- Key insights: AI-powered underwriting fintech Pagaya is suing Klarna – its former partner – for misappropriating its trade secrets and breaching its license and loan sale agreements.
- What's at stake: The suit alleges that Klarna stole Pagaya's point-of-sale underwriting model and marks an end to a four-year relationship between the two companies.
- Forward look: In cases involving misappropriation of trade secret claims, the burden of proof falls on the plaintiff to show that a trade secret exists and that it was improperly acquired.
Pagaya Technologies and Klarna's four-year relationship is ending with a lawsuit over subprime lending models.
The AI-powered alternative underwriting fintech is suing the neobank and buy now, pay later fintech for allegedly misappropriating its trade secrets and breaching its license and loan sale agreements.
"Klarna has unjustly enriched itself by using Pagaya's trade secrets to successfully enter the United States market, make itself a commercially attractive partner to merchants (
Trade secrets are any formulas, practices, processes, designs, instruments, patterns or compilation of information that confer a business an advantage over competitors who do not know or use them, according to the American Bar Association. Misappropriation is the unauthorized use, acquisition or disclosure of those trade secrets, according to the ABA.
Pagaya declined to comment further on the lawsuit. Klarna said the allegations are false. "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," a Klarna spokesperson told American Banker.
Pagaya uses artificial intelligence and machine learning-powered underwriting models to approve more loans, which it then sells in through forward flow and asset-backed securities deals. The company underwrites unsecured personal loans, auto loans and point-of-sale financing loans.
The two companies' partnership dates to October 2022, when Pagaya first bought point-of-sale loans that Klarna turned down. The relationship between the two companies eventually evolved, and Pagaya began underwriting longer-duration and higher-ticket
The suit alleges that Klarna through the partnership was provided details about Pagaya's technology information, data and techniques that it then used to build its longer-term loan product, which it calls "
"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," according to the complaint.
Pagaya has other point-of-sale financing partners, including Sezzle, U.S. Bank's Elavon, and Upgrade, but Klarna loans were the linchpin to its two revolving point-of-sale asset-backed securitizations, of which Klarna was the sole originator and servicer. Those two ABS deals are set to stop revolving on November 30, 2026 and April 30, 2027, but will likely enter their amortization periods earlier than scheduled if Pagaya were to stop purchasing loans, according to a statement from Kroll Bond Rating Agency.
In cases involving misappropriation of trade secret claims, the burden of proof falls on the plaintiff to show that a trade secret exists and that it was improperly acquired. Last year, 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.
