The D.C. Circuit is expected to decide whether companies negotiating with federal regulators can keep documents private under a "settlement privilege," an issue that arose in a case stemming from California’s 2000-01 energy crisis. E.&J. Gallo Winery v. EnCana Energy, No. CV F 03-5412 (E. D. Cal. April 9, 2003). While the case was originally filed in California, plaintiff Gallo subpoenaed documents through the federal district court in Washington, D.C. In re Subpoena Issued to Commodity Futures Trading Commission, No. 1:04MC00564 (D.C. Dec. 16, 2004). The D.C. Circuit will review the lower court’s decision to issue the subpoena. In Re Subpoena Duces Tecum, Issued to Commodity Futures Trading Commission, No. 05-5168 (D.C. Cir. May 18, 2005).
On April 9, 2003, Gallo sued WD Energy (sued erroneously as "EnCana") for WD Energy’s alleged manipulation of natural energy prices in California through sham trades, false reporting of trade data, and other forms of misconduct. E.&J. Gallo Winery v. EnCana Energy, No. 03-5412 (E.D. Cal. April 9, 2003). During the discovery phase of the litigation, Gallo sought documents that the Commodity Futures Trading Commission ("CFTC") collected from WD Energy in 2002-03 while investigating its natural gas trading activities. The CFTC’s 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 penalty of $20,000,000. In the Matter of: WD Energy Services, Inc. f/k/a EnCana Energy Services, Inc. (CFTC Docket No. 03-20), Comm. Fut. L. Rep. (CCH) ¶ 29,544 (2003).
WD Energy refused to produce the documents it created and provided to the CFTC for the purposes of facilitating a settlement of the CFTC investigation on the theory that the documents were protected by a "settlement privilege." On January 28, 2005, the California District Court agreed with WD Energy and refused to order the disclosure of the documents holding that
"[d]isclosure of the CFTC documents would likely chill settlement discussions and thwart tribunal efficiencies and public interests." E.&J. Gallo Winery v. EnCana Energy, No. 03-5412 (E.D. Cal. April 9, 2003) (January 28, 2005 Order at 7).
Meanwhile, on October 22, 2004, Gallo served the CFTC with a subpoena for all the documents that the CFTC collected from WD Energy and several other energy companies in the course of the CFTC’s energy trading investigations. The energy companies filed objections to the subpoena in the District Court of the District of Columbia. In Re Subpoena Issued to the Commodity Futures Trading Commission, No. 1:04MC00564 (D.C. Dec. 16, 2004). WD Energy argued that a small group of documents should be withheld on the basis of a settlement privilege for two reasons. First, it contended that the principles of collateral estoppel required the Court to give binding effect to the California District Court’s decision to prevent disclosure of the documents under a settlement privilege. Second, WD Energy asserted that the Court itself should recognize the existence of a settlement privilege. The Court rejected both arguments. In Re Subpoena Issued to the Commodity Futures Trading Commission, No. 1:04MC00564 (D.C. Dec. 16, 2004) (Memorandum Opinion filed April 28, 2005 at 5-6).
The Court found that it was not required to give preclusive effect to the Magistrate Judge’s discovery order in the California litigation because the CFTC was not a party to the underlying litigation, and never had the opportunity to be heard on the settlement privilege issue. Id. at 8. The CFTC was not bound by the District of California’s order and therefore, collateral estoppel did not apply. Id. at 8-10. The Court also declined to recognize a settlement privilege under federal law that would protect the documents from third-party discovery. The Court based its decision on four factors. First, the Court found that there was no broad consensus in federal and state law in favor of the privilege. Id. at 12. Second, the Court found that Congress chose to promote settlement privilege through limits on admissibility of settlement material rather than limits on their discoverability. Id. at 16. Third, the privilege is not one listed among the nine privileges in the Proposed Federal Rules of Evidence drafted by the Advisory Committee of the Judicial Conference. Id. at 17-18. Finally, the Court found that WD Energy had not established "with a high degree of clarity and certainty that the proposed privilege will effectively advance a public good." Id. at 18 citing to In re Sealed Case, 148 F.3d 1073, 1076 (D.C. Cir. 1998). The Court issued the subpoena and the CFTC turned over the documents.
WD Energy filed an appeal with the D.C. Circuit on May 18, 2005, and a hearing is scheduled for November 29, 2005. In Re Subpoena Duces Tecum, Issued to Commodity Futures Trading Commission, No. 05-5168 (D.C. Cir. May 18, 2005). The Court’s decision on whether the documents are protected by a settlement privilege is expected in the early part of 2006.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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