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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 it believes are governed by the settlement privilege. See Tr. of Motion Hg., Mar. 11, 2005,*fn2 at 58-63. The questions relating to the remaining WD Energy documents have been fully briefed and argued, and are ready for decision by the Court.


WD Energy offers two arguments in support of its challenge to the CFTC subpoena as to the remaining nine documents. First, it contends that principles of collateral estoppel require the Court to give binding effect to the decision of Magistrate Judge O'Neill in the Eastern District of California litigation that a settlement privilege prevents disclosure of the documents at issue. Second, WD Energy urges this Court itself to recognize a settlement privilege. For the reasons set out below, the Court concludes that each of these arguments lacks merit.

I. Collateral Estoppel

At the outset, WD Energy contends that this Court must give preclusive effect to the January 28, 2005, decision of Magistrate Judge O'Neill recognizing a settlement privilege. The D.C. Circuit has explained that the"standards for establishing the preclusive effect of a prior holding are":

First, the same issue now being raised must have been contested by the parties and submitted for judicial determination in the prior case. Second, the issue must have been actually and necessarily determined by a court of competent jurisdiction in that prior case.... See Restatement (Second) of Judgments § 27 (1982) ("[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties"). Third, preclusion in the second case must not work a basic unfairness to the party bound by the first determination.

Yamaha Corp. of America v. United States, 961 F.2d 245, 254 (D.C. Cir. 1992).

The Court has serious doubts whether a discovery order of a Magistrate Judge -- even when, as here, no party has filed a motion to reconsider the order -- is a"final judgment" or"prior holding" for purposes of this Circuit's collateral estoppel rule. See J.P. Stripling v. Jordan Prod. Co., 234 F.3d 863, 868 (5th Cir. 2000) ("We conclude that the magistrate judge's order did not qualify as a final judgment, such that it would provide a preclusive collateral estoppel effect.... A magistrate judge's order issued under 28 U.S.C. § 636(b)(1)(A) or § 636(b)(1)(B) only becomes final once the district court makes it final."); United States v. Ward, 808 F. Supp. 803, 818 (S.D. Ga. 1992) ("[T]he case law is clear. A Magistrate Judge's order under 28 U.S.C. § 636(b)(1)(B) is not final and cannot become final merely through lack of objection. In conclusion, there can be no collateral estoppel effect to the April 3, 1992 order of the Magistrate Judge because it is not a final judgment.").*fn3

The Court need not, however, reach the question whether a Magistrate Judge order can ever be given preclusive effect, for WD Energy's collateral estoppel argument fails on a simpler ground. WD Energy is asserting estoppel against a party (the CFTC) that was not a party to the underlying litigation in the Eastern District of California and therefore never had the opportunity to be heard on the settlement privilege issue."The basic premise of preclusion is that parties to a prior action are bound and nonparties are not bound." 18A Charles Alan Wright et al., Federal Practice & Procedure § 4449 (2d ed. 2002 & Supp. 2005).*fn4 The CFTC is the recipient of the subpoena, the target of the motion to compel, the holder of the documents at issue, and one of the participants in the settlement negotiations that WD Energy argues gives rise to the privilege. The CFTC also has a significant interest in the question of whether a settlement privilege protects its documents from disclosure in civil discovery; the answer to that question will have direct implications for the efficiency and the legitimacy of its corporate investigations in the future.

Nonetheless, WD Energy asks this Court to bind the CFTC to a decision on the issue of the settlement privilege -- and therefore prevent the CFTC from disclosing documents in response to an otherwise valid subpoena -- as to which it was not a party and had no opportunity to make known its position. Specifically, the CFTC was unable to argue in the Eastern District of California that a new privilege is unsupported by the law, is unnecessary to encourage the settlement of government investigations, and is counter to important principles of open government and full access to relevant information in civil discovery -- all of which it has since argued to this Court.*fn5 WD Energy admitted at a hearing that it could not cite a case to support its assertion that the CFTC should be bound by the Eastern District of California order notwithstanding that it was a non-party to that proceeding. Tr. of Mar. 11, 2005, Mot. Hg., at 72-73. In fact, there is no basis in the law of collateral estoppel or elsewhere for this assertion. See Adams v. Bell, 711 F.2d 161, 203 (D.C. Cir. 1983) ("[N]either collateral estoppel nor comity principles bind nonparties or affect the relief available to them."); Consumers Union of the United States v. Consumer Prod. Safety Comm'n, 590 F.2d 1209, 1217 (D.C. Cir. 1978) ("Furthermore, the doctrine of collateral estoppel, which does bind parties to a previous suit to such determinations of material issues as are encompassed in the judgment, only rarely precludes nonparties from litigating the same issues afresh."), rev'd on other grounds sub nom. GTE Sylvania, Inc. v. Consumers Union of U.S., Inc., 445 U.S. 375 (1980).*fn6 Accordingly, the Court will not give preclusive effect to the decision of the Eastern District of California in this case.*fn7

II. Settlement Privilege

In the alternative, WD Energy asks this Court itself to recognize a settlement privilege under federal law that would protect the documents in this case from third-party discovery. Quoting extensively from Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976 (6th Cir. 2003), in which the Sixth Circuit recently recognized such a privilege, WD Energy argues that there"exists a strong public interest in favor of secrecy of matters discussed by parties during settlement negotiations" because the"ability to negotiate and settle a case without trial fosters a more efficient, more cost-effective, and significantly less burdened judicial system," and that"[w]ithout a privilege, parties would more often forego negotiations for the relative formality of trial." WD Energy Mem. at 15 (quoting Goodyear Tire, 332 F.3d at 983). WD Energy maintains that these policies"would be totally undermined here if WD were forced to disclose communications made to the CFTC in furtherance of settlement." Id. Both the CFTC and Gallo urge the Court to reject the application of any settlement privilege to the WD Energy documents at issue here.

The federal courts do not enjoy unbridled authority to define new privileges in discovery whenever they see fit. Federal Rule of Evidence 501 authorizes federal courts to recognize new privileges only by interpreting"the principles of the common law... in the light of reason and experience." Fed. R. Evid. 501. As the Supreme Court has noted:"When we come to examine the various claims of exemption, we start with the primary assumption that there is a general duty to give what testimony one is capable of giving, and that any exemptions which may exist are distinctly exceptional." Jaffee v. Redmond, 518 U.S. 1, 9 (1996) (quotation omitted). Hence, while Rule 501 directs courts to"continue the evolutionary development of testimonial privileges," id. at 9-10, the Supreme Court has"warned that testimonial privileges'are not lightly created nor expansively construed, for they are in derogation of the search for truth.'" In re Grand Jury Subpoena, 397 F.3d 964, 984 (D.C. Cir. 2005) (Henderson, J., concurring) (quoting United States v. Nixon, 418 U.S. 683, 710 (1974)); see also Univ. of Pennsylvania v. EEOC, 493 U.S. 182, 194 (1990) ("Although Rule 501 manifests a congressional desire not to freeze the law of privilege... we are disinclined to exercise this authority expansively.").*fn8

The Supreme Court has identified several factors that should be considered when assessing a proposed privilege under Rule 501. First, the Court has asked whether there exists a broad consensus in federal and state law in favor of the privilege. See Jaffee, 518 U.S. at 12 (emphasizing that"all 50 States and the District of Columbia have enacted into law some form of psychotherapist privilege"); In re Sealed Case, 148 F.3d 1073, 1077 (D.C. Cir. 1998) ("The Supreme Court has put considerable weight upon federal and state precedent when recognizing a privilege."). Second, the Court has considered whether"Congress has considered the relevant competing concerns but has not provided the privilege itself." Univ. of Pennsylvania, 493 U.S. at 194. Third, the Court has consulted the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence. See Jaffee, 518 U.S. at 14; United States v. Gillock, 445 U.S. 360, 365 (1980). Finally,"[t]he Supreme Court has instructed that a party seeking judicial recognition of a new evidentiary privilege under Rule 501 demonstrate with a high degree of clarity and certainty that the proposed privilege will effectively advance a public good." In re Sealed Case, 148 F.3d at 1076.

WD Energy has not come forward with a persuasive case for a federal settlement privilege under any of these factors. See Alexander v. Fed. Bureau of Investigation, 186 F.R.D. 154, 167 (D.D.C. 1999) ("The party claiming privilege has the burden to establish its existence." (quotation omitted)). WD Energy is unable to demonstrate a broad consensus in federal court in support of such a privilege. A few federal cases have recognized a settlement privilege. On the other hand,*fn9 at least two federal cases have not recognized a privilege as such, but have instead required a heightened showing of need for settlement documents on public policy grounds,*fn10 and a substantial number of cases have rejected such a privilege.*fn11 The cases rejecting a privilege include at least two decisions in this Court that have found no settlement privilege for purposes of Exemption 5 of FOIA (which protects from disclosure certain documents that"would not be available by law to a party other than an agency in litigation with the agency"),*fn12 and one case in this Court decided just before the Federal Rules of Evidence became effective that did not find a settlement privilege in the common law as it stood at that point.*fn13 Whatever else might be said about this legal landscape, it does not reflect a consensus of support for a settlement privilege in federal court.*fn14

Nor can such a consensus be found in state law. See The New York Times Co. v. Gonzales, 2005 WL 427911, at *34 (S.D.N.Y.) ("[T]he absence of unanimity among the federal courts as to a particular privilege under Rule 501 does not preclude recognition of the privilege in question where the states have uniformly recognized that privilege."). WD Energy does not even attempt to show that there is support in state law for a settlement privilege.*fn15 A review of the law reveals that several states have expressly declined to recognize a settlement privilege.*fn16 The Court is unaware of any cases that recognize such a privilege, and it seems evident, at the very least, that plaintiffs have not made a showing that there exists a foundation in state law for the new federal privilege they would have the Court create. Compare Jaffee, 518 U.S. at 12 (recognizing a federal psychotherapist privilege where"all 50 States and the District of Columbia have enacted into law some form" of the privilege), with Trammell v. United States, 445 U.S. 40, 50 (1980) (declining to recognize a federal privilege against adverse spousal testimony where only 24 states allowed an accused to prevent adverse spousal testimony).

Turning to the question of whether Congress considered the relevant issues and declined to create a privilege itself, Federal Rule of Evidence 408 is instructive. The Rule provides:

Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.

Fed. R. Evid. 408. Congress clearly enacted this Rule to promote the settlement of disputes*fn17 outside the judicial process. See In re Initial Pub. Offering Sec. Litig., 2004 WL 60290, at *4 (S.D.N.Y.) ("Congress was mindful" of the strong public policy in favor of settlement when it enacted Rule 408); Fed. R. Evid. 408 adv. comm. note ("The purpose of this rule is to encourage settlements which would be discouraged if such evidence were admissible."); H.R. Rep. 93-650, available at 1974 U.S.C.C.A.N. 7075, 7081 (explaining that draft of Rule 408 advances goal of"promoting non-judicial settlement of disputes").

However, it is equally plain that Congress chose to promote this goal through limits on the admissibility of settlement material rather than limits on their discoverability. See NAACP, 612 F. Supp. at 1146 ("Although the intent of FRE 408 is to foster settlement negotiations, the sole means used to effectuate that end is a limitation on the admission of evidence produced during settlement negotiations for the purpose of proving liability at trial."); Ctr. for Auto Safety, 576 F. Supp. at 753 (Rule 408"limits a document's relevance at trial, not its disclosure for other purposes."). In fact, the Rule on its face contemplates that settlement documents may be used for several purposes at trial, making it unlikely that Congress anticipated that discovery into such documents would be impermissible. As a leading treatise on evidence has explained:

The policy of allowing open and free negotiations between parties by excluding conduct or statements made during the course of these discussions is not intended to conflict with the liberal rules of discovery embodied in the Federal Rules of Civil Procedure.... Therefore, a party is not allowed to use Rule 408 as a screen for curtailing his adversary's right of discovery. 2 Weinstein's Federal Evidence § 408.07 at 408-26 (2005). It is not for this Court to rewrite Rule 408 to craft a broader remedy for the precise problem that Congress was attempting to address. See Folb v. Motion Picture Indus. Pension & Health Plans, 16 F. Supp. 2d 1164, 1179 (C.D. Cal. 1998) (declining to recognize a settlement privilege because"only Congress is authorized to amend the scope of protection afforded by Rule 408").

The final two considerations highlighted by the Supreme Court also weigh against constructing a new settlement privilege under federal law. The privilege was not listed among the nine privileges identified in the Proposed Federal Rules of Evidence drafted by the Advisory Commitee of the Judicial Conference, and transmitted by the Supreme Court to Congress in 1972. See Proposed Rules of Evidence, 56 F.R.D. 183,*fn18 234-58 (1972) (recognizing privileges for reports required by law, the attorney client privilege, the psychotherapist-patient privilege, the husband-wife privilege, communications to clergymen, political votes, trade secrets, secrets of state, and informer identity); compare Gillock, 445 U.S. at 365 ("Neither the Advisory Committee, the Judicial Conference, nor this Court saw fit, however, to provide the privilege sought by Gillock."), with Jaffee, 518 U.S. at 14 ("The uniform judgment of the States is reinforced by the fact that a psychotherapist privilege was among the nine specific privileges recommended by the Advisory Committee in its proposed privilege rules.").

Nor can it be said that WD Energy has established"with a high degree of clarity and certainty that the proposed privilege will effectively advance a public good." In re Sealed Case, 148 F.3d at 1076. As the D.C. Circuit recently explained in rejecting a proposed privilege for information obtained by Secret Service personnel while protecting the President:

Even in cases where the proposed privilege is designed in part to protect constitutional rights, the Supreme Court has demanded that the proponent come forward with a compelling empirical case for the necessity of the privilege.... Here, the arguments of the Secret Service, apart from the universally shared understanding that the nation has a profound interest in the security of the President, are based in large part on speculation--thoughtful speculation, but speculation nonetheless. In re Sealed Case, 148 F.3d at 1075. To be sure, WD Energy makes a forceful rhetorical argument that a settlement privilege is necessary to preserve the strong public interest in the settlement of disputes, but a compelling argument has been made for the contrary position as well. See, e.g., Bennett, 112 F.R.D. at 139 ("To suggest, as do these plaintiffs, that the prospect of revealing settlement terms to a narrowly limited audience (non-settling co-defendants and those in privity with them) might impede out of court dispositions seems wrongheaded, given that the alternative to settlement would be a double whammy: the loss of the benefit of the bargain and the more public airing occasioned by a fullblown trial.").

The Court declines to tinker so fundamentally with the rules of litigation based on little more than WD Energy's assertion that it will benefit the public. See Gillock, 445 U.S. at 375 (rejecting as"speculative" policy arguments in favor of proposed state legislative privilege); Branzburg v. Hayes, 408 U.S. 665, 693-94 & n.32 (1972) (rejecting proposed reporters' privilege because"[e]stimates of the inhibiting effect of [grand jury] subpoenas on the willingness of informants to make disclosures to newsmen are widely divergent and to a great extent speculative"). Even if the Court would consider accepting this sort of speculative appeal in some other circumstances, it is particularly inappropriate here, where even the CFTC does not believe a privilege is necessary to encourage settlement, there is a decided absence of consensus among federal and state courts on the issue, several entities carefully considered the issue of encouraging settlements and arrived at a more measured legislative response in Rule 408, and the result will have implications not only for the course of litigation but also for the openness and effectiveness of government investigations. Accordingly, the Court declines plaintiffs' invitation to recognize a federal settlement privilege, and will order the CFTC to produce the WD Energy documents at issue to Gallo.*fn19


For the reasons stated above, the Court will grant Gallo's motion to compel as to the WD Energy documents held by the CFTC for which WD Energy has asserted a settlement privilege. A separate order will issue herewith.

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