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In re Subpoena Issued to Commodity Futures Trading Commission

April 28, 2005


The opinion of the court was delivered by: John D. Bates United States District Judge


WD Energy Services ("WD Energy") is one of many energy companies that came under investigation by the Commodity Futures Trading Commission ("CFTC") several years ago for their natural gas trading activities. In 2003, E. & J. Gallo Winery ("Gallo") brought an action in the United States District Court for the Eastern District of California against WD Energy over its alleged manipulation of energy prices. Gallo subsequently served the CFTC with a subpoena seeking documents that the CFTC had collected from WD Energy and several other energy companies in the course of its investigations. WD Energy and the other energy companies then commenced this action to contest the subpoena, and Gallo has responded with a motion to compel.

In this Memorandum Opinion, the Court addresses the only issues that remain with regard to CFTC documents collected from WD Energy: first, should this Court give preclusive effect to a Magistrate Judge's decision in the underlying Eastern District of California litigation ruling that the same documents in the possession of WD Energy were protected from disclosure by a federal settlement privilege; and second, should this Court itself recognize a settlement privilege under federal law that would protect these documents from disclosure. Because the Court answers both of these questions in the negative, it grants Gallo's motion to compel with regard to the documents as to which WD Energy has challenged production on the basis of a putative settlement privilege.


This action arises out of a federal investigation into alleged market manipulation of the energy industry. In June 2002, the CFTC informed WD Energy that it was part of the investigation, and requested information relating to its energy trading activities. In the course of the investigation, WD Energy provided the CFTC with requested records that existed prior to the commencement of the CFTC inquiry, as well as new records that it created as the investigation progressed to address concerns raised by the CFTC in the course of its investigation. Decl. of Douglas John, Feb. 25, 2005, ¶¶ 3-5. The CFTC investigation of WD Energy was resolved on July 28, 2003, when the CFTC and WD Energy stipulated to an order in which WD Energy did not admit any wrongdoing but agreed to pay a civil penalty of $20,000,000. See In the Matter of: WD Energy Services Inc., CFTC Docket No. 03-20.

A. The Underlying Litigation

On April 9, 2003, Gallo -- a wine producer and one of the largest consumers of natural gas in the State of California -- commenced an action against Encana Energy Services, Inc. and Encana Corp. (collectively"Encana", the predecessor company to WD Energy) in the United States District Court for the Eastern District of California. The suit seeks damages for WD Energy's alleged manipulation of natural gas prices in California through sham trades, false reporting of trade data, and other claimed forms of misconduct. That action is nearing the end of discovery, with Gallo having issued several discovery requests and WD Energy having produced hundreds of thousands of pages of documents in response. However, WD Energy refused to produce several categories of documents, including all documents that it created and provided to the CFTC for the purposes of facilitating a settlement of the CFTC investigation on the theory that those documents are protected by a"settlement privilege." On January 10, 2005, Gallo filed a motion to compel production of those documents.

On January 28, 2005, Magistrate Judge Lawrence J. O'Neill of the United States District Court for the Eastern District of California issued an order holding that"[d]isclosure of the CFTC documents would likely chill settlement discussions and thwart tribunal efficiencies and public interests" and that the documents are therefore protected from disclosure by a settlement privilege. Decl. of Barbara L. Lyons, Feb. 10, 2005, Ex. D, at 7. Responding to a request for clarification, Magistrate Judge O'Neill wrote a letter on February 23, 2005, affirming that based on"WD Energy's representations that it created and provided the CFTC certain documents to reach settlement, this Court in its January 28, 2005 order recognized and applied the settlement privilege to such documents." Decl. of Eric Maier, Feb. 25, 2005, Ex. B, at 1-2. As far as this Court is aware, Gallo has never filed an objection to Magistrate Judge O'Neill's order to the District Judge presiding in that case.

B. The CFTC Subpoena and the Present Action

Meanwhile, on October 22, 2004, Gallo had issued a subpoena to the CFTC requesting all documents that the CFTC had collected from WD Energy and nine other energy companies in the course of the CFTC's energy trading investigations. The CFTC informed Gallo that the CFTC would be unable to comply with the subpoena by the November 16, 2004, deadline stated in the subpoena. Gallo and the CFTC agreed to an indefinite postponement of the subpoena. On December 2, 2005, the CFTC notified the energy companies of the subpoena. Two weeks later, on December 16, 2005, each of the energy companies filed objections to the subpoena in this Court. The energy companies contested the subpoena on several grounds, among them that the documents requested in the subpoena are protected by the investigative privilege, the federal settlement privilege and the self-critical analysis privilege, and that the subpoena seeks irrelevant and confidential or proprietary information.

The CFTC moved this Court to stay its review of the energy companies' objections until the CFTC had completed its own review of the subpoenaed documents. At a hearing on the motion to stay, Gallo agreed not to insist on production of the documents originating from seven of the ten energy companies, leaving only the documents of WD Energy, Duke Energy Corp. ("Duke Energy"), and Reliant Energy, Inc. ("Reliant Energy") at issue. The Court also set a schedule at the hearing for briefing on the objections raised by the energy companies. The schedule was somewhat more accelerated than the one requested by the CFTC in its motion to stay, and gave an opportunity to Gallo to file a formal motion to compel, the CFTC to file a position statement in response, WD Energy and the other two remaining energy companies to file a response of their own, and Gallo and the CFTC to file reply papers. Finally, the CFTC was required to begin producing documents that were not in dispute within 30 days of the order setting out the schedule.

Consistent with this schedule, on February 11, 2005, Gallo filed a motion to compel that addressed many of the objections the energy companies had identified in their initial papers. On February 18, 2005, the CFTC submitted a position statement explaining that it would not assert any governmental privileges at that time, and that it did not oppose production of the documents in its possession, but that it would defer taking a position on the question of a settlement privilege until the energy companies asserting the privilege had identified the particular documents they believed it protected. On February 25, 2005, WD Energy (on the one hand), and Duke Energy and Reliant Energy (on the other) filed papers that narrowed the grounds on which they objected to the subpoena.

WD Energy argued only that a"small group" of documents should be withheld from Gallo on the basis of the same federal settlement privilege recognized by Magistrate Judge O'Neill in the underlying litigation (although WD Energy did not at that time identify the documents it believed were covered by the privilege). WD Energy's Mem. Resp. Motion Compel at 1. Duke Energy and Reliant Energy did not claim a settlement privilege at all, arguing instead that the documents Gallo requested comprised confidential commercial information; that Gallo's subpoena was overbroad in that it sought much information that is irrelevant to Gallo's underlying litigation; and that Gallo had not shown "substantial need" for the documents under Federal Rule of Civil Procedure 45(c).

The CFTC submitted a reply brief in which it argued (among other things) that the Court need not defer to the order of Magistrate Judge O'Neill recognizing a federal settlement privilege; that the Court should not recognize such a privilege itself; and that it was not clear to the CFTC that any of the documents at issue in the subpoena would be covered by any such privilege. Mem. of CFTC in Resp. at 6. Gallo filed its own reply making similar points. On March 11, 2005, the Court held a hearing on Gallo's motion to compel. At the hearing -- and at an additional session on March 21, 2005 -- the Court decided most of the open questions relating to the documents of Duke Energy and Reliant Energy, and heard argument on the settlement privilege issues pertaining to the documents of WD Energy, deferring a final decision on those issues for a written opinion.*fn1 WD Energy came forward at the hearing for the first time with a list of the nine documents ...

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