Nessel joins lawsuit seeking consumer protections as chatbot service declares bankruptcy

Michigan Attorney General Dana Nessel joined 38 other states and the District of Columbia in a lawsuit focused on privacy and safety concerns after a chatbot service that allows users to converse and roleplay with AI characters filed for bankruptcy. 

The platform, Character.AI, announced its bankruptcy filing on Monday, stating that it would sell $20 million in assets to Disney.

Founded in 2021, the company has faced legal scrutiny over its chatbots, including a 2024 wrongful death lawsuit filed after a 14-year-old died after a chatbot allegedly encouraged him to take his own life. The case was settled in January.

Several states, including Michigan, have launched investigations into Character.AI. According to the lawsuit, filed Wednesday, those investigations identified several potential legal concerns, including chatbots posing as licensed professionals, minors being exposed to explicit sexual content, self-harm, violence and other harms through chatbot conversations; insufficient age assurance practices; misrepresentations around the product’s safety; and a failure to comply with state privacy laws.

Although Character.AI has taken steps to restrict minors’ access to chatbot features, the attorneys general note that these features can be circumvented. They also contend they do not address concerns around characters representing themselves as licensed individuals, provide safeguards for users discussing self-harm, suicidal ideation or violence, or bring the platform into compliance with state consumer protection laws.

Nessel and her fellow attorneys general also raised concerns about the sensitive nature of the conversation many users have with the platform’s chatbot characters and the large number of minors using Character.AI. 

“As the Debtor collects and maintains a large volume and variety of consumer personal data, including sensitive data and children’s data, and has demonstrated safety risks to both minor and adult users, the States need to be assured that sufficient safety and privacy programs are in place with any purchaser of any or all of the Debtor’s business,” the lawsuit states.

Any company purchasing Character.AI or its assets should be prepared to comply with regulatory requirements, the attorneys general state. 

This would include age-verification measures beyond users simply providing their birthdates, removing characters that portray themselves as licensed professionals such as therapists or lawyers, implementing a privacy program and ensuring consumers have the opportunity to access their data and delete it prior to any sale.

“Character.AI’s financial troubles should not leave consumers to deal with the privacy fallout the company leaves in the wake of its bankruptcy,” Nessel said in a statement. “Voluntary safety measures are not enough if they can be reversed by a business’ next owner. I’m joining my fellow attorneys general to push for safeguards that will remain in place no matter who takes control of this company.”