Disney’s Character.AI Deal: $20 Million License, Staff Hires and a Bankruptcy Fight

Disney has agreed to pay up to $20 million for a license to much of Character.AI‘s technology and has already hired most of the chatbot startup’s staff, under a deal that runs through Character.AI’s Chapter 11 bankruptcy, court filings and company statements show. The structure leaves the lawsuits and state investigations that weighed on the company behind with Character.AI, according to a WIRED investigation published Monday, Oct. 19, 2026, by Ars Technica. The Disney Character.AI license still has to survive an auction and court approval.

Image: The Alameda Avenue entrance to the Walt Disney Studios in Burbank, California. Photo: Coolcaesar, via Wikimedia Commons (CC BY-SA 4.0).

The Disney Character.AI deal by the numbers

• Total price: $20 million, according to Character.AI’s Oct. 12 announcement.
• Paid so far: $5.5 million in September, plus a refundable $2 million good-faith deposit, according to filings described by WIRED.
• Due at closing: $12.5 million more if Disney wins the auction and the court approves.
• What Disney gets: a perpetual, worldwide, nonexclusive license to code, tools, frameworks and documentation, including Character.AI’s trust and safety moderation stack, training infrastructure and age-prediction technology.
• What it does not get: user data and the Character.AI website are not on the list of licensed assets, WIRED reported.
• Timeline: Character.AI filed for Chapter 11 in Delaware on Oct. 12 and expects the sale to close in late November or early December 2026.

How the two-step deal works

Court filings describe “two interrelated and integrated” transactions. In the first, completed in September before the bankruptcy, Disney made its initial payment and hired the “majority” of Character.AI’s employees, including then-CEO Karandeep Anand, WIRED reported. Disney also agreed that some of those new hires would help keep the Character.AI platform running for five months.

The second step runs through the bankruptcy court. Disney is the “stalking horse” bidder, meaning its offer sets the floor that rival bidders must beat in an auction. If another buyer wins, Disney gets its $2 million deposit back plus a breakup fee. To keep the auction competitive, Disney agreed to let a winning bidder interview and possibly hire up to 80% of certain employees Disney had already brought over, with Disney choosing which ones.

A motion filed by Character.AI’s lawyers says Disney required the deal to be “fully consummated” through bankruptcy because of the startup’s “diminishing cash reserve and significant litigation and regulatory risks.” A draft order prepared by Disney would state that the transaction is not a merger and that Character.AI keeps responsibility for “any liability or other obligation,” including legal claims.

Character.AI said it will keep operating during the sale. If the process does not produce a buyer that continues the platform, the platform will be wound down, the company said.

Why Character.AI ended up in bankruptcy

Character.AI lets users chat and hold voice calls with AI “characters,” from celebrity and cartoon personas to bots that present themselves as therapists. New York Attorney General Letitia James’s office says the platform has more than 20 million monthly users, including more than 2 million accounts registered to users who said they were under 18.

The company has faced private lawsuits over chatbot safety, including a 2024 wrongful death suit involving a 14-year-old boy. Google, which paid a reported $2.7 billion in 2024 to license Character.AI’s technology and hired its founders, was named alongside the startup in several cases. Google and Character.AI agreed in principle in January to settle that and similar suits, and a court-appointed referee approved each individual settlement on Oct. 11, the day before the bankruptcy filing, WIRED reported.

A coalition of state attorneys general began investigating in late 2025, and the number of states and territories involved had reached 46 by the time of the filing. Massachusetts is among the 40 attorneys general who filed a notice in the bankruptcy case on Oct. 14. The filing cites independent testing that found 669 harmful interactions in 50 hours on accounts registered to children ages 12 to 15. The states are asking any buyer to adopt real age verification, safeguards against sexual and violent content, crisis responses for users who mention self-harm, and limits on using private chats for AI training.

What it means for Disney and the AI industry

Deals in which a large company hires most of a startup’s staff and licenses its technology without buying the company outright have become common in AI, and members of Congress have criticized them. The deal is the latest move in a busy stretch of media dealmaking and AI legal fights, from the Paramount and Warner Bros. merger to fights over how AI companies may use other people’s work, such as the recent appeals ruling on AI training with Westlaw headnotes.

Reactions

Disney declined to comment to WIRED. A Character.AI spokesperson said the company could not speculate on the outcome of the bankruptcy and said the states’ filing “is not an accurate portrayal of the safety of our platform.”

“It’s bad for society to let companies exercise control without responsibility,” John Newman, a University of Memphis law professor and former deputy director of the Federal Trade Commission’s Bureau of Competition, told WIRED.

“This company collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder,” James said in an Oct. 14 statement. Character.AI CEO Colin Adams said on Oct. 12 that “maintaining a safe and engaging user experience for our Character.ai community remains a top priority.”

Sources

• Ars Technica (WIRED): Disney found a way to buy Character.AI without buying its lawsuits
• Business Wire: Character.ai Initiates Voluntary Chapter 11 Proceeding
• New York Attorney General: James Urges Court to Protect Children and Consumers in Character.AI Bankruptcy
• Wikimedia Commons: Walt Disney Studios Alameda Entrance (CC BY-SA 4.0)