Lordstown Motors Corp. has agreed to pay $40 million to Karma Automotive LLC to settle a lawsuit that claims Lordstown Motors stole trade secrets and plundered employees from the California-based auto company.
The proposed agreement, which needs approval from a U.S. bankruptcy court judge in Delaware, calls for Lordstown Motors to pay Karma a one-time royalty payment of $5 million, according to the proposal filed Aug. 15 with the court.
The settlement “represents an important step” in Lordstown Motors’ effort to “maximize value” as it navigates Chapter 11 bankruptcy proceedings, according to the agreement, and would wipe clean a “significant impediment” to the company’s sale process.
Karma was seeking more than $900 million from Lordstown Motors.
The lawsuit filed in October 2020 claims Lordstown Motors stole intellectual property about Karma’s infotainment system and poached a specialized team of Karma employees who were designing it for use in Lordstown Motors’ truck, the Endurance.
The proposed settlement, which represents about 4.4% of that sought-after amount, “is not only an exercise of sound business judgment and within the range of reasonableness, but is a critical and necessary compromise that paves the way for the debtors (Lordstown Motors) to maximize the value of their assets for the benefit of all stakeholders, and to quickly and efficiently exit Chapter 11,” the filing stated.
A trial on the matter was supposed to begin Sept. 12 in U.S. court in central California.
It was allowed to move forward July 27, when bankruptcy court Judge Mary F. Walrath lifted a stay automatically imposed on Karma’s case when Lordstown Motors filed for Chapter 11 protection June 27.
On July 27, Walrath said, she thought resolution of the case, which would go toward fully determining the assets belonging to Lordstown Motors, was critical before moving ahead with the bankruptcy proceeding. She also said it wasn’t her place to make that decision.
“I think the appropriate thing is for the California court that has devoted three years to conducting discovery, addressing pretrial motions and is fully familiar with these facts” to decide the issue, she said then.
Lordstown Motors asserted it would be prejudiced if the West Coast trial were allowed to go forward as it argued management’s focus would be diverted from the bankruptcy; that allowing it to proceed put at risk losing employees who are critical to helping sell the company; and the cost to defend itself in court, which an estimate put at $2.5 million.
An attorney for Lordstown Motors, Jason Zakia with White & Case LLP in Chicago, said during a hearing Aug. 15 the resolution was reached at 11:57 p.m. Aug. 14.
Doing so resolves the lawsuit, damage claim and “importantly, would free the debtors to sell the technology, which is the subject of the dispute with Karma. Part of the deal, Karma grants the debtors, I may not get all the IP (intellectual property) terms right, but a worldwide, global, perpetual, irrevocable license which is being provided in exchange for the settlement consideration.”
A hearing on the settlement proposal is scheduled for Aug. 21.
Earlier in August, an attorney for Lordstown Motors said the company had received interest from 13 parties to acquire all or some of the company’s assets. One included a condition regarding the Karma lawsuit.