A federal bankruptcy judge has urged Character.AI to appoint an independent privacy expert amid concerns about the platform’s potential harm to children, as The Walt Disney Company moves forward with a $20 million bid to license its artificial intelligence technology.

Cause for Concern Over Disney’s AI Deal

As reported by Bloomberg, U.S. Bankruptcy Judge Brendan Shannon encouraged Character Technologies, the company behind Character.AI, to hire a privacy ombudsman during a hearing in Wilmington, Delaware, on Friday, October 30.

A privacy ombudsman is an independent expert tasked with reviewing how a company handles personal information and identifying potential privacy risks. In this case, the expert would examine concerns about Character.AI’s handling of user data, particularly information shared by minors.

Shannon said he would “strongly encourage” the appointment of an expert to examine privacy concerns surrounding the platform, which has faced lawsuits and investigations from multiple states over its interactions with children.

Although the judge stopped short of requiring the appointment, he suggested it could help address concerns raised by state attorneys general regarding the company’s handling of sensitive user information.

Character.AI allows users to create and interact with AI-generated personalities through text and voice conversations. The company has promoted the platform as a form of interactive storytelling, enabling users to develop fictional scenarios, role-playing experiences, and fan fiction.

However, the service has drawn scrutiny from officials in states including Florida, Kentucky, Texas, Pennsylvania, and New Mexico. Investigations and lawsuits have raised concerns about the potential psychological harm caused by chatbot interactions, particularly involving minors.

Disney’s $20 Million Bid Moves Forward

Despite objections from state attorneys general, Shannon approved the company’s proposed auction procedures, allowing Disney to proceed as the opening bidder with an offer of $20 million.

The bid would grant Disney a non-exclusive license to certain Character.AI intellectual property and technology. Disney would automatically become the winning bidder if no competing offers emerge, although the transaction would still require final court approval.

Attorneys general representing 41 states challenged the auction process, arguing that Disney had gained an unfair advantage by recruiting most of Character.AI’s employees before the bankruptcy filing. The states also questioned proposed legal protections that could shield Disney and former Character.AI employees from certain claims.

Shannon rejected objections to the bidding procedures but left open the possibility of further challenges when the final sale comes before the court. He did not approve the disputed legal protections during Friday’s hearing.

Disney’s interest in Character.AI extends beyond the proposed technology license. Earlier this month, reports indicated that Disney recruited 66 of the company’s 86 employees before its bankruptcy filing and expects to spend approximately $180 million in compensation and retention incentives over three years.

The recruitment followed the appointment of former Character.AI CEO Karandeep Anand as Disney’s first company-wide Chief Technology Officer, a position he assumed in October.

Disney had previously sent Character.AI a cease-and-desist letter in September 2025 over the unauthorized use of Disney characters on the platform, raising concerns about inappropriate chatbot interactions involving its intellectual property.

Regardless of developments on the Character.AI front, Disney has also continued exploring AI technology for its own entertainment experiences. Earlier this month, Disney filed patents for AI-powered interactive characters capable of remembering personal interactions and developing emotional connections with users.

It remains unclear how Disney intends to use the technology licensed from Character.AI, or whether it could eventually contribute to the company’s theme park experiences, entertainment products, or other operations.

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