The EV start-up Lordstown Motors Corporation filed for Chapter 11 bankruptcy protection in Delaware federal court on June 27, 2023.
As part of its bankruptcy filing, Lordstown sued its strategic partner, Taiwan’s Foxconn, for allegedly setting in motion the circumstances that drove Lordstown into bankruptcy. Lordstown’s lawsuit teaches valuable lessons.
First, some background. Lordstown was formed in 2018 to develop the Endurance – a battery electric pickup truck for the North American commercial fleet market. Lordstown then acquired the shuttered General Motors assembly plant in Lordstown, Ohio. After its founder and CEO resigned amid controversy, Lordstown partnered with Foxconn, the contract manufacturer best known for assembling the iPhone, to bring the Endurance to market.
According to Lordstown’s adversary complaint, Lordstown and Foxconn entered into an agreement in 2021 to form a “deep partnership” and work jointly on electric vehicle programs. As part of their agreement, Lordstown sold its Ohio assembly plant to Foxconn at a fraction of its replacement cost, the complaint alleges. The parties’ agreement contemplated the formation of a joint venture under which, according to the complaint, Foxconn would fund the development of future vehicle programs and proprietary software. As part of the JV, many of Lordstown’s manufacturing and operational employees at the plant became employees of Foxconn. Under a separate manufacturing agreement, Lordstown outsourced to Foxconn all the manufacturing of Endurance, including the component purchasing function. Lordstown also alleged that Foxconn was to share the designs of two new electric vehicles, the “Model C” crossover and “Model E” sedan, that Foxconn had developed independently. Lordstown claims that it “devoted enormous resources towards making Foxconn’s EV ambitions a reality.”
Unfortunately, says Lordstown, things didn’t go as planned. Lordstown alleged that Foxconn “stonewalled” the JV and never shared its designs for the Model C or Model E. Instead, Foxconn announced that it would be manufacturing vehicles for other OEMs, including PEAR, INDIEV, and Monarch, at the Lordstown, Ohio plant. As a result, Lordstown claimed that Foxconn deprived it of necessary capital and business opportunities.
In an attempt to resolve their differences, the parties pivoted from the JV agreement to a new investment agreement. Under the investment agreement, Foxconn and SoftBank, a multi-national technology investor, would purchase common and preferred stock of Lordstown for $170 million and possibly take Lordstown private to develop a new electric vehicle platform favored by SoftBank. The stock purchase never came to fruition because, Lordstown alleges, Foxconn failed to use necessary efforts to agree upon a budget or critical milestones. Foxconn, in turn, sought to terminate the investment agreement when Lordstown’s share price fell below minimum thresholds.
Consequently, Lordstown accused Foxconn of maliciously destroying its business, stripping its assets, and poaching its talent. In its adversary complaint against Foxconn and its affiliates, Lordstown asserted claims for fraud, breach of contract, and tortious interference. As the litigation plays out in bankruptcy court, automakers and suppliers alike can heed three important lessons:
- Don’t leave anything to negotiate. Many of Lordstown’s grievances arose from Foxconn’s alleged failure to use commercially reasonable efforts to negotiate in good faith or use good faith efforts to agree on milestones. Leaving a contracting party to exercise good faith invites disputes. Contracts should spell out each party’s obligations in detail and set forth clear deadlines, leaving as little as possible to future negotiation or undefined good faith efforts.
- Protect your talent. Use employment agreements with appropriate nondisclosure, nonsolicit, and noncompete covenants. Such covenants should be reasonable in scope and duration and limited to protect the employer’s legitimate business interests. To the extent necessary, loan or lease employees to partners and JVs rather than transfer employment.
- Define expectations. Make sure all expectations and commitments are clearly defined in your agreements. Use clear and definite terms (specific dates, deadlines, amounts, etc.) to set expectations. Also use appropriate disclaimers to limit expectations and commitments. Early discussion and negotiation to align expectations can help avoid future disputes.
