Disney takes Character.AI's team, not its conversations

A clause that reads like a list

On October 13, we asked what would happen to the conversations people entrusted to Character.AI, a day after the company filed for bankruptcy. Part of the answer sits in one clause of the contract between the company and Disney, filed with the Delaware bankruptcy court (case 26-11603).

The clause is titled "Excluded IP." In it, Disney acknowledges that its license doesn't cover users' data and databases, their personal information, what they type when they use the service, or what the service generates for them. That's both sides of the chat: what you write to the character and what it answers.

The same clause leaves out the training data and the finished models, every conversational character included, as well as the website, the domain names, the brands and the app itself. The contract lists what Disney is not taking, and everything users built is on that list.

What Disney actually takes

The contract gives Disney a perpetual, worldwide, non-exclusive license to the technology: the code, the infrastructure and training pipelines, and the evaluation and safety tools, including moderation and the prediction of users' ages. Disney also takes over whatever claims Character.AI may have against the employees it has hired. Non-exclusive means Character.AI keeps the right to license the same technology to someone else.

The order of events matters. On September 18, Disney announced that Karandeep Anand, Character.AI's CEO, would become its first chief technology officer. According to the motion Character.AI filed, that was the same day the company signed an exclusivity agreement and a transition services contract with Disney.

The bankruptcy came after, and it was intended. The motion says so plainly: with cash dwindling and legal and regulatory risks mounting, Disney required the deal to be completed inside a bankruptcy proceeding. That is what allows a sale free of any claims, including a buyer's liability for the seller's past.

Twenty million for the code, the rest for the people

The license price is $20 million. Disney paid $7.5 million of it before the bankruptcy, including a $2 million deposit that is refundable if it loses the auction. In that case it would also collect $700,000 in break-up fees and expenses.

The figures on employees come from the term sheet attached to the agreement, and they are Disney's estimates. The company plans to hire up to six key people, the CEO among them, and to make offers to at least sixty others. On a first review of about 65 employees, Disney estimates their total compensation at about $60 million a year. On top of that comes a $30 million retention pool, paid at the first two anniversaries, and Disney puts the whole package at about $180 million over three years.

That money doesn't go to Character.AI: it's salary, paid by Disney to the people who work for it. The "vast majority" of employees who got an offer accepted it, according to the motion, with no further detail. It's a move, not a takeover: the trucks left with the people and the blueprints, and the house is still for sale.

What's left in the shell

A lot is left. According to the declaration of its new CEO, Colin Adams, Character.AI has about 12 million monthly active users, who spend an average of two hours a day on it. The company was losing $8 to $9 million a month in August and had $57 million in cash when it filed.

A first banker approached about 28 potential buyers starting in August 2025. Only one proposal came back, judged unworkable, for the same reason every time: the product and its audience were impressive, the weight of the lawsuits and investigations was off-putting. Those lawsuits and investigations stay with Character.AI, along with the data.

One caveat. The former employees now on Disney's payroll are still running the platform, for up to five months after signing. The transition contract lets them access personal data, but on behalf of Character.AI, only from its systems and computers, without keeping copies outside those systems unless there is written consent.

Excluded doesn't mean protected

So the conversations have been left out of Disney's package, not out of the sale. The bidding procedures let bidders go after the company's other assets. If nobody wants to take over the platform, it will shut down, and none of the documents we read says what would then happen to the data.

Character.AI's motion provides for no privacy guardian, no deletion, and no special hearing for this data. The only text in the file that deals with it comes from elsewhere. On October 14, the attorneys general of about forty states and the District of Columbia jointly filed a 28-page notice.

They point out that, according to a Kentucky complaint, more than 2.1 million US accounts reported being under 18 in March 2025. They add that a chat history can hold enough detail (job, housing, city) to identify someone, to the point of making standard anonymization impossible. Taking a name off a confession is like blurring a face in a wedding photo where everyone still recognizes the dress.

The states expect any buyer of the business, the product or the data, "chat content" included, to honor nine commitments. Two target conversations directly: letting everyone delete their data before any sale, and not using it to train models beyond what users and parents agreed to.

What isn't decided

The states reserve the right to ask for a privacy ombudsman, the watchdog provided for in US bankruptcy law. They haven't done so yet: as of October 20, no such request is on the docket. They also reserve the right to challenge the sale and the auction rules.

The schedule is tight. Objections to the bidding procedures are due before October 23, with a hearing set for October 30. Bids are due before November 20, the auction will be held on November 23, and the Disney agreement has to close by December 17 at the latest.

Until then, Disney has the engineers and is about to have the code. What its contract leaves aside, in black and white, is what users made themselves, message after message.