AI-Underwriting Fintech Pagaya Files Lawsuit Against Klarna Alleging Misappropriation
AI-powered underwriting fintech, Pagaya Technologies, has recently filed a lawsuit against Klarna, its former partner. The cause of the legal battle is the alleged misappropriation of Pagaya’s trade secrets and violation of its license and loan sale agreements. This marks a rather bitter end to a four-year relationship between the two companies.
Details of the Allegations
The suit, filed in the U.S. District Court for the District of Delaware, accuses Klarna of stealing Pagaya’s subprime point-of-sale underwriting model. In addition, it alleges that Klarna has not been honoring its loan sale commitments to Pagaya. As part of their business arrangement, Pagaya would sell Klarna’s Buy Now, Pay Later (BNPL) loans on the secondary market. According to the lawsuit, Klarna has unjustly enriched itself by using Pagaya’s trade secrets to successfully enter the US market and build a consumer lending business line worth approximately $2 billion.
What are Trade Secrets?
The American Bar Association defines trade secrets as any formulas, practices, processes, designs, instruments, patterns, or compilation of information that confer a business advantage over competitors who do not know or use them. Misappropriation refers to the unauthorized use, acquisition, or disclosure of these trade secrets.
Klarna’s Response
Klarna has refuted the allegations, stating that they are false. A Klarna spokesperson stated, “On March 25, 2026, we notified Pagaya that we were terminating our commercial relationship, as is our contractual right. Pagaya has responded by filing a lawsuit, which we believe is without merit. We will defend ourselves vigorously against these false allegations and are evaluating all legal options.”
The History of Pagaya and Klarna’s Partnership
Pagaya utilizes artificial intelligence and machine learning-powered underwriting models to approve more loans, which it then sells through forward flow and asset-backed securities deals. The Pagaya-Klarna partnership began in October 2022, with Pagaya first buying point-of-sale loans that Klarna declined. Over time, the relationship evolved, and Pagaya began underwriting longer-duration and higher-ticket first-look applications.
The Allegations in Detail
The lawsuit alleges that Klarna used the details about Pagaya’s technology information, data, and techniques provided through the partnership to build its longer-term loan product, known as “Fair Financing”. The complaint states, “Before Pagaya, Klarna lacked the capability to profitably underwrite subprime POS loans and to structure transactions that would remove those loans from its balance sheet, transferring its risk and replenishing its capital.”
The Impact on Pagaya’s Other Partnerships
Pagaya has other point-of-sale financing partners, including Sezzle, U.S. Bank’s Elavon, and Upgrade. However, Klarna loans were integral to its two revolving point-of-sale asset-backed securitizations, wherein Klarna was the sole originator and servicer. These deals are set to stop revolving on November 30, 2026, and April 30, 2027. However, they will likely enter their amortization periods earlier than scheduled if Pagaya were to stop purchasing loans.
What’s at Stake in Misappropriation Claims?
In cases involving misappropriation of trade secret claims, the burden of proof falls on the plaintiff to demonstrate that a trade secret exists and that it was improperly acquired. A notable example of this occurred last year when a jury awarded clean energy company Propel Fuels about $800 million in damages after Phillips 66 terminated its attempted acquisition of the company and then launched a competing renewable fuels business using trade secrets acquired under a non-disclosure agreement during due diligence.
This lawsuit not only marks the end of the partnership between Pagaya and Klarna but also serves as a reminder of the crucial role that trade secrets play in the competitive landscape of the fintech industry. As the case unfolds, it will be insightful to observe how the courts interpret the alleged misappropriation and the implications it may have for future collaborations within the industry.
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