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Judge Urges Character.AI to Add Privacy Oversight to Disney Sale
U.S. Bankruptcy Judge Brendan Shannon encouraged Character Technologies to hire a privacy expert but did not order an appointment as the company pursues a sale process that includes Disney’s bid for certain intellectual property. State atto
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U.S. Bankruptcy Judge Brendan Shannon urged Character Technologies to appoint an independent privacy ombudsman, but stopped short of ordering one as the company pursues a bankruptcy sale involving Disney. At a hearing on Friday, October 30, Shannon said he would encourage the company to hire an expert to evaluate privacy concerns about its platform, Bloomberg reported. State attorneys general say an independent review is needed if user information could change hands, while Character Technologies argues its privacy policy permits a transfer without an ombudsman.
Shannon recommends a review, not an order
Shannon said an ombudsman could help address concerns raised by state attorneys general about the Character.AI platform and possible harm to children. He did not make the appointment a condition of the auction procedures he approved at the hearing. The distinction leaves the company free to decide whether to take up the recommendation, even as the privacy dispute remains part of the broader sale process.
A coalition of 39 states and the District of Columbia joined the U.S. Trustee’s objection before the hearing. The coalition said an ombudsman is necessary if Character Technologies sells or transfers property that may contain users’ personally identifiable or sensitive information. In its filing, the states wrote:
“To the extent the Debtor is seeking to sell or transfer any property that may contain personally identifiable information or sensitive information of its approximate 12 million active users or past users (including minors), the Coalition of States agree with the United States Trustee - a Consumer Privacy Ombudsman is necessary.”Coalition of States, represented by state attorneys general, in a court filing
The states also warned that the company’s sale motion did not make clear whether the entire platform, beyond the assets covered by Disney’s offer, could be sold.
Disney’s bid covers technology, not chat histories
Disney is the opening bidder for a $20 million, non-exclusive, perpetual license to certain Character.AI intellectual property and claims. The agreement does not include the app or user data, according to Quartz and the filings discussed by the states. The privacy question reaches beyond Disney’s proposed license: Character Technologies is seeking to sell its assets through bankruptcy, leaving open the possibility that another buyer could pursue the platform or other assets tied to user information.
Disney’s offer also includes transition services involving former Character.AI employees. State attorneys general objected to parts of the auction process, arguing that Disney’s position could give it an advantage over rival bidders. Shannon approved the procedures for now, while leaving the states room to raise some objections again when the winning bidder seeks final approval of a sale.
Character Technologies disputes the need for an ombudsman
In a filing before the hearing, the company argued that the privacy policy in effect when it filed for bankruptcy allows user data to be transferred as part of the case, so an ombudsman is not required. It also said it could agree to appoint one under appropriate circumstances, according to PPC Land’s account of the filing. Disney has said it is not buying personally identifiable information and has no access to the company’s user data.
The dispute reflects a difference in scope: Disney’s bid is for specified technology, while the states and the U.S. Trustee are concerned about any broader sale or transfer that could involve personal information. Shannon’s recommendation does not resolve whether such a transfer would fit Character Technologies’ privacy policy or what safeguards a buyer would have to follow. Under the proposed timetable, bids are due November 20, an auction is scheduled for November 23 and the sale hearing is set for November 24, 2026.