What the court heard Friday
In a hearing in Wilmington, Delaware, Judge Brendan Shannon urged Character Technologies to bring in an expert to review customer privacy concerns tied to its AI platform, which has drawn lawsuits and state investigations. He did not order an ombudsman, but said the step could ease worries raised by several state attorneys general as the company pursues a sale of its main assets, including technology Disney wants to license.
The judge also cleared Character to run an auction for that technology. Disney is slated to start the bidding at $20 million, and would win by default if no rival bids appear.
The sale mechanics and Disney's position
More than 30 states asked the court last week to keep the option open to appoint a privacy ombudsman and argued the bidding terms could tilt the auction toward Disney. Shannon overruled those objections, but said the states can raise some of them again when the winning bidder seeks final sale approval.
Before Character filed for bankruptcy earlier this month, Disney committed $5.5 million to obtain the right to hire Character's employees. Abigail Ryan, appearing for the states, told the judge that staffing deal gives Disney an unfair edge in the process.
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Product, privacy concerns, and state scrutiny
Character.AI lets users text or talk with different bots to build stories, and the company describes it as interactive storytelling that can visualize fan fiction or create role-playing scenarios. In an October 27 filing, US Trustee Andrew Vara said that people interacting with the company's bots provide personal details such as biographical information and photos, along with other content, on the platform.
Character.AI faces investigations or lawsuits from officials in Kentucky, Texas, Florida, Pennsylvania and New Mexico regarding its platform for kids to create stories, characters and chat with AI bots. Earlier this year, the company resolved its then-pending personal injury suits and, per a court filing, put in place a prohibition on users under 18 accessing certain chat services. Chief Executive Officer Colin Adams said the company is working toward resolving their investigation through coordinated discussions with multiple state attorneys general.
Why investors should watch
Case to track: Character Technologies, Inc., 26-11603, US Bankruptcy Court, District of Delaware (Wilmington). The auction will determine who controls the tech Disney wants, while any push for a privacy ombudsman at sale approval could shape safeguards around data use. Either outcome can influence timing, structure and ultimately the value buyers assign to the assets.
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