40 state attorneys general demand child data protections in Character.AI bankruptcy

A group of 40 state attorneys general on Wednesday urged a US bankruptcy judge in Wilmington, Delaware, to protect young users of Character.AI and keep their private data safe during the AI chatbot company's bankruptcy, according to Reuters. Character.AI filed for Chapter 11 bankruptcy late on Monday and is seeking to resolve state investigations and lawsuits, license its technology to the Walt Disney Company for $20 million, and find a buyer for its chatbot business. Abigail Ryan, an attorney for the states, told US Bankruptcy Judge Brendan Shannon that the states are negotiating a settlement over allegations that its chatbots impersonated licensed medical professionals and exposed children to abusive interactions. "This company has collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder," New York Attorney General Letitia James said in a Wednesday statement. Character.AI's platform allows users to talk to generative AI characters, with active users spending an average of two hours a day on the app. The company attributed its bankruptcy to heavy legal expenses and high costs for computing power and AI talent, losing between $8 million and $9 million a month before filing. In September, the Walt Disney Company stepped in to hire most of the company's staff and pay $20 million to license its technology, though Disney's deal is subject to higher offers and does not include the disputed user data. Character.AI attorney Erin Fay told the court that no buyer has yet made an offer for the user data or the operating chatbot business. For your business, when customer data changes hands in a bankruptcy, the legal fallout hits hard. Keep a close eye on how consumer data regulations tighten as courts scrutinize digital assets.