beat. If another deal for the same assets closes instead, Disney would receive, subject to court approval, a break-up fee and expense reimbursement together capped at $700,000, or 3.5 percent of its price. The deal is to be completed free and clear of all claims, including successor liability, and Disney may walk away if it has not closed by Dec. 17, unless its own breach caused the delay.

For its money, Disney would get a perpetual, worldwide, non-exclusive license to some of Character.AI’s intellectual property and technology, plus any unreleased claims the company holds against the employees Disney hired. The license excludes the consumer app, the brand, the company’s finished models and training data, and its users’ data, personal information, chats and outputs.

Under the term sheet, Disney was to hire up to six key employees, the chief executive among them, and offer jobs to at least 60 others; it estimated their pay at about $60 million a year and committed to a $30 million retention pool. By the term sheet’s estimate, pay and retention for the Character.AI staff Disney offered jobs come to about $180 million over three years, nine times its bid for the license. The “vast majority” of those offered jobs accepted, the company said in its sale motion. They still help run Character.AI under a transition agreement, for up to five months from Sept. 18, with Disney charging nothing for their time beyond expenses.

On Sept. 18, Disney named Karandeep Anand, who had most recently been Character.AI’s chief executive, as its first chief technology officer, Reuters reported. Colin Adams now holds the chief executive’s title. The company’s motion acknowledges that its former chief executive was an insider, but says Disney does not control the company and that independent directors led the deal.

Character.AI’s sale motion says its precarious financial situation was “largely caused by costly capital expenditures but accelerated by litigation and a changing regulatory environment,” and that staff had been leaving. Mr. Adams cited “significant legal, regulatory and operational headwinds,” CBS News reported. “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,” he said in a statement. If no higher or better offer comes, or the Disney deal is not approved, the company told the court, its platform will be wound down.

The States

On Oct. 14, the attorneys general of 39 states and the District of Columbia told the court that any buyer of the business, the app or its users’ data should be prepared to put nine protections in place.The CoalitionWisconsin announced its part on Friday. Eleven states did not join, among them Texas and Florida. Among them: age checks that do not rely solely on a self-declared birth date; removing characters that pose as therapists, doctors or lawyers; crisis protocols that “cannot be defeated with a simple click-through”; no training on chats beyond what users consented to; and a chance for every user to delete their data before any sale of that data. The states had tried to agree on terms with the company, they wrote, but “could not reach agreement on how to do that before the Debtor filed for bankruptcy.” They acknowledged that the company had stopped users under 18 from open-ended chats with its characters, but called the restriction voluntary: it “could be rolled back at any time, including by a purchaser.”

By the company’s own records, the states wrote, citing the lawsuit Kentucky filed against it in January, more than 21.6 million U.S. accounts had been created by March 13, 2025, more than 2.1 million of them with a declared age under 18.

The states reserved the right to seek a consumer privacy ombudsman and to object to the bidding procedures, the sale or any plan.The OmbudsmanUnder the Bankruptcy Code, selling personally identifiable information in a way that conflicts with a privacy policy barring transfers to unaffiliated parties, in effect when the case began, requires an ombudsman and the court’s approval. Character.AI’s policy allows user data to be disclosed in a sale, CBS News reported. “Companies that gather sensitive personal data must protect that data,” said Josh Kaul, Wisconsin’s attorney general. The company has said that customer data “continues to be protected under our Privacy Policy,” and that users can delete their accounts or export their data.

Companies that gather sensitive personal data must protect that data.

On Oct. 15 the first wrongful-death suit against the company was dismissed with prejudice against Character.AI, its two co-founders and Google, after a settlement. Several of the states had begun investigating the company after it was filed, in 2024. Megan Garcia and Sewell Setzer Jr. brought it, individually and for the estate of Sewell Setzer III, a 14-year-old who died by suicide in February 2024. Their notice says it follows a signed settlement and “all required court approvals.” The parties had agreed to settle in January, and the terms were not disclosed, WKMG News 6 in Orlando reported. The defendants had denied responsibility, it reported, and the company had argued that the suit sought to impose liability for protected speech.

What Comes Next

Judge Shannon is to hear the proposed bidding procedures on Oct. 30, with objections due Oct. 23, according to the docket entry for the hearing notice as reproduced by ElevenFlo, a docket service. Under the company’s proposal, which needs his approval, bids would be due Nov. 20 at 5 p.m. Eastern, an auction would follow on Nov. 23 and a sale hearing on Nov. 24.

The bidding will show whether anyone wants what Disney left behind, the app and its users’ data, or whether the platform is wound down.