In mid-November, Karma Automotive filed a federal lawsuit against Lordstown Motors (NASDAQ:RIDE), the electric vehicle startup that has big plans for its Endurance battery-electric pickup truck to be built at the former General Motors (NYSE:GM) plant in Lordstown, Ohio. Despite the potential ramifications, very little’s been written about how this lawsuit could affect RIDE stock.
Karma believes that Lordstown stole its intellectual property, breached its contract with the company, and hired people directly involved with developing its own infotainment system. The same one Lordstown had spent six months getting to know for potential use in its pickup truck.
It could just be much ado about nothing. However, as a veteran of the business news game, there’s always more to the story than either party would care to admit.
The question is, who’s telling the truth?
I’ll look at both parties’ motivations.
Karma’s Disgruntled Employees
According to reporting from The Detroit Bureau, Karma’s former director of infotainment and his or her five-person team were all hired away by Lordstown in August after six months of negotiations between the two companies.
“We were extremely disappointed to learn about the circumstances surrounding this case involving our former employees and their secretive dealings with Lordstown Motors and their management,” Stefan Gudmundsson, chief innovation officer, Karma Automotive, said in a statement e-mailed to The Detroit Bureau.
Karma first heard from Lordstown in February when it contacted them to discuss adapting the infotainment system the company was developing for its own high-end luxury electric vehicle its launching in 2021.
One thing led to another and Lordstown signed an agreement to use the infotainment system in the Endurance. But before any money changed hands, Lordstown called things off, claiming the unit was incompatible with the pickup truck.
Shortly thereafter, the entire Karma team was working for Lordstown.
Coincidence? Perhaps not.
A Fantasy of Epic Proportions
Karma believes that Lordstown used a “Trojan horse” scheme to steal its employees and technology. Lordstown naturally feels the allegations are a “fantasy” and without merit.
RIDE argues that it didn’t go ahead with the Karma arrangement because the infotainment system was far too expensive for its needs. Further, Karma’s engineering department had been downsizing, forcing the former employees to seek more suitable employment.
As for an actual response, Lordstown replied as follows:
“We have no need or use for Karma’s purported trade secrets, and we are confident that our dealings with Karma complied with all relevant laws,” Driving.ca reported on Nov. 24.
Due to the delicate nature of legal proceedings, it’s not surprising that either company mentions them on their websites. That’s why 10-Q’s require a section for all legal proceedings. Lordstown’s can be read in its third-quarter report under Item 1.
Karma alleges that Lordstown did the last-minute maneuver to save itself $4.6 million. It also estimates that the deal could have brought Karma as much as $3 billion in revenue by 2024.
While I realize these units are technological marvels, I find it hard to believe that the contract was worth that much to Karma over the next four years.
Ride Stock and the Bottom Line
Lordstown’s Q3 2020 report was for the period ended Sept. 30. That was before its merger with DiamondPeak Holdings on Oct. 23. Lordstown got $675 million in cash as part of the merger, more than plenty to get it closer to actual production.
On the surface, it would seem ridiculous that Lordstown would potentially jeopardize its future to save $4.6 million.
That said, if Karma began discussing a relationship with Lordstown all the way back in February when RIDE was looking for capital, it’s possible that it needed a way to acquire an infotainment system on the cheap.
Then again, the merger was announced in early August, which means they had been negotiating for a least a few weeks before it pulled out of its arrangement with Karma. It would make no sense to jeopardize a $1.6 billion combination to save a few bucks.
If Karma’s having money problems, it may be overstating the value it brought to the table.
In mid-November, I said a good entry point for RIDE stock is $15. Given the litigation taking place, I wouldn’t go any higher until Lordstown’s in the clear.
It might be a nuisance suit. It might not. Buyer beware.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.