Judge approves Character.AI's auction over state objections and urges a privacy ombudsman for children's chat data

US Bankruptcy Judge Brendan Shannon approved the auction rules for Character.AI's assets at a hearing in Wilmington, Delaware, on Friday, October 30, with Disney's $20 million offer for a non-exclusive license to some of the company's technology and intellectual property as the opening bid, Bloomberg, WDWNT and Briefs Finance report. If no rival bids arrive, Disney wins by default. Final approval of any sale still has to come back to the court. The case is Character Technologies, Inc., No. 26-11603.

The states' objections and the privacy question

More than 30 states had asked the court the week before to keep open the option of appointing a privacy ombudsman and argued the bidding terms favored Disney, Briefs Finance reports. Disney recruited 66 of Character.AI's 86 employees before the filing. Abigail Ryan, appearing for the states, said that staffing deal gives Disney "an unfair edge in the process." Shannon overruled the objections to the bidding procedures but left room for the states to raise some of them again when a winning bidder seeks final approval. Proposed legal protections for Disney and former Character.AI employees, which the states had questioned, were not approved at the hearing, WDWNT reports.

Shannon did not order a consumer privacy ombudsman, an independent expert who reviews the privacy risks of a sale. He said he would "strongly encourage" Character Technologies to appoint one, with a focus on data from minors. In an October 27 filing, US Trustee Andrew Vara said users provide personal details such as biographical information and photos, per Briefs Finance. Several states, including Kentucky, Texas, Florida, Pennsylvania and New Mexico, have investigated or sued the company over its interactions with children.

Why it matters

The court is treating users' chat data as a live issue in the sale of a consumer AI company. The same question applies to business tools. If an AI vendor holding your employees' prompts, uploaded files or customer data is sold or liquidated, what happens to that data depends on its privacy policy, your contract and the court. Ask vendors for deletion-on-termination and change-of-control terms in writing, and confirm you can export and purge your data on short notice.