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The transaction still needs final court approval. The judge encouraged an independent privacy expert but left that review voluntary.
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The ruling advances a narrow intellectual-property and technology license, not a sale of Character.AI itself: Disney’s offer is non-exclusive, and approval of any final transaction is still pending. If no rival bids emerge, Disney would win the auction, but 41 states can still challenge the final terms, including proposed protections they say could limit claims. The judge encouraged an independent privacy review focused partly on minors but did not require one, leaving child-safety concerns unresolved as bidding proceeds.
The 41 state attorneys general argued Disney had an unfair bidding advantage after recruiting most of Character.AI’s employees before its bankruptcy filing.
The judge did not approve proposed legal protections for Disney and former Character.AI employees; disputes over future claims remain open.
The court has not established how Disney would use the licensed technology.
A bankruptcy judge approved auction rules on October 30 allowing Disney to open bidding at $20 million for a Character.AI technology license. He also urged the chatbot company to bring in an independent privacy expert to examine concerns involving children. He did not require that appointment, and the proposed transaction still needs final court approval.
U.S. Bankruptcy Judge Brendan Shannon said he would “strongly encourage” Character Technologies, the company behind Character.AI, to hire a privacy ombudsman, Bloomberg reported. That is an independent expert who examines how a company handles personal information and identifies privacy risks. The proposed review would address customer privacy and potential harm to children, including concerns about information shared by minors.
Character.AI lets users create and converse with AI-generated personalities through text and voice. The company has promoted those exchanges as interactive storytelling, including role-playing and fan fiction. Concerns about the platform have prompted lawsuits and investigations by several states. Shannon said an expert could help alleviate concerns raised by state officials.
Attorneys general representing 41 states challenged the auction procedures, according to WDW News Today. They argued that Disney gained an unfair advantage by recruiting most of Character.AI’s employees before its bankruptcy filing. Shannon rejected their objections to the bidding procedures but left open further challenges when the proposed sale comes before the court.
The states also questioned proposed legal protections that could shield Disney and former Character.AI employees from certain claims. Shannon did not approve those protections at the hearing. His ruling therefore allows bids to proceed without resolving the dispute over who could be protected from future claims.
Under the approved procedures, Disney would become the winning bidder if no competing offers emerge. How Disney intends to use the licensed technology remains unclear.
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