US Bankruptcy Judge Brendan Shannon declined to order Character Technologies to appoint a consumer privacy ombudsman at a bankruptcy hearing on 30 October, but said he would “strongly encourage” the company to hire an expert to assess privacy concerns about its AI platform, Bloomberg reported. The question arose as the operator of Character.ai pursues a plan to license some of its technology to Walt Disney Co. The judge’s encouragement leaves the decision to hire an expert with the company rather than imposing the appointment sought by state attorneys general.
Key points
- Shannon encouraged Character Technologies to hire a privacy expert but declined to order an ombudsman’s appointment.
- Attorneys general for 39 states and the District of Columbia sought an ombudsman in a 29 October filing.
- The states raised concerns about a possible sale of the whole platform and information relating to approximately 12 million current or former users, including minors.
The Character Technologies sale procedures
Character Technologies filed for Chapter 11 on 12 October. Disney Worldwide Services made a $20 million bid for a licence to certain intellectual property, as AI Affairs reported when the bankruptcy began. The company subsequently asked the US Bankruptcy Court for the District of Delaware to approve bidding procedures and protections for Disney as the proposed initial purchaser, according to PPC Land. That request is the sale motion to which the privacy objections are directed.
The proposed Disney licence is one part of the dispute. In a notice of interest filed on 14 October, forty attorneys general sought safeguards for Character.ai user data. PPC Land reported that the notice set conditions for a buyer and preserved the states’ option to apply for a consumer privacy ombudsman, citing Bankruptcy Code sections 332 and 363(b)(1). The states later objected to aspects of the proposed sale rules, while the US Trustee lodged a separate objection on 27 October. The US Trustee is the Justice Department office that oversees bankruptcy cases.
The 39 states’ ombudsman demand
Attorneys general for 39 states and the District of Columbia filed a joinder on 29 October in the Delaware bankruptcy court. The filing, Docket No. 80 in case 26-11603 (BLS), adopts the US Trustee’s objection to the company’s proposed sale procedures, PPC Land reported. A joinder puts the coalition behind that objection. It also advances the states’ own request for a consumer privacy ombudsman: an independent person to examine how a proposed transfer of user information would affect the company’s privacy commitments.
The states’ concern extends beyond the intellectual property Disney has agreed to license. According to PPC Land’s account of the joinder, the coalition says Character Technologies’ sale motion does not make it “readily apparent” that the company is also seeking to sell its entire platform. That distinction matters to the states because the platform may contain personal or sensitive information about users. They frame the ombudsman request as applying if property holding that information is sold or transferred, rather than as a condition confined to Disney’s proposed licence.
The joinder describes approximately 12 million active or past users, including minors. The coalition also says its members have investigations concerning consumer protection and privacy violations involving the platform. Those are the states’ assertions in support of their request, rather than findings made at the 30 October hearing. Their filing marks a change from the October notice of interest, which reserved the possibility of seeking an ombudsman, to a request that one be appointed for a transaction involving user information.
The US Trustee’s Office had also argued that the Delaware judge must appoint an ombudsman to review the proposed asset sale, Law360 reported on 28 October. Its objection and the states’ joinder put the requested appointment before Shannon as the court considered the procedures for selling the company’s assets.
Shannon leaves the appointment to Character Technologies
Shannon’s response at the 30 October hearing stopped short of the order the states and the US Trustee sought. He encouraged Character Technologies to bring in an expert to evaluate customer privacy concerns about its platform, while declining to appoint a consumer privacy ombudsman. Bloomberg reported that the judge linked those concerns to lawsuits and investigations by several states. He said hiring an expert would help address the attorneys general’s concerns.
