Disney found a way to buy Character.AI without buying its lawsuits

Character.AI filed for Chapter 11 bankruptcy on October 12. Court filings show the bankruptcy was baked into a two-part deal with Disney. In September, Disney paid the startup $5.5 million plus a $2 million refundable deposit and hired most of its staff, including its now-former CEO, Karandeep Anand. Now Disney is seeking a perpetual, worldwide, nonexclusive license to a wide sweep of Character.AI's code and tools. That includes its trust and safety moderation stack, its training infrastructure and its age-prediction technology.

The catch is where the liability goes. A draft order Disney prepared would say this is not a merger, and that Character.AI alone keeps any legal claims against it. That shell would be left facing a multistate investigation that had grown to 46 states and territories by the time of the filing. Filings on behalf of 40 states describe screenshots of chatbots encouraging minors to hide self-harm injuries and to kill their parents. Character.AI says that filing is not an accurate portrayal of its platform's safety.

If courts sign off, this becomes a template. Any AI company carrying safety liability could be emptied of talent and technology, leaving the people who were harmed to chase whatever is left.

Let's be direct. This is a deal designed to take the valuable parts of a company and leave the responsibility behind. Character.AI's own filings say Disney wanted it done through bankruptcy because of the startup's shrinking cash and its significant litigation and regulatory risk. That isn't us reading between the lines. It's the stated reason.

We don't think every reverse acquihire is sinister. Startups fail, talented people need jobs, and licensing technology out of a dying company can keep good work alive. Disney paying real money for a product that prospective buyers reportedly called impressive is, on its face, a normal market outcome. If the only question were whether a big studio can hire a chatbot team, we'd shrug.

But this isn't only about talent. Disney's license list includes the very systems at the center of the safety complaints: moderation, age prediction, the training stack. Disney would get the tools that shaped what those bots said to kids, while the company answering for what they said shrinks to a husk. Former FTC competition official John Newman told WIRED that the corporate law safeguards built to stop buyers from taking assets without liabilities weren't designed for a structure like this. We agree with his core point. Control without responsibility is a bad bargain for everyone else.

There's a pattern here too. Google reportedly paid $2.7 billion in 2024 to license Character.AI's technology and hired its founders. Google later argued it was a separate company and not responsible for a teen's death, and a judge wasn't persuaded on the aiding-and-abetting claim. Those cases were settled, with a referee approving each settlement on October 11, one day before the bankruptcy filing. The timing is worth noticing.

The ones protecting the public interest now are the states. They've said they reserve the right to challenge any bankruptcy plan, and the license still has to go through an auction and court approval. The so-called competitive process lets a rival bidder interview up to 80% of certain employees Disney already hired, with Disney choosing which ones. Experts doubt that can be unwound in practice. We doubt it too.

Where this leads if it scales is the real worry. Companion and chatbot apps carry obvious risks for young users. If the industry learns that liability can be shed by sending the brand into bankruptcy while the code and people move to a richer parent, the incentive to build safely gets weaker. I'm watching whether a judge treats this as a routine asset sale or as what it looks like.

A reverse acquihire is a sequence of deals in which a buyer hires a target's key staff and takes a broad license to its technology without formally merging. Companies often argue these aren't mergers that must be reported to antitrust regulators, and the practice has drawn criticism from Congress as it spread across AI. Character.AI had already done one with Google in 2024, then struggled with profitability and, per its filings, found buyers scared off by litigation and regulatory overhang.

The license being sought excludes user data, which can get extra protection in bankruptcy, and the Character.AI website. Disney declined to comment.