A U.S. regulatory agency has filed a sealed appeal challenging a Chicago judge who initiated a sanctions investigation last month focused on whether federal officials violated the terms of a settlement that barred the government from making certain public statements about the deal.

The new case in the U.S. Court of Appeals for the Seventh Circuit is under seal, and officials at the U.S. Commodity Futures Trading Commission declined to comment Monday about what arguments the agency is making and what action it wants the appeals panel to take.

Court papers indicate the CFTC is seeking an order that could halt or minimize a hearing next week at which the judge is expected to probe the contours of the disputed settlement terms and what agency officials said in media statements about how the case was resolved. The unfolding litigation marks a rare clash between a federal agency and regulated companies.

Central to the CFTC appeal is the judge's recent order initiating proceedings that will examine whether agency leaders, including three U.S. Senate-confirmed commissioners and the enforcement director, violated the terms of a settlement involving Kraft Food Groups Inc. and Mondelēz Global LLC.

The two companies agreed to pay $16 million to resolve claims of price manipulation in the wheat market. The settlement, filed in U.S. District Court for the Northern District of Illinois, included a provision restricting what the parties, including the agency, could say about the agreement.

Lawyers for Kraft and Mondelēz, represented by teams from Jenner & Block and Eversheds Sutherland, argue that the CFTC news release and accompanying statements from individual commissioners went beyond what the agency was allowed to say. "The CFTC and its commissioners engaged in a deliberate, orchestrated effort to violate the court's consent order within minutes of its entry," Jenner litigation partner Dean Panos said in a court filing seeking sanctions against the agency.

Responding to the companies' push for sanctions, U.S. District Judge John Robert Blakey said he would hold a hearing—now set for Oct. 2—exploring whether agency officials violated the agreement, and what sanction, if any, should be imposed. Blakey has requested agency leaders, including Chairman Heath Tarbert, commissioners Dan Berkovitz and Rostin Behnam, and enforcement director Jamie McDonald, to appear and be prepared to testify.

The hearing next week is civil, not criminal, Blakey said in a recent order that revealed the CFTC's appeal in the Seventh Circuit.

Blakey said a "variety of potential measures or remedies may be considered" if any evidence shows the agency went outside the bounds of the settlement terms. The judge said those remedies might include vacating the settlement itself and setting the case for a trial. He also said "civil contempt, referral for a potential investigation into criminal contempt or ethical violations" are also in play.

"This court retains jurisdiction to conduct the proceeding as scheduled, unless and until the Seventh Circuit directs otherwise," Blakey said in an order.

Panos was not reached for comment Tuesday about the CFTC's appeal, and an agency representative declined to discuss the substance of it. Various records recently filed in the Chicago trial court are under seal, leaving no insight into what sanctions the companies want and how the agency is defending itself. The CFTC on Monday filed sealed papers in the trial court that purport to address "privileges."

Heath Tarbert Heath Tarbert. Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL

The CFTC has disputed that Tarbert and the other commissioners violated the settlement terms with Kraft and Mondelēz. Tarbert, a former Allen & Overy partner, said in a news release that market manipulation "inflicts real pain on farmers by denying them the fair value of their hard work and crops."

The agreement contained a provision that barred both sides from making "any public statement about this case other than to refer to the terms of this settlement agreement or public documents filed in this case." Berkovitz and Behnam, two Democratic commissioners, issued a joint statement at the time of the settlement questioning the gag provision. The two commissioners argued that as individuals they were not a "party" to the agency's settlement with Kraft and Mondelēz.

A team from King & Spalding was retained to represent Tarbert, Behnam, Berkovitz and other CFTC officials, according to new court filings filed Tuesday. The King & Spalding lawyers asked Blakey for a status conference ahead of next week's hearing.

"The commissioners and chairman respectfully request a status conference so their counsel may better appreciate and understand the court's expectations for the upcoming hearing," King & Spalding partner Zachary Fardon, a former U.S. attorney, said Tuesday. Much of the new filing was redacted.

CFTC lawyers said in earlier court filings that the statement from Berkovitz and Behnam "was largely devoted to general legal and policy considerations regarding the settlement of government enforcement cases." Agency lawyers have also said Tarbert's remarks in his press statement were focused generally on CFTC enforcement and did not violate the terms of the settlement.

A representative for the agency on Monday defended the statements from Tarbert, Berkovitz and Behnam. "The unanimous view of the commission is that its statements were fully compliant with the consent order," the representative said. "Ultimately, the question before the court is whether the consent order applied to individual commissioners, but the law is clear that it can't."

The CFTC has, for now, removed the press statements about the Kraft and Mondelēz case from the agency's website.