The Marathon decision – is it right that employees can unlawfully remove confidential documents and not pay damages?

The High Court has recently considered the approach to assessing "licence fee damages" in a claim against two former employees of Marathon Asset Management, James Seddon and Luke Bridgeman, who breached their duties of confidence by unlawfully removing approximately 40,000 documents when they resigned to set up a competing business: Marathon Asset Management LLP and another v Seddon and another [2017] EWHC 300 (Comm).

This decision is part of a suite of related claims against Jeremy Hosking (one of Marathon's founding partners), Mr Seddon and Mr Bridgeman in which a series of serious breaches of duty has been established and collectively resulted in the payment of significant amounts to Marathon (see also Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch)).

Although the defendants to the present claim had breached their duties of confidence, and lied about doing so, the High Court held that Marathon should only be entitled to nominal damages.

Marathon does however have the comfort of knowing that the conduct of its past employees (and present competitors) will now be the subject of intense scrutiny by their regulators and investors.

Nevertheless, the judgment not only challenges established legal principles, it also causes serious practical concerns for asset managers and other businesses. Peter Frost, partner, Chris Bushell, partner, and Gary Horlock, associate, consider the decision further below.

The breaches

The judge found that Mr Bridgeman indiscriminately copied and removed a prodigious amount of information in relation to Marathon's clients, investment portfolios and operational procedures that he thought might be useful to him and the proposed competing business. Mr Bridgeman initially denied that he had removed the documents and only admitted that he had done so after having been served with legal proceedings and confronted with incontrovertible forensic IT evidence. The judge found that Mr Bridgeman had breached his duties of confidence to Marathon by copying the documents, accessing some of them, and retaining them until they were returned in 2013.

Mr Seddon assisted Mr Bridgeman by copying certain documents to a shared drive so that Mr Bridgeman could remove them. Mr Seddon refused to admit liability at any stage. However, the judge found that he had been "economical with the truth", that he had given "false" evidence, and "when later confronted with evidence of his involvement, Mr Seddon tried to brazen it out".

Clear breaches of duty and dishonest – indeed potentially criminal – behaviour were therefore established.

The approach to damages

While the documents taken by the defendants were undoubtedly very valuable, Marathon could not prove (a) that significant use was made of the documents (b) that it had suffered any financial loss purely as a result of the removal of the documents, or (c) that the defendants had made any financial gain purely as a result of the removal of the documents.

Therefore, Marathon could not claim conventional damages or an account of profits but instead claimed "licence fee damages", assessed as the reasonable fee that the defendants would have agreed to pay to relax the obligations that they breached. This was on the basis that the law should not allow a party to do something unlawfully which he could not do lawfully.

The judge held that Marathon should not be entitled to substantial damages in respect of the misappropriation and retention of its documents. The principal basis for this conclusion was that the wrong for which a remedy was sought was "limited to the copying of the files", that "the remedy awarded must respond only to that wrong", and that accordingly the defendants should only have to pay the price which they would have hypothetically negotiated to copy the relevant files, without making any subsequent use of them.

The judge emphasised what he saw as the critical importance of matching any award of licence fee damages to the wrong for which they represent redress, which he said was confirmed by the Court of Appeal in Eaton Mansions (Westminster) Ltd v Stinger Compania de Inversion SA [2013] EWCA Civ 1308. In that case it was held that licence fee damages for trespass (by a tenant in placing air conditioning equipment on a roof) should be assessed on the basis of the actual period of the trespass, regardless of the defendant's intention when the trespass commenced that the installation would be permanent.

The judge noted that the more recent decision in CF Partners (UK) LLP v Barclays Bank plc [2014] EWHC 3049 (Ch) was consistent with Marathon's case. In CF Partners the court awarded licence fee damages for misuse of confidential information by reference to the price that would reasonably have been paid "to enable the exploitation of the opportunity free of restrictions and with an open mind (and some uncertainty) as to where that might lead". However, the judge considered that to be an incorrect approach which was contrary to principle and to the decision of the Court of Appeal in Eaton Mansions (which was handed down after the close of argument in CF Partners and therefore was not cited to the court).

The judge proposed the following framework for assessing damages for misuse of confidential information:

  • The first question is whether there is an alternative lawful means by which the defendant could have obtained the information. If so, the benefit can be valued on the basis of the market price.
  • If there is no alternative lawful means of obtaining the information, then the second question is whether it is reasonable to expect that the claimant would have granted the defendant a licence to use the information in return for a fee. If so, the benefit can be valued by estimating the licence fee that would reasonably have been charged.
  • If it is not reasonable to expect that the claimant would have granted a licence, then the appropriate method of valuation is to assess the amount of profit made by the defendant which is attributable to the wrongful use of the claimant's property.

The upshot, on this approach, is that if there was no available market for the information, the claimant would not have granted the defendant a licence to use the information, and the defendant did not actually profit from it, the claimant will be left without a remedy.

Comment

With respect to the learned judge, we consider that this approach has the potential to give rise to significant unfairness, and that the alternative approach supported by various decisions and dicta to the contrary are to be preferred: see in particular CF Partners (referred to above); Primary Group (UK) Ltd v Royal Bank of Scotland plc [2014] EWHC 1082 (Ch); and Lewison LJ in Force India Formula One Team Ltd v Aerolab SRL [2013] EWCA Civ 780.

The law generally adopts the position that a person who detains property belonging to another with the intention of making use of it must pay the equivalent of the reasonable price of hire. This has been the position for well over a century: see for example Watson, Laidlaw & Co. (1914) 31 RPC 104. This makes good sense. It reflects the principle that one should not be better off by stealing something than one would have been by acting honestly and paying for it. Whether or not the victim would have used the property ought to be immaterial. As should whether the wrongdoer has in fact been able to make profitable use of what was taken. If an honest man hires goods, rather than stealing them, he cannot thereafter ask for a refund on the grounds that he did not use the goods as much (or as profitably) as he had expected. The wrongdoer should be in no better position.

The judge rejected the analogy with the conversion of goods because, he said, where an employee copies electronic data, the employer is not deprived of anything; its ability to use the information is unimpaired. It is only if and when the employee makes use of the information that there may be a financial impact on either or both parties.

In our view, however, the position in relation to information should be no different from the position in respect of physical goods. In the 21st Century, information is at least as important an asset as physical goods and it deserves the same level of legal protection. Indeed, the value of goods will often be a function of the information that is incorporated in them (such as a book or a USB).

In many cases, information has a market value. The judge accepted that, where it does, someone who steals the information must pay its market value regardless of whether he uses it, just as when a person steals goods. It is difficult to see why there should be a different result if the information has no market value, perhaps because the information is unique or because it is so valuable that its owner would never be prepared to offer it for sale. In those circumstances, on the judge's approach, the owner will only be entitled to damages if the employee has actually profited from the use of the information. 

As noted above, the principal ground of the decision was that the hypothetical “licence fee” should encompass only copying the documents, and not the value of having them available for use. We would respectfully suggest that this is wrong. The claim made by the owner of the documents is that the defendants have taken the documents in order to use them and have acquired for themselves the ability to use the documents at their leisure and election. This is precisely the same as any case in which goods are taken. It is not clear why unfettered access to the documents (which was the purpose of their theft) is not something that the wrongdoer should pay for, just because as things turned out it did not make use of them.

Worse still, even if the defendant uses the documents, the owner might have no claim unless it can show that it has suffered a loss from the use or that the defendant has made a profit from it.

In our view, the preferable approach, both in terms of legal principle and in terms of fairness, is what had previously been thought to be the default rule in “licence fee cases”: namely, that the licence fee is quantified as the hypothetical reasonable fee payable to be released from the relevant obligation determined as at the date of breach, and regardless of what benefit or harm was suffered thereafter.

Implications

In some cases an employer will be able to nip the wrongdoing in the bud if it discovers it quickly enough. But if (as here) the defendants act surreptitiously, and if the Marathon decision is right, then the employer's ability to recover damages will be entirely dependent on its ability to prove that it has suffered an identifiable loss or that the wrongdoer has made some identifiable profit. This will often be very difficult, if not impossible.

It means that when an employer finds that confidential information has been stolen, it will rarely be in a position to assess whether or not it might have a financial remedy. Whether or not such a remedy exists will depend upon whether the employer can show that (a) the information has been used and (b) that the use has caused loss to the employer or a profit to the defendant. That is unsatisfactory. It will also reward a wrongdoer who is able to conceal the use made of information – such as by destroying the computer on which the documents have been accessed.  

The decision casts doubt on the general extent of the availability of licence fee damages, a remedy which has gained traction recently, including in the Court of Appeal in One Step (Support) Ltd v Morris-Garner [2017] QB 1, but for which the learned judge showed some distaste.

This decision is however unlikely to be the last word on the matter. The Supreme Court will examine aspects of the licence fee damages remedy when it considers an appeal from the Court of Appeal's decision in One Step. It will be interesting to see whether the Supreme Court's decision will reinvigorate the remedy in circumstances such as those in Marathon's case.

Note: Herbert Smith Freehills acted for Marathon in this matter and related proceedings.

Peter Frost
Peter Frost
Partner
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+44 20 7466 2325
Chris Bushell
Chris Bushell
Partner
Email | Profile
+44 20 7466 2187
Gary Horlock
Gary Horlock
Associate
Email
+44 20 7466 2917

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