The U.S. Bankruptcy Court for the District of Delaware entered a written order on Wednesday, Nov. 4, approving the rules for selling Character Technologies, the company behind the Character.AI chatbot app. The judge had approved the rules at a hearing on Oct. 30, according to a news report. The company filed for Chapter 11 bankruptcy, which usually lets a company keep running its business under a court's eye, on Oct. 12, to sell or license all or nearly all of what it owns. It posted the court's notice of the sale on its blog on Nov. 5.
The court also approved Disney Worldwide Services, part of Disney, as the opening bidder for the assets it wants: the bidder whose signed offer sets the bar that rival offers for those assets must top. Disney agreed before the company filed for bankruptcy to pay $20 million for a permanent license to some of the company's intellectual property and some of its legal claims. A license gives the right to use them without owning them, and the company could grant the same right to others. Disney also agreed to lend the work of former Character.AI staff it has hired, to help keep the app running for a limited time and support the sale, the company said.
Disney does not plan to buy the chatbot app or its users' data, including their chats, according to a news report. The rules let the company name other opening bidders for the assets outside Disney's offer. Anyone who wants to object to the sale must file by 4 p.m. Eastern time on Nov. 18, or may lose the chance to be heard. Objections about how the auction is run, or about a winner other than an opening bidder, can still be raised at the hearing after the auction. Bids are due by noon on Nov. 24. An auction is scheduled for Dec. 1, unless it is called off or postponed, and the court is set to hold a hearing on Dec. 3 and 4 to consider the sale, unless it is postponed. Character.AI said in October that it hopes the sale brings an offer that keeps the app running, and that otherwise the app will be shut down.
At the Oct. 30 hearing, according to a news report, Judge Brendan Shannon overruled objections from attorneys general for 41 states. They argued that the auction unfairly favors Disney, which had hired most of the company's staff, including its former chief executive, and negotiated legal protections for itself and those staff before the bankruptcy. Disney hired 66 of Character.AI's 86 employees and expects to pay them $180 million over three years. A parent who sued the company, saying its chatbot harmed their child, also objected, as did the Justice Department's bankruptcy watchdog.
Much of the fight is over what Disney would get besides the license. If Disney wins, Character.AI will ask the court to rule that Disney is not the company's successor or a continuation of it, and owes nothing for its debts or the claims against it unless it agrees in writing. That order would bar suits against Disney on the theory that it took over the company. It would also shield Disney and its staff from claims over the help they provide, except for willful misconduct, bad faith or gross negligence. Character.AI would also give up its own claims against Disney and the staff Disney hired, including over that hiring.
Kentucky's attorney general sued the company in January, saying it put profits ahead of children's safety. According to a news report, others have also sued, saying its chatbots pushed children toward suicide and self-harm. At the October hearing, the judge did not approve the releases for Disney and the hired staff, and said the protections could still be challenged later. He also said he would likely appoint a privacy ombudsman, an independent adviser on users' sensitive data during the bankruptcy.
The company's banker told the court that some buyers have shown interest in the app, according to a news report. Who will bid, whether a buyer would keep the app running, and whether the court will grant Disney the protections it is seeking are not yet known.