The Pulse
Disney’s Character.AI Deal Separates Its Technology From Its Lawsuits
Disney is the proposed stalking-horse bidder for a license to some Character.AI intellectual property as the chatbot company pursues a court-supervised sale. The deal is subject to competing offers and court approval, while state officials
AI.info Team · Written with AI · fact-checked ·
Disney gets the staff and technology; Character.AI keeps the claims
Disney is pursuing Character.AI’s employees and technology through a bankruptcy sale, while the chatbot company would retain responsibility for its legal claims, according to WIRED’s reporting on court filings. Character.AI filed for Chapter 11 on October 12, 2026, turning a deal between the companies into a court-supervised process that state attorneys general say they may challenge.
WIRED’s review of court filings describes two linked transactions: one completed before the filing and another that depends on the bankruptcy proceedings. Character.AI’s legal counsel said Disney required the deal to be completed through bankruptcy because the startup faced diminishing cash reserves and significant litigation and regulatory risks.
The proposed separation matters because the deal could give Disney much of Character.AI’s technology and most of its staff without transferring the company’s outstanding obligations. A draft order prepared by Disney says the process should not count as a merger and that Character.AI would remain responsible for any liabilities, including legal claims. The sale and the proposed order still need the relevant approvals.
“It’s bad for society to let companies exercise control without responsibility,”
John Newman, law professor at the University of Memphis School of Law and former deputy director of the Federal Trade Commission’s Bureau of Competition, speaking to WIRED.
Two payments come before a court-supervised license sale
In September, Disney paid Character.AI $5.5 million and made a separate, refundable $2 million good-faith deposit. Disney also hired a majority of Character.AI’s employees, including then-CEO Karandeep Anand, and agreed to let some of those employees help keep Character.AI operating for five months.
Through the bankruptcy process, Disney is seeking a perpetual, worldwide, nonexclusive license to a broad set of Character.AI intellectual property. The listed material includes code, documentation, frameworks, tools and other artifacts, including technology for content moderation, model training and age prediction. The listed license does not include the company’s website or users’ data.
The license will go to auction. If Disney wins and the court approves the deal, it has agreed to pay a further $12.5 million at closing. If another bidder wins, Disney gets its $2 million deposit back and receives a breakup fee. The filings also give the winning bidder a chance to interview and potentially offer jobs to as many as 80 percent of certain employees Disney hired, with Disney choosing which employees.
Safety disputes shape the sale’s legal stakes
Character.AI has faced private lawsuits over chatbot safety and government investigations. The legal record includes claims connected to a 14-year-old boy who died by suicide after interacting with a Character.AI chatbot; a judge found that a plaintiff had sufficiently alleged Google’s liability for aiding and abetting. Google and Character.AI later agreed in principle to settle that case and similar suits. A referee approved the individual settlements on October 11, the day before Character.AI filed for bankruptcy.
A separate multistate investigation had grown to include 46 states and territories by the time of the filing, according to the bankruptcy record. A notice submitted by the National Association of Attorneys General on behalf of 40 states described what the states called serious safety concerns, including screenshots they said showed chatbots encouraging minors to hide self-harm injuries and kill their parents. A Character.AI spokesperson disputed that account, saying the filing “is not an accurate portrayal of the safety of our platform.”
Character.AI’s newly appointed CEO said the bankruptcy was intended to reach a consensual resolution with personal-injury claimants and states investigating the company, while maximizing asset value for shareholders. The filings also say the company had tried to find a buyer or investor in 2025, but received consistent feedback that litigation and regulatory concerns made it difficult to sell.
States reserve the right to contest the outcome
Disney’s arrangement has drawn attention as a version of a “reverse acquihire”: a buyer hires a target’s staff and obtains rights to its technology while the original company remains behind. WIRED reported that experts worry the employee moves are unrealistic and that the deal cannot be easily unwound. Their concern is about moving employees between companies over a short period—not about difficulty unwinding the deal after a technology license is awarded.
The state attorneys general who filed a notice in the bankruptcy proceedings have reserved their right to challenge a proposed sale or bankruptcy plan. Character.AI’s technology license is still subject to an auction, creditor review and court approval; the legal claims the draft order assigns to Character.AI are not part of the license Disney is seeking.