Marathon Digital fined $138 Million for Breaching an Agreement with Cryptocurrency Investor

Legal disputes are on the rise in the fast-paced world of digital asset management and cryptocurrency. For instance, Michael Ho, one of the founders of the cryptocurrency entity U.S. Bitcoin Corp. and a senior executive of Hut 8, a crypto mining company, filed and prevailed in his federal breach-of-contract lawsuit against publicly traded Marathon Digital Holdings, a prominent cryptocurrency mining company based in Las Vegas, Nevada.

The case, Michael Ho v. Marathon Patent Group Inc. et al., 5:21-cv-339-PSG-SP (C.D. Cal. Jun. 23, 2021), was heard by Judge Philip S. Gutierrez in the U.S. District Court for the Central District of California after first being filed in state court in January of 2021. The litigation addresses accusations of financial misconduct, breach of fiduciary duty, mismanagement, and breach of restrictive covenants. It has garnered substantial national attention due to the potential impact it could have on the cryptocurrency industry in general, including investor behavior, financial management, and regulatory activity.

Pursuant to Michael Ho’s complaint, Marathon Digital mishandled certain financial transactions, breaching its fiduciary duty to Ho by prioritizing its own goals and interests over those of Ho’s and other interested stakeholders and stockholders.

Specifically, Ho alleged that Marathon (i) materially misrepresented its operational capabilities and financial status to induce Ho to conduct business with it, and (ii) violated the terms of an agreement it entered into with Ho by failing to honor certain contractual obligations, including violating both a non-disclosure and non-circumvention agreement. A non-circumvention agreement is a legally binding restraint on trade that prevents the bound party from going directly to the non-bound party’s client(s) or supplier(s) and contracting with them directly for the subject goods or services. This type of arrangement is commonly included in commercial transactions of all kinds, including sales, joint ventures, and partnerships, to protect the non-bound party’s business.

Ho, who has been very actively involved in the cryptocurrency business since 2014, discovered in 2020 that Beowulf Electricity & Data, a Montana based energy producer with whom it had conducted business, maintained unexploited energy sources that were more than sufficient for Bitcoin mining. Ho communicated this discovery to the then-CEO of Marathon Digital, Merrick Okamoto, subject to Marathon’s agreement to (i) compensate Ho for any ensuing deals entered into between the parties for this power; and (ii) be bound by appropriate restrictive covenants.

Ho then successfully negotiated, on Marathon’s behalf, a profitable arrangement for Marathon to acquire power directly from Beowulf to operate Marathon’s Bitcoin mining centers. The deal included appropriate non-disclosure and non-circumvention agreements, effectively prohibiting Marathon from circumventing Ho and dealing directly with Beowulf for power. Marathon breached this agreement, however, and with the help of several of its own consultants, cut Ho out of the deal and negotiated directly with Beowulf. Marathon’s consultants were generously compensated for their efforts with approximately three million shares of the company’s stock as a commission which, according to Michael Ho’s attorneys, were worth approximately $138 million dollars. Ho’s counsel provided the court with ample evidence (including internal communications, financial documents, and expert witness testimonies, among other things) to substantiate Ho’s allegations in sufficient detail for the jury.

Not surprisingly, Marathon denied all wrongdoing in a December 2021 summary judgement motion, claiming that all of its actions were legally compliant in all respects, and further arguing that any losses which Ho incurred were assumed by Ho as part of the inherent risk that is so clearly associated with making cryptocurrency investments in general. Marathon Digital also claimed that it never entered into a binding agreement with Ho in the first instance, and even if the court found that one existed, the non-circumvention language should nevertheless be considered non-binding as anti-competitive, and therefore, an invalid restraint on free trade in violation of public policy and applicable antitrust law (such as the Sherman Act or Clayton Act).

The Honorable Philip S. Gutierrez, however, gutted the bulk of Marathon’s legal defenses in a February 2022 order, despite not requiring that Ho be further compensated (as Ho had requested) for the services that Ho provided to Marathon prior to the parties’ execution of the non-disclosure and non-circumvention agreements. The Judge also tossed out Ho’s claims pertaining to negligent and intentional interference with Ho’s financial relationship with Beowulf in general.

Marathon’s attorneys failed to convince the jury that their client did not violate valid and enforceable restrictive covenants that ultimately cost Ho a significant amount of money. The agreed-upon restrictions served the valid business purpose of protecting Ho from being circumvented and were reasonable in scope to defend their enforceability. After a two-week trial, the California federal jury unanimously found Marathon liable to Ho for approximately $138 in damages. Pursuant to David W. Affeld, one of Michael Ho’s attorneys, "the unanimous jury verdict for $138 million vindicates Michael Ho's efforts and expertise, and it reinforces the importance of honoring contractual obligations and respecting professional relationships.”

Michael Ho was represented by David W. Affeld and Edward E. Johnson of the Los Angeles-based law firm Affeld England & Johnson LLP, and Gregg D. Zucker of Foundation Law Group, also based in Los Angeles. Marathon Digital’s attorneys, Jonathan D. Polkes and Arianna Scavetti of the New York-based firm Weil Gotshal & Manges LLP, have indicated their intent to appeal the decision.

Michael Ho’s successful litigation against Marathon Digital will likely influence regulatory practices and investment activities in the cryptocurrency sector in the years to come. This particular case demonstrates the importance of maintaining comprehensive and legally compliant business and financial practices, including strict accountability to investors and business partners. It also serves as a precautionary tale to those cryptocurrency investors who fail to engage in a thorough due diligence process prior to investing in or otherwise managing cryptocurrency-related products or entities. In any event, the case will most likely trigger enhanced regulatory scrutiny of financial practices within the cryptocurrency business, as the industry has been confronted with immense criticism for its decentralized nature and poor regulatory oversight in general.

Valued at approximately 7 billion U.S. dollars, Marathon Digital is still the biggest Bitcoin mining firm in the world based on market capitalization.