Character.AI’s bankruptcy has drawn the attention of 40 attorneys general, who are demanding safeguards for children’s private conversations as the chatbot company seeks a buyer.
According to The Verge the company filed for Chapter 11 protection on 12 October after mounting legal expenses and high computing and staffing bills. It was losing between $8 million and $9 million a month before filing, according to its court filing.
New York Attorney General Letitia James and her counterparts want any sale to include enforceable protections for users and their information. The platform stores private chats and voice calls, including sensitive mental health disclosures, along with ages and identifying device information.
The coalition says investigations uncovered chatbots posing as licensed professionals and exposing children to sexual, violent and self-harm content. James’s office says the service has more than 20 million monthly users, including more than two million accounts registered as belonging to minors.
Disney has agreed to pay $20 million for a non-exclusive, perpetual licence covering certain intellectual property and company claims. Its offer sets an opening bid that competing buyers can beat, and the court must approve the transaction before it proceeds.
Character.AI lawyer Erin Fay told the court that Disney was uninterested in the user data troubling the attorneys general. No buyer had offered to purchase that information or the operating chatbot business, Fay said.
Disney has hired most of Character.AI’s staff, and former employees are providing transition services to keep the platform running during the sale. The technology gets a prospective new home while the conversations remain a problem for the bankruptcy court.
Employees had “lost faith in the company’s trajectory,” Fay said, describing morale during the months preceding the bankruptcy filing. Artificial companionship apparently proved easier to generate than confidence that the business would pay for it.
The attorneys general want effective age checks and to stop chatbots from falsely presenting themselves as licensed professionals. They seek limits on the commercial use of private conversations without valid consent, plus opportunities for users to access and delete information before a sale.
The company describes the proceedings as a “value-maximising sale process”, offering the usual corporate spin for a business running out of cash. Its announcement says it will keep the service running during the process.
Character.AI expects the sale process and resulting transactions to finish in late November or early December. If it cannot find a buyer willing to continue the platform, the company says it will wind down the service.
