Klarna and Pagaya Technologies · Governance finding · severity 2 of 5
Pagaya, an AI underwriting fintech that had assessed subprime point-of-sale loan applicants for Klarna since 2022, sued Klarna in Delaware federal court on 13 May 2026. According to the complaint, Klarna "distilled Pagaya’s core underwriting technology for POS loans and then willfully misappropriated its trade secrets", including its proprietary machine-learning credit model, to build a US consumer lending business worth about $2 billion. The complaint also alleges breaches of the license, loan-sale and commitment agreements. Klarna, which ended the relationship on 25 March 2026, said the suit is without merit and the allegations are false. In July 2026 it moved to dismiss part of the complaint. The case is pending.
Record last reviewed Oct 21, 2026 · Markdown
Date
Institution
Klarna, Pagaya Technologies
Country
United States
AI system
Pagaya credit underwriting model · Machine-learning credit underwriting model for subprime point-of-sale loans · vendor: Pagaya Technologies
AI?
Described as AI by the institution or regulator
The institution, a regulator or a court called the system AI.
Category
Status
Disputed
Severity
2 of 5
Impact
Pagaya alleges Klarna used its trade secrets to build a consumer lending line worth about $2 billion, and seeks damages, disgorgement of unjust enrichment and exemplary damages. No consumer harm is alleged.
What happened?
Pagaya and Klarna worked together from October 2022. Pagaya first bought point-of-sale loans that Klarna had turned down, then underwrote longer-duration, higher-ticket applications for Klarna's US Fair Financing product. Pagaya also bought and securitised those loans; Klarna was the sole originator and servicer of two revolving asset-backed securitisations.[4][5]
Pagaya's complaint, filed in the US District Court for the District of Delaware, says "at the heart of Pagaya’s Trade Secrets is its proprietary machine learning credit underwriting Model", which Pagaya put more than $100 million at risk to develop. It alleges that over nearly four years Klarna "distilled Pagaya’s core underwriting technology for POS loans and then willfully misappropriated its trade secrets" in order to "absorb Pagaya’s trade secrets, use them to build its own competing capabilities, and cut Pagaya out". The claims are misappropriation under the federal Defend Trade Secrets Act and Delaware law, and breach of the license, loan-sale and commitment agreements.[1]
The complaint points to statements by Klarna's chief executive, Sebastian Siemiatkowski: on the day of Klarna's IPO, 10 September 2025, he said Klarna did not outsource its risk underwriting to Pagaya, and on the 19 February 2026 earnings call he said its US fair-financing underwriting was built on "our proprietary underwriting systems that we’ve developed". Pagaya alleges both statements were false. Klarna told Pagaya on 25 March 2026 that it was ending the commercial relationship.[1][4]
When did it happen?
- Oct 2022
The Pagaya–Klarna partnership begins, with Pagaya buying point-of-sale loans Klarna had declined.[1][5]
- Feb 19, 2026
On Klarna's earnings call, its CEO says US fair-financing underwriting runs on Klarna's own proprietary systems; Pagaya later alleges this was false.[1]
- Mar 25, 2026
Klarna notifies Pagaya that it is terminating their commercial relationship.[4][5]
- May 13, 2026
Pagaya files suit against Klarna Inc. and Klarna Group plc in the District of Delaware; the public complaint is docketed on 14 May.[1][2]
- Jul 15, 2026
Klarna moves to dismiss counts II and IV and part of count V of the complaint.[2]
- Oct 13, 2026
The court sets a scheduling conference, after a request for oral argument was filed on 1 October.[2]
What was the impact?
- Other: Pagaya alleges Klarna used its trade secrets to build a consumer lending line worth about $2 billion, and seeks damages, disgorgement of unjust enrichment and exemplary damages. No consumer harm is alleged.[1][5]
Severity 2 of 5: A commercial dispute over an AI underwriting model, with alleged harm to a partner and no consumer harm; the case is pending, Klarna denies the claims and no court has ruled on the merits.
How did Klarna and Pagaya Technologies respond?
A Klarna spokesperson said: "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." Klarna has moved to dismiss part of the complaint.[2][4][5]
What was the outcome, and did regulators act?
Pending before Judge Colm F. Connolly in the District of Delaware. Briefing on Klarna's partial motion to dismiss closed in September 2026, and a scheduling conference was set on 13 October 2026. There is no ruling on the merits. No regulator is involved.[2][3]
Why is Pagaya suing Klarna?
Pagaya alleges that during their 2022–2026 partnership Klarna learned and copied its machine-learning underwriting model for subprime point-of-sale loans, used it to build its own US lending business, and then cut Pagaya out. It also alleges breaches of their license, loan-sale and commitment agreements.
What does Klarna say?
Klarna says it ended the relationship on 25 March 2026 as was its contractual right, that the lawsuit is without merit and the allegations are false, and that it will defend itself vigorously. In July 2026 it moved to dismiss two of the counts and part of a third.
Were Klarna customers affected?
No consumer harm is alleged. The dispute is about who owns the underwriting know-how and whether Klarna met its contractual commitments to Pagaya. Rating agency commentary focused on Pagaya's securitisations of Klarna loans, which depend on Klarna as originator and servicer.
Has the court decided the Pagaya v. Klarna case?
No. As of October 2026 the case is pending in the US District Court for the District of Delaware. Briefing on Klarna's partial motion to dismiss is complete and a scheduling conference has been set, but there has been no ruling on the merits.
- Pagaya Technologies Ltd. et al. v. Klarna, Inc. and Klarna Group plc — Complaint (redacted), D.I. 7 court
- Pagaya Technologies Ltd. v. Klarna, Inc., 1:26-cv-00557 (D. Del.) — docket court
- Pagaya Technologies Ltd. et al v. Klarna, Inc. et al, 1:2026cv00557 court
- Pagaya sues Klarna over alleged trade secret misappropriation news
- Pagaya accuses Klarna of stealing subprime lending model news
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