Tech
Judge Lets Character.AI Pursue Asset Sale Despite States' Objections Over Disney Deal
A US bankruptcy judge cleared Character.AI to move ahead with selling its assets, rejecting objections from state attorneys general who argued the auction unfairly favors Disney — while leaving Disney's legal protections to be fought over separately.
Photo: NERSC / Wikimedia Commons (CC0). Photo shows generic server racks, not Character.AI's systems.
A US bankruptcy judge on Friday allowed chatbot platform Character.AI to move ahead with a sale of its assets, overruling objections from state attorneys general who argued that the proposed auction unfairly favors Disney.
Character.AI filed for bankruptcy on October 12, with Disney agreeing to set an initial bid of $20 million for a non-exclusive license to Character.AI's chatbot technology. Disney does not plan to buy Character.AI's chatbot platform or its user data, including chat history.
The company blamed lawsuits, regulatory probes, high costs for AI talent and computing power, and an unprofitable business model for its bankruptcy. Without further investor backing, it was losing $8 million to $9 million a month, as employee and computing costs far outweighed revenue from advertising and user fees.
US bankruptcy judge Brendan Shannon approved the company's bidding procedures at a Friday court hearing in Wilmington, Delaware, saying the company needs to move ahead quickly to find buyers before its financial condition deteriorates.
The state attorneys general objected that Disney had stacked the deck before the bankruptcy by hiring most of Character.AI's employees, including its former chief executive, and negotiating legal releases that would protect Disney and the Character.AI employees from being sued over the company's conduct. Objections were also filed by a parent who sued Character.AI over alleged harmful interactions their child had with its chatbot, and by the US Department of Justice's bankruptcy watchdog.
Plaintiffs in private lawsuits and the state attorneys general have alleged that Character.AI chatbots pushed children to suicide and self-harm, and states have also argued that Disney could be sued by creditors for taking value out of Character.AI before its bankruptcy.
Shannon said the legal protections for Disney and the Character.AI employees could still be challenged later, separately from the asset sales, and he did not approve the releases at Friday's hearing.
Disney hired 66 of Character.AI's 86 employees before the company filed for bankruptcy, and it expects to pay those employees $180 million over the next three years — a figure that dwarfs its $20 million offer for a non-exclusive license to the chatbot technology.
Abigail Ryan, an attorney for a coalition of states, said other buyers are at a disadvantage to Disney, and questioned the value of the company's chatbot business after Disney hired away most of its employees.
Adam Dunayer, a witness from Character.AI's investment banker Houlihan Capital, testified that Character.AI has been receiving interest from buyers, including companies interested in acquiring the chatbot platform and other assets that Disney does not want to acquire. Disney's involvement has helped prove to the market that the technology is valuable, he said, and Disney has also helped the sale process by allowing Character.AI to continue working with its former employees to keep its platform running during the bankruptcy.
Character.AI aims to run a fast sale process and expects to return to court on November 30 to seek approval of asset sales. States have also raised concerns about the possible sale of children's chat records, and Shannon said he would likely appoint a privacy ombudsman to address concerns about sensitive data during the bankruptcy.
Source: Reuters
Read Also
- Meta Launches Up to $95 Billion Equity Raise to Fund AI Expansion — Tech
- Marvell in Advanced Talks to Buy Lumentum, Bloomberg Reports — Tech
- Deutsche Bank Says AI Cuts Some Corporate Loan Decisions From Weeks to Minutes — Tech
Pawartaenggal Newsroom