A coalition of 40 US state attorneys general has asked the bankruptcy court overseeing Character.AI's Chapter 11 case to protect young users' data and require stronger safety measures from any eventual buyer. The request came on 14 October, two days after the company filed, Reuters reported.
What we know
Per Reuters, the states made their case before Judge Brendan Shannon in the US Bankruptcy Court in Wilmington, Delaware. Their lawyer, Abigail Ryan, said the states wanted to stop past problems from carrying over to a new owner. The states want chat histories safeguarded and safety features improved as conditions of any transfer.
The underlying allegations include chatbots impersonating licensed medical professionals and exposing children to sexualised and abusive exchanges; the states are negotiating a settlement, according to Reuters. Character.AI's counsel, Erin Fay, said the company had heard the concerns and that no bidder had yet offered for user data or the chatbot business.
Reuters also reported that Disney's proposed $20m deal covers a licence to technology and intellectual property, plus hiring most of the staff, and that Disney has no interest in user data. The company cited legal bills and high computing and talent costs, and was reportedly losing $8m to $9m a month before filing.
Why it matters
User data is often one of the few assets of value a failed consumer AI company has left. Here, it consists of millions of intimate conversations, many with minors. The states' intervention signals that companion chat logs will not be treated as an ordinary asset to be sold to the highest bidder. Any buyer should expect court-imposed limits on use, retention and safety obligations, which will depress the value of the data.
For the wider industry, the case sets an expectation that companion operators plan for insolvency: data deletion paths, transfer restrictions in terms of service, and clear user notice. Investors underwriting companion businesses should price in that their most sensitive asset may be the least saleable.
What to watch
Whether the court attaches data conditions to the sale order, and whether any bidder emerges for the consumer app before the auction.
Written by the AI Companion Wire newsroom from public reporting, credited above. Image via Reuters.
