Georgia Court of Appeals Holds that Competitor’s Financial Records are Discoverable in Dispute Between Former Partners

Posted by Neal F. Weinrich on

In McMillian v. McMillian, — S.E.2d –, 2011 WL 2685722 (Ga. App. July 12, 2011), the Georgia Court of Appeals held that where one partner is claiming another partner misappropriated business opportunities belonging to the partnership, the remaining partner is entitled to discovery regarding the financial records of his or her former partner’s new competitive business for purposes of investigating his or her damages.

Bruce and Robbie McMillian were partners in a bulk-mail services business called Corporate Mail Management.  In late 2002, Robbie informed Bruce that he intended to withdraw from their partnership.  Robbie did not tell Bruce that he had been having discussions about starting a new company with others who were interested in entering the bulk-mail services business.  Robbie formed Mail Source & Data, Inc. (“Mail Source”) in January of 2003.  Mail Source commenced operations almost immediately.

Bruce alleges that while Robbie appeared to be continuing to manage Corporate Mail, in fact he was working for Mail Source and diverting to Mail Source business opportunities that should have been presented to Corporate Mail.  In April of 2003, Robbie shut down Corporate Mail and took all of its assets and business opportunities with him to Mail Source.  In its first year, Mail Source earned more than $245,000.00 from customers that had previously been customers or prospective customers of Corporate Mail.  Bruce was left with the debts of Corporate Mail.

Bruce filed suit against Robbie, alleging, among other things, that Robbie breached his duties to the partnership by misappropriating business opportunities and giving them to Mail Source.  Bruce sought to recover damages for the lost profits from the prospective business opportunities that Corporate Mail had lost to Mail Source.  In discovery, Bruce sought Mail Source’s financial records and argued that they were admissible proof of its damages.  The trial court denied Bruce’s motion to compel and the Georgia Court of Appeals granted interrogatory review.

In denying Bruce’s request for the financial records of Mail Source, the trial court concluded that they are not relevant to the measure of damages because Bruce’s damages must be based on the value that a reasonable person would have assigned to the prospective business opportunity at the time of its loss.  That is, what Mail Source actually earned was irrelevant, according to the trial court.

On appeal, Bruce argued that disgorgement of profits was an appropriate remedy for a claim for breach of a fiduciary duty, and that therefore the revenues and profits of Mail Source are directly relevant to his damages.  The Georgia Court of Appeals, however, observed that the cases cited by Bruce holding that disgorgement was an appropriate remedy for breach of a fiduciary duty did not involve partnership disputes.  The Court of Appeals sidestepped whether disgorgement was an appropriate remedy and instead focused on the fact that, regardless of whether disgorgement was an appropriate remedy, if Bruce was successful, he would be able to recover his share of the lost profits that the partnership would have earned from the wrongfully misappropriated prospective business opportunity.  Taking this a step further, given that lost profits was a proper remedy of damages for Bruce’s claim, the Court of Appeals found that while the revenues and profits earned by Mail Source from Corporate Mail business opportunities would not necessarily be dispositive of Bruce’s recoverable damages, that does not mean that they are irrelevant and not discoverable.  That is, the revenue and profits earned by Mail Source were at a minimum probative of the lost revenue and profit of Corporate Mail, particularly if there is evidence that the two companies have similar pricing structures and costs.

Given the liberal standard for the scope of discovery, the Court of Appeals therefore found that Bruce could have discovery regarding the finances of Mail Source.  In making this ruling, the Court of Appeals appears to have rejected arguments that the speculative nature of a lost profits claim should preclude the discovery, noting that difficulty in precisely calculating the lost damages sustained will not preclude the recovery, particularly when it is the conduct of the wrongdoer that prevents a more precise calculation.

While McMillian involves a claim for misappropriation of partnership opportunities, the case may still provide useful guidance as to how trial courts should rule in competition-related cases involving other claims where a party is seeking discovery regarding a competitor’s finances and business activities.