Watts v. Securities & Exchange Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 7, 2006 Decided March 30, 2007

No. 06-1307

PHILIP WATTS,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order of the

Securities and Exchange Commission

Andrew J. Morris argued the cause and filed the briefs for

petitioner.

Melinda Hardy, Assistant General Counsel, Securities &

Exchange Commission, argued the cause for respondent. With

her on the briefs were Mark B. Stern and Tara Leigh Grove,

Attorneys, U.S. Department of Justice, Brian G. Cartwright,

General Counsel, and Kathleen Cody, Senior Counsel.

Before: BROWN and KAVANAUGH, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

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KAVANAUGH, Circuit Judge: Several Shell shareholders

sued Sir Philip Watts, a former Shell executive, and alleged that

he committed securities fraud. During discovery, which is still

ongoing, Watts served third-party testimonial subpoenas under

Federal Rule of Civil Procedure 45 on three Securities and

Exchange Commission employees. Watts thinks their testimony

might help his defense. The SEC did not permit the three

employees to testify, contending that their testimony would

cover privileged matters and be unduly burdensome. Watts has

sought review of the SEC’s refusal – not in the district court, but

directly in this Court. He has invoked the statute providing for

direct court of appeals review of SEC “orders.” See 15

U.S.C. § 78y(a); see also id. § 77i(a).

We lack subject-matter jurisdiction to reach the merits;

instead, Watts’s challenge must be decided by the district court

in the first instance. As the consistent practice of courts and

agencies reflects, an agency’s determination not to comply with

a third-party subpoena in an ongoing civil suit is simply an

agency’s ordinary litigation decision, not an “order” that a court

of appeals has separate jurisdiction to directly review. Disputes

over third-party subpoenas to agencies in civil litigation

therefore must commence in the district court under Rule 45.

We transfer this case to the United States District Court for the

District of Columbia. See 28 U.S.C. § 1631.

I

1. In March 2004, Sir Philip Watts resigned as the

Chairman of the Committee of Managing Directors at the

corporate predecessor of Royal Dutch Shell plc. Shell disclosed

in a series of announcements during 2004 that it had incorrectly

categorized as “proved oil and gas reserves” certain quantities

of the reserves it had previously reported in its financial

statements. Shell re-categorized those quantities, reducing the

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dollar value of Shell’s proved reserves for several fiscal years.

In August 2004, the SEC settled a cease-and-desist

proceeding with Shell. See In re Royal Dutch Petroleum Co.,

Exchange Act Release No. 50,233 (Aug. 24, 2004). The agency

issued related findings (which Shell neither admitted nor denied)

that Shell’s “overstatement of proved reserves, and its delay in

correcting the overstatement,” stemmed in part from Shell’s

failure to comply with the standards of Rule 4-10 of SEC

Regulation S-X. See 17 C.F.R. § 210.4-10; Release No. 50,233,

at 3. Under Rule 4-10, companies that issue federally registered

securities must disclose the value of their oil and gas reserves,

and they may report as proved reserves only those oil and gas

quantities that “geological and engineering data demonstrate

with reasonable certainty to be recoverable in future years.” 17

C.F.R. § 210.4-10(a)(2).

In describing the requirements of Rule 4-10 that Shell

allegedly failed to satisfy, the SEC’s cease-and-desist order

repeatedly referred to informal agency guidance concerning the

rule. See Release No. 50,233, at 4-5, 7-8, 12-15. The SEC staff

had published that guidance on its website in 2000 and 2001.

Employees of the SEC’s Division of Corporate Finance had

discussed that guidance with numerous oil and gas companies,

including Shell. The SEC employees involved in those

discussions included Roger Schwall, an assistant director at the

Division, and two of his subordinates, Ronald Winfrey and

James Murphy.

Following the SEC’s cease-and-desist proceeding, Shell

shareholders sued several persons, including Watts. In that

lawsuit – which is still ongoing in the United States District

Court for the District of New Jersey – the shareholders alleged

that the defendants had engaged in securities fraud by not earlier

disclosing the overstatement in proved reserves. The

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shareholders’ complaint referenced the SEC’s informal guidance

about Rule 4-10 and the SEC’s cease-and-desist order.

2. In February 2006, Watts served four testimonial

subpoenas under the authority of the United States District Court

for the District of Columbia. See Fed. R. Civ. P. 45. He

directed one subpoena to the SEC. (A government agency can

designate a knowledgeable person to give a deposition on the

agency’s behalf. See Fed. R. Civ. P. 30(b)(6).) Watts also

directed subpoenas to Schwall, Winfrey, and Murphy – the

individual SEC employees involved in administering Rule 4-10.

The testimonial subpoenas sought depositions on two

general topics: (i) the development, interpretation, and

application of the terms “proved oil and gas reserves,”

“reasonable certainty,” and “reasonable doubt,” as used in Rule

4-10 and the staff-written guidance; and (ii) communications

between the SEC and oil and gas companies concerning Rule

4-10 and the related guidance. Watts emphasized that the

depositions would support his defense in the shareholder

litigation. He argued that the informal guidance and SEC staff

contacts with Shell and other companies improperly tightened

the substantive standard of Rule 4-10, and that Shell’s reserves

re-categorization stemmed from that regulatory crackdown, not

from any fraud.

In an April 2006 letter to Watts, the SEC’s General Counsel

stated that the SEC objected to the depositions and would not

comply with the subpoenas. The General Counsel asserted that

the deliberative process privilege shielded the information Watts

sought, and that a deposition of the SEC’s Rule 30(b)(6)

designee would be unduly burdensome. Citing agency

regulations, see 17 C.F.R. § 200.735-3(b)(7), the General

Counsel also stated that the SEC would not authorize the three

individual employees to give depositions because of the

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deliberative process privilege.

Watts sought to contest the General Counsel’s

determinations along two routes in May 2006. First, regarding

the subpoena directed to the SEC, he filed a motion to compel

in the District Court for the District of Columbia. The District

Court has stayed that proceeding.

Second, regarding the subpoenas directed to the three SEC

employees, Watts initially sought Commission review of the

General Counsel’s action. The SEC denied Watts’s petition,

amplifying the General Counsel’s deliberative process argument

and adding that “allowing staff to appear for testimony would

place an undue burden on the Commission.” In re Royal

Dutch/Shell Transp. Sec. Litig., Exchange Act Release No.

54,259, at 3 (Aug. 1, 2006). Watts then filed a petition in this

Court for judicial review of the SEC’s action with respect to the

subpoenas to the three SEC employees. Watts pointed to

Section 25 of the Securities Exchange Act of 1934 as the source

of our subject-matter jurisdiction. See 15 U.S.C. § 78y(a)(1).

II

1. Limits on subject-matter jurisdiction “keep the federal

courts within the bounds the Constitution and Congress have

prescribed,” and those limits “must be policed by the courts on

their own initiative.” Ruhrgas AG v. Marathon Oil Co., 526

U.S. 574, 583 (1999). In this case, we therefore must address an

issue not presented to us by the parties: whether Watts’s petition

for review of the SEC’s privilege and undue burden assertions

belongs in this Court at this time.

Congress is free to “choose the court in which judicial

review of agency decisions may occur.” Five Flags Pipe Line

Co. v. Dep’t of Transp., 854 F.2d 1438, 1439 (D.C. Cir. 1988)

6

(internal quotation marks and alteration omitted). Because

district courts have general federal question jurisdiction under

28 U.S.C. § 1331, the “normal default rule” is that “persons

seeking review of agency action go first to district court rather

than to a court of appeals.” Int’l Bhd. of Teamsters v. Pena, 17

F.3d 1478, 1481 (D.C. Cir. 1994). Initial review occurs at the

appellate level only when a direct-review statute specifically

gives the court of appeals subject-matter jurisdiction to directly

review agency action. Id.; accord Midwest Indep. Transmission

Sys. Operator, Inc. v. FERC, 388 F.3d 903, 908 (D.C. Cir.

2004).

The SEC is subject to such a direct-review statute for

judicial review of SEC “orders.” Section 25 of the Securities

Exchange Act of 1934 provides: “A person aggrieved by a final

order of the Commission entered pursuant to this chapter may

obtain review of the order in the United States Court of Appeals

for the circuit in which he resides or has his principal place of

business, or for the District of Columbia Circuit . . . .” 15

U.S.C. § 78y(a)(1) (emphasis added). Section 9 of the Securities

Act of 1933 similarly provides: “Any person aggrieved by an

order of the Commission may obtain a review of such order in

the court of appeals of the United States, within any circuit

wherein such person resides or has his principal place of

business,” or in this Court. 15 U.S.C § 77i(a) (emphasis added).

This case hinges on interpretation of the term “order” used

in Section 9 of the Securities Act and Section 25 of the

Exchange Act. Neither the Securities Act nor the Exchange Act

defines the term. We therefore look to the Administrative

Procedure Act, as we have done before when an agency’s direct-

review statute did not define “order.” See APCC Servs., Inc. v.

Sprint Communications Co., 418 F.3d 1238, 1249 (D.C. Cir.

2005) (looking to APA when interpreting “order” in 47 U.S.C.

§§ 407, 416(c)). The APA provides that an “order” is “the

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whole or a part of a final disposition, whether affirmative,

negative, injunctive, or declaratory in form, of an agency in a

matter other than rule making but including licensing.” 5 U.S.C.

§ 551(6); cf. Int’l Tel. & Tel. Corp. v. Local 134, Int’l Bhd. of

Elec. Workers, 419 U.S. 428, 443 (1975) (“[W]hen Congress

defined ‘order’ in terms of a ‘final disposition,’ it required that

‘final disposition’ to have some determinate consequences for

the party to the [agency] proceeding.”).

2. To decide whether we have jurisdiction to directly

review Watts’s challenge, we must determine whether the SEC’s

decision not to authorize its employees to give deposition

testimony in response to Watts’s third-party subpoena

constitutes “the whole or a part of a final disposition” of the

SEC “in a matter other than rule making.” 5 U.S.C. § 551(6).

We think not. A government agency’s decision to assert

privilege or otherwise not to comply with a subpoena in ongoing

civil litigation, or to decline to authorize employees to answer

subpoenas directed to them, is simply an ordinary litigation

decision, not an agency’s “final disposition” of the kind

referenced in the APA. “Subpoenas are process of the issuing

court . . . .” In re Sealed Case, 141 F.3d 337, 341 (D.C. Cir.

1998). Therefore, an agency’s response to a judicial subpoena

(even one obtained by private civil litigants in aid of discovery)

neither finally disposes of the subpoena, nor even disposes of

the agency’s responsibilities regarding it – because the subpoena

issues under the authority of the district court, not the agency.

Furthermore, direct review in this Court of agency

responses to third-party subpoenas would generate a variety of

odd analytical and practical consequences that help confirm that

the agency’s action is not an “order.” Cf. Buckeye Check

Cashing, Inc. v. Cardegna, 126 S. Ct. 1204, 1210 n.3 (2006).

For example, if the SEC’s subpoena decision were to qualify for

direct review, then many agency actions in ongoing district court

8

litigation between private parties – including agency amicus

briefs, privilege assertions, letters about scheduling issues, and

the like – would be orders separately reviewable in the court of

appeals under a direct-review provision, while the litigation

itself chugged along in the district court. Such a bifurcated

procedure would be cumbersome, duplicative, and ultimately

nonsensical – and underscores the implausibility of labeling the

challenged agency action here an “order.”

Moreover, were an agency’s response to a third-party

subpoena in private litigation an order under the APA, it would

follow that the steps the agency took in generating its response

would be an APA “adjudication,” which is defined as “agency

process for the formulation of an order.” 5 U.S.C. § 551(7). In

deciding that an agency should not comply with a third-party

subpoena in private litigation, agency lawyers presumably

review the subpoena, the filings in the underlying case, and the

applicable case law, regulations, and agency precedents. And

there no doubt are internal agency meetings and consultations.

But that internal agency process for reaching a decision on

whether to comply with a judicial subpoena is not typically or

comfortably described as an “adjudication” (even given the

broad scope of formal and informal adjudications under the

APA). It would be particularly odd to classify as agency

adjudication the agency’s formulation of a response to a

subpoena in a pending district court adjudication. The potential

circularity of such an interpretation has a hall-of-mirrors quality

to it – where every agency filing in ongoing district court

litigation is simultaneously subject to review in the court of

appeals.

In addition, direct court of appeals review of subpoena

compliance decisions would frustrate the traditional role of

district courts in resolving discovery disputes. Federal Rule of

Civil Procedure 45 authorizes court-issued subpoenas to obtain

9

discovery from third parties, and Rule 26, which generally

governs civil discovery, provides: “Parties may obtain

discovery regarding any matter, not privileged, that is relevant

to the claim or defense of any party . . . .” Fed. R. Civ. P.

26(b)(1). Rule 26 “vests the trial judge with broad discretion to

tailor discovery narrowly and to dictate the sequence of

discovery.” Crawford-El v. Britton, 523 U.S. 574, 598 (1998).

The basis for our deferential, abuse-of-discretion review of

district court discovery rulings is the recognition that

supervising the to-and-fro of district court litigation falls within

the expertise, in the first instance, of district courts and not

courts of appeals. See Pierce v. Underwood, 487 U.S. 552, 558

n.1 (1988) (“It is especially common for issues [such as

discovery sanctions] involving what can broadly be labeled

‘supervision of litigation,’ . . . to be given abuse-of-discretion

review.”). Endorsing direct court of appeals review of the

agency’s refusal to comply with a subpoena would turn that

principle on its head; it would suggest that appellate judges have

some advantage over district judges in resolving discovery

disputes, which no one believes.

Given all of this, it comes as no surprise that the parties

have not cited a single case holding that an agency’s assertion of

privilege or undue burden in ongoing district court litigation

between private parties is the kind of agency action falling

within a statute providing for direct court of appeals review. On

the contrary, initial review of federal agency decisions not to

comply with third-party subpoenas on privilege or other grounds

has occurred in the district courts. The consistent practice of

district court review in the first instance indicates that agencies

and courts alike have reached a sound conclusion (albeit perhaps

implicitly): Litigation decisions by agencies, including

assertions of privilege, are not the kinds of agency

determinations that are channeled to courts of appeals under the

direct-review statutes. See Schreiber v. Soc’y for Sav. Bancorp,

10

Inc., 11 F.3d 217, 219-20 (D.C. Cir. 1993) (Federal Reserve

Board of Governors and FDIC); Friedman v. Bache Halsey

Stuart Shields, Inc., 738 F.2d 1336, 1339-40 (D.C. Cir. 1984)

(SEC and CFTC); see also Yousuf v. Samantar, 451 F.3d 248,

250 (D.C. Cir. 2006) (Department of State); Linder v. Calero-

Portocarrero, 251 F.3d 178, 179-80 (D.C. Cir. 2001)

(Departments of State and Defense and CIA); Northrop Corp. v.

McDonnell Douglas Corp., 751 F.2d 395, 398 (D.C. Cir. 1984)

(Departments of State and Defense); COMSAT Corp. v. Nat’l

Sci. Found., 190 F.3d 269, 273-74 (4th Cir. 1999); Edwards v.

Dep’t of Justice, 43 F.3d 312, 314 (7th Cir. 1994); Exxon

Shipping Co. v. Dep’t of Interior, 34 F.3d 774, 776 (9th Cir.

1994); Moore v. Armour Pharm. Co., 927 F.2d 1194, 1196 (11th

Cir. 1991) (FDA); Davis Enters. v. EPA, 877 F.2d 1181, 1183-

84 (3d Cir. 1989).

Watts suggests, however, that certain SEC regulations

nonetheless support judicial review directly in this Court. Under

SEC regulations, agency employees must decline to disclose

information in response to subpoenas unless the General

Counsel authorizes them to give “non-expert, non-privileged,

factual . . . testimony.” 17 C.F.R. § 200.735-3(b)(7)(ii),

(iii). Because the SEC consulted those regulations in deciding

not to comply with the subpoenas, Watts incorrectly assumes

that the SEC action is an order qualifying for direct court of

appeals review. Those SEC regulations ensure centralized

agency control over agency employees and are functionally

similar to the Department of Justice regulations examined in

United States ex. rel. Touhy v. Ragen, 340 U.S. 462 (1951). In

Touhy, the Supreme Court concluded that, because the Attorney

General could “validly withdraw from his subordinates the

power to release department papers,” a subordinate who invoked

the Attorney General’s regulation in refusing to answer a

subpoena could not be held in contempt. Id. at 465, 467-68. But

Touhy regulations have no relevance to the threshold question

11

posed here; they do not determine which court has initial

jurisdiction to consider an agency assertion of privilege or undue

burden.

3. We have thus far established that the SEC’s decision to

object to the subpoena was not an “order” qualifying for our

direct review. As a result, the District Court is the proper forum

for Watts’s claim. The question remains whether such a claim

is properly styled as (i) a motion to compel under Rule 45, or

(ii) a petition for APA review of the agency’s final privilege or

undue burden decision (although not an “order,” that decision

was final agency action, see 5 U.S.C. § 704; Yousuf, 451 F.3d at

251).

Rule 45 gives the district courts authority to issue

subpoenas and instructs the courts how to address disputes over

subpoenas. We have held, moreover, that government agencies

are “persons” subject to Rule 45 subpoenas. See Yousuf, 451

F.3d at 257. Therefore, a challenge to an agency’s refusal to

comply with a Rule 45 subpoena should proceed and be treated

not as an APA action but as a Rule 45 motion to compel (or an

agency’s Rule 45 motion to quash). See 5 U.S.C. § 703 (“The

form of proceeding for judicial review is the special statutory

review proceeding relevant to the subject matter in a court

specified by statute . . . .”).

Rule 45 also supplies the standards under which district

courts assess agency objections to a subpoena. The rule requires

that district courts quash subpoenas that call for privileged

matter or would cause an undue burden. Courts have applied

these Rule 45 standards to document subpoenas issued to third-

party agencies or agency employees in federal civil suits. See

Houston Bus. Journal, Inc. v. Office of the Comptroller of the

Currency, 86 F.3d 1208, 1212 (D.C. Cir. 1996); see also Linder,

251 F.3d at 181. Rule 45 does not set forth a different standard

12

for testimonial subpoenas issued under Rule 45 to an agency or

agency employee (nor would it be logical to apply a different

standard); Rule 45’s privilege and undue burden standard thus

applies to both document and testimonial subpoenas. See Exxon

Shipping, 34 F.3d at 779 (applying Rule 45 standard to third-

party testimonial subpoenas directed to federal agency

employees).* Moreover, an agency’s Touhy regulations do not

relieve district courts of the responsibility to analyze privilege

or undue burden assertions under Rule 45. An agency’s Touhy

regulations are relevant for internal housekeeping and

determining who within the agency must decide how to respond

to a federal court subpoena. See 5 U.S.C. § 301 (authorizing

Touhy regulations but providing: “This section does not

authorize withholding information from the public or limiting

the availability of records to the public.”); Yousuf, 451 F.3d at

257 (describing Touhy regulations as establishing “method[] by

which . . . an agency would respond to a subpoena”); Comm. for

Nuclear Responsibility, Inc. v. Seaborg, 463 F.2d 788, 793 (D.C.

Cir. 1971) (5 U.S.C. § 301 “does not confer a privilege”); see

also 9 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE

§ 45.05[1][b] (3d ed. 2006) (“[T]hough an agency regulation

*

In Houston Business Journal, we suggested in footnote dicta that the

APA arbitrary and capricious standard governed review of agency decisions

not to comply with a federal court’s testimonial subpoena (as opposed to a

federal court’s document subpoena). 86 F.3d at 1212 & n.4; see 5 U.S.C. §

706(2)(A). But Houston Business Journal arose out of an agency’s refusal

to provide documents in response to a document subpoena issued by a state

court. See 86 F.3d at 1210-11, 1213-14. In general, state court subpoenas

present entirely different issues (because of the Supremacy Clause and

sovereign immunity), and a state court litigant’s only recourse from a federal

agency’s refusal to comply with a state court subpoena is to bring an APA

claim – necessarily governed by the APA arbitrary and capricious standard

– against the agency in federal court. For reasons explained in the text, we

do not believe the APA arbitrary and capricious standard applies when a

court reviews an agency’s decision not to comply with a federal court

subpoena.

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may provide the method by which an agency head will comply

with or oppose a subpoena, the legal basis for any opposition to

the subpoena must derive from an independent source of law

such as a governmental privilege or the rules of evidence or

procedure.”).

One additional point warrants mention: The Rule 45

“undue burden” standard requires district courts supervising

discovery to be generally sensitive to the costs imposed on third

parties. See, e.g., Cusumano v. Microsoft Corp., 162 F.3d 708,

717 (1st Cir. 1998) (“concern for the unwanted burden thrust

upon non-parties is a factor entitled to special weight in

evaluating the balance of competing needs” in Rule 45 inquiry);

Misc. Docket Matter No. 1 v. Misc. Docket Matter No. 2, 197

F.3d 922, 927 (8th Cir. 1999) (quoting id.); see also Fed. R. Civ.

P. 45(c)(2)(B) (any court order to compel compliance with

document subpoena “shall protect any person who is not a party

or an officer of a party from significant expense” of

compliance). In addition, Federal Rule of Civil Procedure

26(b)(1)-(2) requires district courts in “[a]ll discovery” to

consider a number of factors potentially relevant to the question

of undue burden, including: whether the discovery is

“unreasonably cumulative or duplicative”; whether the

discovery sought is “obtainable from some other source that is

more convenient, less burdensome, or less expensive”; and

whether “the burden or expense of the proposed discovery

outweighs its likely benefit, taking into account the needs of the

case, the amount in controversy, the parties’ resources, the

importance of the issues at stake in the litigation, and the

importance of the proposed discovery in resolving the issues.”

With these tools, district courts in cases involving third-

party subpoenas to government agencies or employees can

adequately protect both the litigant’s right to evidence and the

“government’s interest in not being used as a speakers’ bureau

14

for private litigants.” Exxon Shipping, 34 F.3d at 780 (internal

quotation marks omitted). As the court in Exxon Shipping

recognized, in other words, discovery under Rules 26 and 45

must properly accommodate “the government’s serious and

legitimate concern that its employee resources not be

commandeered into service by private litigants to the detriment

of the smooth functioning of government operations.” Id. at

779; see also Moore, 927 F.2d at 1197-98 (expected “onslaught

of subpoenas” in similar litigation raised substantial concern

about “cumulative impact” of individual subpoena) (internal

quotation marks omitted); Davis Enters., 877 F.2d at 1187

(agency had “legitimate concern with the potential cumulative

effect” and “proliferation of testimony by its employees” that

compliance with individual subpoena would entail).

III

We lack subject-matter jurisdiction to consider Watts’s

petition for review. However, we have discretion to transfer the

case to another court where it could have been brought at the

time it was filed. See 28 U.S.C. § 1631; Five Flags Pipe Line

Co. v. Dep’t of Transp., 854 F.2d 1438, 1442 (D.C. Cir. 1988).

We therefore transfer the case to the United States District Court

for the District of Columbia, where the SEC’s privilege and

undue burden assertions may be reviewed in the first instance

under the standards set forth in Federal Rule of Civil

Procedure 45.

So ordered.