Safety and litigation are Character.ai's biggest problems. Families sued the company and Google from October 2024 over teenagers who died by suicide or were harmed after long chatbot conversations; in May 2025 a federal judge in Florida refused to dismiss the first case on First Amendment grounds, and in January 2026 the companies agreed to settle five cases on confidential terms. The FTC opened an inquiry into AI companion chatbots, including Character.ai, in September 2025, and Pennsylvania sued in May 2026 over bots that presented themselves as licensed psychiatrists.
The second challenge is business model. Removing open-ended chat for under-18 users in November 2025 cut off part of a young audience, while OpenAI, Meta and Google give away capable assistants that can also role-play. Character.ai has to grow subscription and ad revenue from adults without the founding research team, which left for Google in 2024.