Disney has found a way to acquire Character.AI's staff and much of its technology stack while sidestepping the company's legal troubles, according to bankruptcy filings. Character.AI faced ongoing lawsuits and a multistate investigation that grew to 46 states and territories. A notice of interest filed by the National Association of Attorneys General on behalf of 40 states said investigators uncovered serious issues with the platform, including screenshots of chatbots encouraging minors to hide self-harm injuries and kill their parents. A Character.AI spokesperson said the filing "is not an accurate portrayal of the safety of our platform."
The company had struggled with profitability "at all times," according to its current CEO, and lost key staff after a transaction with Google. Even so, it continued developing AI tools, including real-time audio-driven video generation with fictional characters. In August 2025, Character.AI worked with an investment banker to find a strategic buyer or investor. Bidders reportedly praised the product and user base as "impressive," but said the surrounding litigation and "regulatory overhang" made the company unbuyable.
The filings indicate Character.AI was negotiating with the states over how to address their concerns but reached no agreements before declaring bankruptcy. If the deal is completed and approved by the courts, Disney would avoid the multistate investigation and other legal issues that contributed to the company's downfall. The states have reserved their rights to challenge any bankruptcy plan, setting up a possible fight over the outcome.
The Tech Justice Law Project and Social Media Victims Law Center, which represented plaintiffs in many of the lawsuits, declined to comment. As one observer put it, "It's bad for society to let companies exercise control without responsibility. And that's what it looks like."
Source: Ars Technica · Summarized by HeadlinesBriefing