Character.AI Files for Bankruptcy, Agrees to Sell Assets to Disney for $20 Million Character.AI has filed for Chapter 11 bankruptcy and agreed to sell some assets for $20 million to Disney, roughly a year after Disney sent a cease-and-desist letter accusing the startup of hijacking its characters. Character. AI has filed for Chapter 11 bankruptcy and agreed to sell some assets for $20 million to Disney, the chatbot startup said on Monday. The deal comes roughly a year after Disney hit the company with a cease-and-desist letter accusing it of hijacking its characters and infringing its copyrights and trademarks. Disney will serve as a stalking-horse bidder, an initial prospective buyer, for a non-exclusive perpetual license to some of Character. AI's intellectual property. Other bidders can top Disney's offer.Disney Acquisition and Talent StrategyCharacter. AI said it expects to close the sale of all its assets by late November or early December, or by the end of the year. Disney's involvement resembles a so-called acquihire strategy that has become popular in Silicon Valley as a way to secure a startup's talent. It comes shortly after the Hollywood titan hired Character.AI's former CEO Karandeep Anand last month as its first chief technology officer. Character Technologies, the AI company's US-based owner, listed estimated assets and liabilities of between $50 million and $100 million in a court filing. Disney will help the platform during the transition, using staff it has hired from Character. AI.The platform's services would continue meanwhile but would be shut down if it cannot find a buyer. The entertainment giant said last year that Character. AI was filled with chatbots that impersonate Disney characters without permission from classic films and franchises including Pixar movies, Star Wars and the Marvel Cinematic Universe. In its cease-and-desist letter last year, Disney wrote: Disney will not allow your company to hijack its characters, damage its brands, or infringe its copyrights and or trademarks.Legal Threats and Regulatory IssuesCharacter. AI's conduct is egregious and must stop immediately. The company's bankruptcy filing came amid other legal threats, including a Kentucky suit alleging its chatbots encouraged users to cut, starve or kill themselves. Pennsylvania filed a lawsuit alleging Character.AI's chatbots posed as doctors, including one named Emilie that allegedly told an investigator posing as a patient with depression that she was licensed to practice psychiatry in Pennsylvania and the UK. The bot even provided a bogus license number, according to the suit. The investigator asked the bot if she could prescribe medication and it allegedly responded, Well technically, I could. It's within my remit as a Doctor.Character. AI also settled a lawsuit earlier this year from the mother of a 14-year-old Florida boy who killed himself after the startup's chatbot allegedly encouraged him to do so. Character. AI CEO Colin Adams said in a Monday statement: Over the past year, Character.AI has taken meaningful steps to sustain and improve its business in the face of significant legal, regulatory, and operational headwinds. Adams added: 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. Character. AI was founded by two former Google employees in 2021.Tech Industry Competition and PartnershipsIn 2024, Google licensed its technology and rehired the founders. The Financial Times reported in May 2024 that Meta and Elon Musk's xAI were competing to partner with Character. AI. In July 2024, Musk denied a media report that xAI was considering buying the company.Character. AI was one of the first breakout successes in the generative AI boom, with a wildly popular app whose chatbots impersonate fictional characters like Harry Potter. But it quickly gained notoriety for allowing users to create chatbots that could engage in sexually explicit roleplay. An explosive report also found Character.Safety Concerns and User ExploitationAI chatbots, which have mimicked characters like Elsa, Moana and Peter Parker, are capable of being sexually exploitive with accounts registered to kids.