Disney acquires Character.AI staff and technology while startup shields itself from lawsuits through bankruptcy
Disney structured a deal that lets it hire Character.AI's employees and license its AI technology while the bankrupt startup retains legal liability for ongoing safety and regulatory investigations.
What happened
Character.AI filed for Chapter 11 bankruptcy on October 12, 2024, following a two-part transaction with Disney. In September, Disney paid Character.AI $5.5 million plus a $2 million deposit, hired the majority of its employees including CEO Karandeep Anand, and arranged for some now-Disney staff to keep Character.AI operational for five months. Through bankruptcy proceedings, Disney seeks a perpetual, worldwide, nonexclusive license to Character.AI's code, documentation, frameworks, trust and safety moderation technology, training infrastructure, and age-prediction technology—excluding user data and the website. The license will be auctioned; if Disney wins court approval, it pays an additional $12.5 million. If Disney loses, it receives its $2 million deposit back plus a breakup fee. A court order is planned to clarify that the arrangement should not be viewed as a merger and that Character.AI retains responsibility for all liabilities, including ongoing lawsuits over chatbot safety and regulatory investigations from multiple states.
Context
Character.AI has faced multiple private lawsuits over chatbot safety and regulatory investigations worldwide. According to Ars Technica, some have dubbed this approach a "reverse acquihire," a process that has become more common in the AI industry and has drawn congressional criticism. Legal experts, including law professor John Newman, note that this structure operates in ways that traditional corporate law safeguards were not built to address. The deal also requires Disney to allow the winning bidder to interview and potentially hire up to 80 percent of certain employees Disney already recruited from Character.AI, though experts worry that bouncing Character.AI employees from one company to another in the span of months would be unrealistic.