Now that the dust has settled on the Marathon Asset Management LLP (“Marathon”) litigation, which was so long running Pheidippides himself would have been proud, this blog reflects on the lessons for professional and financial services partnerships. Aside from the satisfying nominative determinism, the Marathon cases provide important insights and practical lessons in a number of areas – partnerships, team moves, the protection of confidential information and fiduciary duties.
Marathon, an investment management business, was founded by three partners: Ostrer, Arah and Hosking. Over time the business developed into two main strands of fund management, roughly delineated by geographical scope. One was headed by Ostrer and Arah and the other by Hosking. However, there was little interaction or working relationship between the two teams.
The relationship between Hosking and his partners descended into acrimony resulting in arbitral and high court proceedings to deal with the fallout from Hosking and members of his team moving on to set up a competing firm.
Breach of fiduciary duties and forfeiture of partnership profits - Hosking v Marathon
This was an appeal to the High Court following an arbitration in which it was held that Hosking had breached contractual and fiduciary duties to the LLP shortly before his retirement.
He did so by discussing his new business venture with four employees of Marathon and developing a business plan for a competing asset management business when still a full member of the LLP. In addition to compensation of £1.4 million in respect of Marathon’s lost chance of keeping three of Hosking’s team resulting from his actions, it was held that Hosking should forfeit 50% of his profit share for the relevant period – around £10.4 million. His appeal with respect to that award was dismissed.
The case turned on the provisions of the LLP agreement on profit share and the retirement of founding partners from the firm. Under the agreement all founder members were entitled to an equal share of the profits of the firm whilst they continued working for the firm as “Executive Members”. On their departure (retirement) from the business, their entitlement as “Non-Executive Members” was to receive half the profit share of the remaining Executive Members going forward.
On this basis, the arbitrator at first instance distinguished between profits made by a member solely on account of their ownership interest in the LLP and profits which were effectively remuneration for the performance of their executive duties. In this case, it was relatively straightforward to distinguish between these two elements, although the Court recognized that would not always be the case.
The novel finding in this case is that, if a partner’s share of partnership profits can be properly defined as remuneration for the provision of their services to the firm, then it is liable to be forfeited if there is a relevant breach of duty. (The principle of forfeiture had typically applied previously in the context of the remuneration of agents, not in LLP and partnership cases). Furthermore, forfeiture is possible even if there is no provision for it in the LLP agreement, so amendments to existing agreements are not necessary for partnerships to rely on this remedy.
An unintended result of this case may be that in professional services firms, fixed share or junior equity partners may be at greater risk of forfeiture than senior or full equity partners. There may be greater scope to characterise their profit share rights as connected to the provision of their services to the firm, by contrast with senior or full equity partners whose profit share rights typically bear a closer relationship to overall annual profitability, and whose investment and ownership interest in the firm is also greater.
In the financial services sector, the extension of forfeiture to the profit shares of LLP members is consistent with the general direction of travel of recent years, as bonus schemes have incorporated clawback provisions in compliance with regulatory obligations.
This case therefore emphasises the need for caution when partners are planning to enter into competition with their current firm and want to take their team with them. Whilst the Court noted that the principle of forfeiture can be excluded by contract, most firms will not want to deprive themselves of the right to claim forfeiture of profits from their partners in appropriate cases of breach of duty. On the other hand, individual partners may find that prospect more appealing.
Damages for misappropriation of confidential information - Marathon v Seddon & Bridgeman
This case concerned the misappropriation of confidential information by Seddon and Bridgeman when they left Marathon to join Hosking at his new investment firm. Before their departure they downloaded a very significant volume of confidential and commercially sensitive documents and emails from the firm’s servers in breach of their duties of confidence and fidelity.
Seddon made no use of the downloaded documents. Bridgeman used some of them to a very limited extent (e.g. he used the compliance manual to cross-check a new one purchased elsewhere), but most he did not even open. On that basis, the misappropriation of the files resulted in no financial loss for Marathon, but also no financial gain for the two defendants.
However, Marathon did not pursue a remedy based on the use actually made of the documents and any consequent loss or gain, but rather sought what the judge described as “jackpot” damages. Its claim was that Seddon and Bridgeman should be ordered to pay a sum equivalent to the value of the files taken, which Marathon claimed was £15 million. This argument found very little favour with the Court, which noted that Marathon’s arguments were predominantly based on hypothetical scenarios of what use could be made of the documents, rather than what actually happened, i.e. very little. Consequently the Court decided that Marathon was entitled only to nominal damages of £2.
Whilst it should be seen in the context of the broader litigation surrounding the departure of Hosking followed by members of his team to their new firm (not all aspects of which have been covered in this blog), this decision was therefore a pyrrhic victory for Marathon. It highlights the importance of picking your battles carefully.