The opinion of the court was delivered by: James C. Francis IV United States Magistrate Judge
This action stems from a dispute surrounding the management of a family-run bread-making business and retail store. The plaintiff, Stanley I. Orwasher, is a minority shareholder of the business, A. Orwasher, Inc. (the "Company"). (Verified Complaint and Jury Demand ("Compl."), ¶ 1). According to the plaintiff, his brother, Abram Orwasher, owns a majority of the shares and is also the company's sole officer and director. (Compl., ¶ 1). Stanley brings this derivative suit against the Company, Abram, and Orwasher's Fine Foods, a business that he claims Abram controls. He alleges that he, on behalf of the corporation, is entitled to recover damages as a result of Abram's "self-dealing, breach of fiduciary duty, fraud, looting, and excessive compensation." (Compl., ¶ 1).
Central to the plaintiff's allegations is Abram's handling of the sale of most of the Company's assets to another entity, Oven Artisans, Inc., in October of 2007. Stanley accuses Abram and the Company of denying him access to corporate records relating to the sale, and he deems certain aspects of the sale "suspicious," "careless," and "costly." (Compl., ¶¶ 8-11, 38-51). The plaintiff also contends that Abram has only distributed one-third of the proceeds from the sale to the shareholders, even though he was told that the deal was "all cash." (Compl., ¶ 46).
On December 21, 2009, I entered a Protective Order, allowing the parties to designate certain documents produced during discovery as "confidential" or "highly confidential." (Order for the Production and Exchange of Confidential Information dated Dec. 21, 2009 ("Protective Order")). Currently before me is a discovery dispute in which Stanley requests that the defendants be ordered to de-designate documents marked as highly confidential. He also seeks sanctions. For the reasons set forth below, the plaintiff's motion is granted in part and denied in part.
At issue are two sets of documents. The first set contains about 90 documents, "almost all of which relate to the sale of the business, such as the Asset Purchase Agreement and communications with the purchaser or the bakery's union concerning aspects of the sale, as well as tax returns." (Plaintiff's Memorandum of Law in Support of its Motion to De-Designate "Highly Confidential" Documents and for Sanctions ("Pl. Memo.") at 7). Stanley also disputes the defendants' decision to mark as highly confidential 1,503 documents that were produced in response to a subpoena served by the plaintiff on Weiss & Weiss, the Company's accountants. (Declaration of Walter A. Kretz, Jr. dated March 16, 2010 ("Kretz Decl."), ¶ 18(iii)). These documents include "corporate tax returns, accountant's work papers, financial statements, bank account statements, and information about the company's expenses or receivables." (Pl. Memo. at 9).
The Protective Order allows the parties to designate certain documents as confidential and others as highly confidential on the basis of the producing party's "good faith" belief. (Protective Order, ¶¶ 2, 5). Confidential documents are deemed to "consist of trade secrets, proprietary business, technical and financial information, data concepts and processes, as provided in [Rule] 26(c)(1)(G)" of the Federal Rules of Civil Procedure. (Protective Order, ¶ 2). The designation of highly confidential is reserved for documents that "should not or cannot be shared with one or more of the parties . . . as a result of the producing party's contractual confidentiality obligations." (Protective Order, ¶ 5). While documents falling under both categories must be kept private and only shared with people who are necessary to the litigation, documents designated as highly confidential cannot be shared with the parties themselves.*fn1 (Protective Order, ¶¶ 3, 6).
The Protective Order provides that if a party objects to the designation of a document, "[t]he Designating Person has the burden of showing by a preponderance of the evidence that there is good cause for the documents or other material to have such designated protection." (Protective Order, ¶ 8). It also allows either party to challenge a designation by motion. (Protective Order, ¶ 28).
B. Documents Concerning the Sale of the Company
The defendants offer a number of reasons to support the decision to designate documents regarding the sale of the Company as highly confidential. Most of these reasons fall far from providing the good cause necessary to justify their designation. For instance, the defendants contest the merit of the plaintiff's claims (Kretz Decl., ¶¶ 3-4, 22), but this is not the proper motion for doing so. They also insist that Stanley's "extreme hostility" toward them creates "a clear risk of abuse of any produced information," and they are concerned that if he receives the documents, the plaintiff will "generat[e] embarrassing publicity" as he apparently has in the past. (Kretz Decl., ¶ 8(ii)-(iii)). However, the defendants may not choose to prevent Stanley from viewing these documents simply on an assumption that he will violate the Protective Order. And, most oddly, the defendants argue that the plaintiff has no right to see the documents in dispute because, as a podiatrist, Stanley "knows next to nothing about the internal operations of a business," making it "extremely unlikely he would have any meaningful comprehension of the detailed information provided" in the documents. (Kretz Decl., ¶¶ 8(v), 22).
The only colorable justification put forth by the defendants is that one of the documents at issue, the Asset Purchase Agreement that memorialized the sale of the Company to Oven Artisans, contains a confidentiality clause that reads,
(a) Seller shall keep confidential and shall cause its officers and directors, to keep confidential all information relating to (i) the Business, including, without limitation, all recipes and formulas, (ii) the conduct of the Business prior to Closing, and (iii) any business plans relating to the Business, and (b) Buyer and Seller agree to keep this Agreement and the Ancillary Agreements confidential . . . , except for disclosure to their professional advisors and lenders, or in connection with any action or proceeding to enforce its rights under this Agreement or the Ancillary Agreements. (Asset Purchase Agreement, attached as Exh. M to Declaration of Jeffrey Gross dated March 3, 2010, § 7.07). In light of this provision, a designation of the documents relating to the sale as confidential, rather than highly confidential, is appropriate.
Moreover, these documents go to the heart of the plaintiff's claims, as he has made several allegations about the circumstances surrounding the sale of the Company. The defendants contend that the Protective Order permits some discussions between Stanley and his counsel about the contents of these documents. (Kretz Decl., ¶ 26). They refer to the clause in the order that allows disclosure of documents to "witnesses . . . where such disclosure is reasonably necessary for the purposes of trial preparation, factual investigation or discovery." (Protective Order, ¶ 6(d); Kretz Decl., ¶ 27). The plaintiff's counsel rightly notes that Stanley, who is not merely a witness, but who is a party to the ...