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Disney Asked Character.AI to Go Bankrupt for a Get-Out-of-Lawsuits Card
This week, Character.AI declared bankruptcy. While some saw the fall of a chatbot platform as a harbinger for the industry, court filings indicate that the decision was actually a key part of a deal that has let Disney hire most of Character.AI’s staff—including its now former CEO Karandeep Anand—potentially acquire most of Character.AI’s technology, and avoid the beleaguered startup’s many legal liabilities and obligations.
In the past few years, Character.AI has faced multiple private lawsuits over the safety of its chatbots, as well as investigations from regulators around the world. In a declaration filed as part of the bankruptcy, Character.AI’s newly appointed CEO explained that the goal of the bankruptcy was to reach a “consensual resolution” with personal injury claimants and a group of states investigating the company, while maximizing the value of the company’s assets for shareholders.
The Disney deal seems to be structured so that whatever is left of Character.AI will retain responsibility for those legal battles, some of which are still ongoing.
The move appears to be a new twist on what some have dubbed a “reverse acquihire,” a process in which a buyer carefully orchestrates a succession of deals with a target company, usually in an effort to hire key employees and obtain expansive license to use and build on the target company’s unique technology. Stripped of its employees, the target becomes a husk of itself.
Companies often take the position that reverse acquihires are not actual mergers, and that they do not have to notify federal antitrust regulators about those deals as they would otherwise be required to by law. These arrangements have become more commonplace in the AI industry in recent years, drawing the ire of Congress.
In the case of Character.AI, a motion filed by Character.AI’s legal counsel says that Disney required that the deal be “fully consummated” through bankruptcy proceedings because of the startup’s “diminishing cash reserve and significant litigation and regulatory risks.”
A spokesperson for Character.AI referred WIRED to Disney for comment on whether the deal was contingent on the startup declaring bankruptcy. Disney declined to comment on this story.
According to court filings, the deal involves “two interrelated and integrated” transactions—one before Character.AI declared bankruptcy, and one after.
As part of the first transaction, which occurred in September, Disney paid the startup $5.5 million, along with a refundable “good faith deposit” of $2 million. Disney also hired the “majority” of Character.AI’s employees, including the CEO, and agreed that it would let some of the now-Disney employees help keep Character.AI operational for five months.
Character.AI filed a petition for chapter 11 bankruptcy on October 12. Through the bankruptcy proceedings, court filings show that Disney hopes to secure a perpetual, worldwide, nonexclusive license for a huge range of Character.AI’s code, documentation, frameworks, tools, and “other artifacts,” including those produced for its trust and safety moderation stack, training infrastructure, and age-prediction technology. The list of IP included in the filings does not include users’ data (which can get additional protections in bankruptcy proceedings) or Character.AI’s website.