Lordstown Motors faces ‘corporate espionage’ suit from Calif.-based Karma Automotive

IRVINE, Calif. — Luxury electric automaker Karma Automotive has accused Lordstown Motors Corp. of corporate espionage, including the misappropriation of trade secrets relating to its vehicle software systems and the poaching of its employees.

A lawsuit filed Oct. 30 in the United States Central District of California Court alleges a former Karma employee acted as a "double agent," working with Lordstown Motors to develop the infotainment system for its all-electric pickup truck, the Endurance, then later co-opting those trade secrets and confidential information and jumping ship to help Lordstown Motors develop its own system, and save millions in costs.

Those systems, which are increasingly common in modern cars, include dashboard touch screen displays, audio and video interfaces and other connectivity features.

Karma claims its former manager Roger Durre, who is also named as a defendant in the suit, worked for several months to "hammer out the deal" with Lordstown Motors' Chief Technology Officer Darren Post, also a former Karma employee, beginning in February.

"This involved providing LMC access to Karma's trade secrets and a peek at Karma's computer source code, designs, cost and pricing information, vendor and supplier relationships, human capital and skills capabilities of Karma's software engineers and other sensitive and proprietary information," the complaint reads.

Karma hired Post in January 2016. He became the company's VP of engineering before departing in November 2019, when Lordstown Motors assumed ownership of the former GM Lordstown complex.

Post appeared that month at a Lordstown Motors media event alongside other newly hired Lordstown Motors executives, including Rich Schmidt, the former Tesla executive recently named Lordstown Motors president, who is also listed as a defendant in the Karma suit.

In April, Karma submitted a statement for the infotainment system, which included a quote — about $10.9 million, according to an email from Post to Durre included as evidence in the case. It was at this time Karma claims Durre began scheming with Lordstown Motors to "potentially cut out Karma."

In June, Lordstown Motors signed a letter of intent to contract with Karma. Lordstown Motors, however, terminated that letter in August, stating they "decided to move in a different direction" and that the company would return, destroy or erase Karma's confidential information. That termination letter, included in court filings, suggests Karma's offering was more than Lordstown Motors expected.

The deal represented $3 billion in anticipated revenue for Karma through 2024, according to the complaint.

On Aug. 4, just two days before Lordstown Motors stopped working with Karma, Post "accidentally" forwarded an email to Durre's company email account with Karma suggesting Durre had already begun working with Lordstown Motors and that he was searching for a short-term lease on office space in Orange County, Calif., according to the complaint. Post "immediately tried to 'recall' the message unsuccessfully," it states.

Durre, however, didn't officially resign from Karma until Sept. 1, "meaning he had access to Karma's trade secrets and confidential information for a full month while he was working for and on behalf of LMC," the complaint states.

Karma later conducted a forensic investigation on Durre's computer. Recovered emails suggest he was placed on Lordstown Motors' payroll on Aug. 3, and was offered $285,000 a year to be Lordstown Motors' director of software.

He'd also been using his Karma-provided computer to send emails from his new Lordstown Motors email account discussing the creation of what appears to be Lordstown Motors' own infotainment group, based on the West Coast, "where [Lordstown Motors] had absolutely zero presence prior to initiating talks with Karma in February," the complaint states.

In a recovered email from July 30, Durre told Post he could save Lordstown Motors $4.6 million by developing the system in-house. The email "reflects clear evidence of the intent to sabotage the deal with Karma, raid its workforce and misappropriate Karma's trade secrets," the complaint reads.

Lordstown Motors on Monday announced it intends to open a service center in Irvine, Calif., to serve commercial users in southern California. The location was chosen for its "favorable regulatory backdrop" and its statewide push for electric vehicle adoption, according to a Monday release from the company.

In an Aug. 4 email recovered from Durre's computer, Lordstown Motors CEO Steve Burns suggests the infotainment site — for which Lordstown Motors was seeking a short, three- to six-month lease — could double as a service center.

"I was thinking that if we are going to have a software office out in LA, maybe it could double as our sales/service dealership," Burns wrote. "What do you think? Could the software team benefit from having a few bays with lifts for testing and developing their software?"

Before quitting Karma, the suit claims Durre used external storage devices and cloud services to copy several files containing the company's trade secrets or confidential information — and at that time was also seen using Lordstown Motors-owned cloud services — then intentionally deleted thousands of shared files from Karma's cloud-based system "so that this information could not be recovered by Karma."

"This intentional sabotage constitutes a criminal act and was done with the intent to cripple Karma's ability to remain competitive in the marketplace against the new infotainment team Durre and other former Karma employees and contractors had established at LMC," the complaint states.

The suit also names defendant Hong Xin Huan, Karma's former software systems architect, whom Karma alleges also copied confidential information to external storage devices, which Karma now seeks to recover. The day before Huan returned his company laptop to Karma, he attempted to wipe the main drive, the suit claims.

The suit brings 10 counts, including misappropriation of trade secrets, unfair competition and breach of contract, among others, and seeks various forms of compensation, as well as an order keeping Lordstown Motors from benefiting from Karma's work.

A federal judge on Nov. 6 denied Karma's request for a temporary restraining order to keep Lordstown Motors from advancing the Endurance's infotainment system, but allowed Karma to depose Durre, Huan and Post and restrained Lordstown Motors from destroying or otherwise concealing any of Karma's confidential information or trade secrets that it may possess.

Lordstown Motors, in a statement to The Business Journal, called Karma's corporate espionage claims a "fantasy."

In statements to the court, Durre and Huan declared they have not used any of Karma's confidential information at Lordstown Motors, nor did they share that information with anyone at the company.

They also said they decided to leave Karma due to cutbacks in its engineering and manufacturing programs. At the time, the company had let more than 200 engineers go, they said. Durre said at the time of his departure, he was no longer in charge of infotainment for Karma.

He claimed Karma's and Lordstown Motors' infotainment systems are incompatible, and that Lordstown Motors' system was developed independently using open-source, or public, standards — "simply put, even the operating systems utilized by Karma and LMC speak different languages," he wrote.

Karma offers concept, engineering and manufacturing services for display and infotainment systems, which can be designed and customized to fit the vehicle's brand, according to its website. Those systems can offer "over-the-air" updates for consumer and commercial vehicles, allowing manufacturers to "develop new revenue streams" from selling new software features.

In a Sept. 15 interview with the Jack Spencer Investing YouTube channel, Burns said the company intends to ship the Endurance with the components necessary for autonomous driving features like corrective steering and emergency braking, which could be turned on by software updates pushed to the vehicle's infotainment system.

He noted, however, those features aren't yet "top of mind" for fleet buyers, as employers mainly rely on vehicles to move workers to job sites.

"All software is in-house. We're really adamant that software is the secret sauce here, especially controlling those four hubs independently and all the infotainment over the air, encrypted, so nobody can mess with that," he said.

"We think we're going to have some cool software updates down the road if fleets want that," Burns said. "It's a nice revenue stream after you sell the vehicle, if you can keep adding value through the software."

Lordstown Motors recently finalized a $675 million public merger and began public trading on the NASDAQ in late October. The stock (NASDAQ: RIDE) opened Oct. 26 at $18.97 per share.

RIDE opened Monday at $18.89 and climbed 26 percent to $22.55 at the final bell.

This story was originally published November 17, 2020 at 3:52 AM with the headline "Lordstown Motors faces ‘corporate espionage’ suit from Calif.-based Karma Automotive."