Opinion ID: 345561
Heading Depth: 2
Heading Rank: 1

Heading: Relevance Determinations

Text: 26
27 The gas producers contend that the district court properly limited production to those documents relating to proved reserves on grounds of relevance. 22 They argue that because the FTC's investigation is targeted on a conspiracy to underreport reserves to the AGA, and only proved reserves are reported to the AGA, only proved reserves can be relevant to the inquiry. The FTC, on the other hand, maintains that its investigation cannot be so circumscribed, and that all reserve estimates made by the producers, both for various internal business purposes and for reports to the AGA, and however denominated, are relevant to access whether violations of section 5 of the Federal Trade Commission Act have taken place. 28 In resolving this controversy, we must determine whether the district judge's limitation comports with the standard of reasonable relevance. 23 Where, as here, no complaint has yet been formulated and the issues have therefore not yet been crystallized, some courts have concluded that an attenuated standard of relevance is appropriate. 24 In our view, however, the better approach is simply to recognize that in the pre-complaint stage, an investigating agency is under no obligation to propound a narrowly focused theory of a possible future case. Accordingly, the relevance of the agency's subpoena requests may be measured only against the general purposes of its investigation. The district court is not free to speculate about the possible charges that might be included in a future complaint, and then to determine the relevance of the subpoena requests by reference to those hypothetical charges. The court must not lose sight of the fact that the agency is merely exercising its legitimate right to determine the facts, and that a complaint may not, and need not, ever issue. 25 29 Under this frame of reference, the district court's determination that only proved reserve estimates are relevant cannot withstand scrutiny. The relevance of the material sought by the FTC must be measured against the scope and purpose of the FTC's investigation, as set forth in the Commission's resolution. 26 Here, however, the gas producers have posited and the district court has apparently accepted an erroneous interpretation of the scope of the FTC's inquiry, and they have then sought to limit the investigation to the confines of this distorted interpretation. There is no merit to the producers' contention that the FTC is only investigating possible underreporting of proved reserves to the AGA. The FTC's resolution does not even mention either the AGA or proved reserves; further, in addition to conduct in the reporting of natural gas reserves, the resolution obviously incorporates a broad range of activities relating to the exploration and development, production, or marketing of natural gas . . . . Although the FTC has never denied that reporting to the AGA is one aspect of its inquiry, it has repeatedly stated that its investigation cannot be so narrowly defined. 27 30 Basically, the gas producers would have us believe that all the FTC has in mind is a recomputation of proved reserve estimates submitted to the AGA. On the contrary, the authorized inquiry envisions an examination of all phases of the estimating process. In particular, the FTC seeks to compare estimates prepared for various business purposes with those reported to the AGA. As Specification G of the subpoena indicates, producers may make reserve estimates in connection with bidding on or nominating leases; deciding whether or not to erect permanent platforms; compiling or inventorying total company reserves or supply; negotiating or contracting for the sale of natural gas, or for the joint or common exploration, development, production, purchase, or sale of acreage; obtaining bank loans; or filing depreciation expense schedules with the Internal Revenue Service. While some of these estimates may be labeled proved, some may not. Producers also may refer to certain reserve estimates as, inter alia, speculative, possible, or probable, depending on the stage of development of the field. 31 In order to assess whether proved reserve figures accurately reflect economic reality, reserve estimates with other labels may be important; the same or substantially similar underlying data may give rise to distinctly denominated reserve estimates. In other words, the FTC may fairly inquire whether the companies, through the use of an excessively restrictive approach, have excluded awareness of certain realistic and reliable estimates which are taken into account in making significant business decisions but which are not labeled proved and are therefore not included in the AGA reports. As counsel for the FTC stated to the district judge, in explaining the relevance of the requested data, 32 This is relevant in determining whether AGA reserves reflect economic realities. Remember, those reserves are based on a definition of what constitutes a proved reserve but it may be that an examination of the company's practices in the way it computes its reserves would show that the AGA reserve definitions are too restrictive, that in fact the companies themselves by their own conduct show that their reserves are more than what they would report to the AGA as proved reserves, or given a top and down estimate they may pick within a wide range, they may pick a top estimate for purposes where it serves their purposes, and a low estimate for other purposes where it serves their purpose. 33 App. II 368a-369a. 34 Thus, even if the FTC were investigating only the reporting of proved reserves (and we conclude that the inquiry is not so narrow), the analysis would certainly not be limited to whether the gas producers have accurately calculated their proved reserves. It is possible that such calculations are entirely in accord with the AGA's definition of proved reserves, but that, in light of other estimates considered significant by the producers, this definition has an anti-competitive effect. The agreement of the producers, with each other, and with and through the AGA, to use such a restrictive definition as the exclusive method of projecting the industry's position may have the effect and, indeed, the purpose of raising prices through its impact on purchasers and government. The FTC's investigation is for the purpose of enabling it to determine whether the companies' practices constitute an unfair method of competition. An unfair method of competition may result from concerted action even though there is no conspiracy by the dark of the moon. And as Morton Salt noted, the FTC may investigate either to develop the existence of a violation or to assure itself that none exists. 338 U.S. at 652, 70 S.Ct. 357. 28 35 It is thus clear that the development and reporting of estimates at various stages of the investment and development process is reasonably relevant to the FTC's purpose. We therefore hold that the district judge's limitation of enforcement of the subpoena to only proved reserve estimates was erroneous. 29
36 In addition to ruling that only proved reserve estimates need be produced, the district court specifically found that bid calculation data and bid calculation files were irrelevant to the investigation, and therefore need not be produced. 30 Like the district court's general relevance determination, this more specific ruling is also premised upon the court's erroneous delineation of the scope and purpose of the FTC's investigation, and therefore, it, too, cannot be sustained. 37 Bid files are collections of documents developed for and used in nominating and bidding for the right to lease tracts in the federal domain for oil and gas exploration. According to the producers, bid files typically contain speculative reserve estimates, back-up data for such estimates i. e., raw geological data and interpretation thereof, and documents reflecting the calculation of the producer's bid. 31 38 The producers maintain that bid files are not relevant to the determination of proved reserves, because bid files contain only speculative estimates which are of no further use once the company obtains a lease and begins exploratory drilling. The question, however, is not relevance to the calculation of proved reserves, but relevance to the FTC's investigative purpose. Admittedly, bid file estimates are quickly superseded by more accurate data, are not used to compute proved reserve figures, and may be completely erroneous predictions of the amount of natural gas eventually found. But any estimate of reserves however defined on which a company relies in the course of its business is relevant to the company's practices in estimating and reporting reserves. 39 We agree with the FTC that comparative information of this sort is reasonably relevant to its investigation. While, in response to the companies' arguments, the FTC has advanced several examples to demonstrate the relevance of bid files, 32 the Commission emphasized that this approach which requires, in effect, the delineation of a particular theory of violation is inappropriate in the pre-complaint stage; and here, too, we agree. While the FTC has not articulated the specific anti-competitive practices which may be present, it could not reasonably do so without access to the relevant documents. 33 Certainly a wide range of investigation is necessary and appropriate where, as here, multifaceted activities are involved, and the precise character of possible violations cannot be known in advance.
40 Apparently because Superior is not a member of the AGA and does not report proved reserve estimates to the AGA, the district judge denied enforcement of Specifications G through J in relation to Superior. Again, this ruling misconceives the nature of and unduly limits the FTC's investigation. Superior's argument that it cannot be guilty of a conspiracy to underreport proved reserve estimates to the AGA is not dispositive, because the FTC's investigation is not restricted to this theory. Superior does make reserve estimates for its fields in Southern Louisiana; therefore, it possesses information that could well be relevant to the FTC's inquiry. In point of fact, comparison of Superior's estimating process with that of a producer who does report to the AGA could be a useful analysis. At this stage, whether or not Superior has participated in some conduct that would amount to an unfair trade practice is certainly conjectural, but the Commission need not demonstrate that a complaint is likely to issue against Superior. We hold that the district judge erred in denying enforcement against Superior of major parts of the subpoena.