General Practice, Solo & Small Firm DivisionMagazine
VOLUME 19, NUMBER 2 MARCH 2002
BUSINESS AND COMMERCIAL LAW
Stemming the Release of Commercially Valuable Information Under FOIA
By Stephen Gidiere and Lawrence P. Mellinger
With the flood of information that is now available on agency websites, what prevents government agencies from becoming conduits for the wholesale transfer of commercially valuable information from one competitor to another?
All agency disclosures made under the Freedom of Information Act (FOIA) are subject to certain exemptions that protect commercially valuable information. This article discusses two exemptions: Exemption 4, which protects information of commercial value to private parties, and Exemption 5, which protects information in which the government itself has a commercial interest.
Exemption 4: Competitive harm and impairment. Exemption 4 of FOIA exempts from disclosure trade secrets and commercial or financial information obtained from a person and privileged or confidential. The courts have adopted an interpretation of what constitutes a "trade secret" under Exemption 4 that "narrowly cabins trade secrets to information relating to the 'productive process' itself." Commercial or financial information [that is] privileged or confidential is referred to as "confidential business information" (CBI).
The parameters of what qualifies as CBI were discussed in National Parks & Conservation Ass'n v. Morton, where the court identified both a private interest and a governmental interest that Congress sought to protect. These two interests are the competitive harm prong and the impairment prong of Exemption 4. The impairment prong stems from the need of government officials to access private information to carry out their duties in a well-informed manner. The competitive harm prong recognizes that submitters of valuable financial or commercial information would suffer very real competitive disadvantages if that information were published.
In Critical Mass Energy Project v. NRC, the D.C. Circuit explained that the first determination should be whether the information was submitted to the government voluntarily or was required. If the information was given to the government voluntarily, the only question is whether it is the type of information that "for whatever reason, would customarily not be released to the public by the person from whom it was obtained." If the business was compelled to provide the information, two situations qualify the information as "confidential" for purposes of Exemption 4: if disclosure of the information would result in a diminution of the "reliability" or "quality" of what is submitted to the government, or if disclosure would cause the business to suffer competitive harm.
Assuming the information submission is deemed to have been required, it will fall within Exemption 4 if its release would be likely to cause competitive harm to the submitter. This determination is made on a case-by-case basis. One thing is clear-the party opposing disclosure need not show actual competitive harm. Rather, the general standard recited by the courts is that the submitter actually faces competition and that substantial competitive injury would likely result from disclosure.
In addition to the "impairment" and "competitive harm" prongs, courts have elaborated on a so-called third prong that focuses more broadly on the governmental interests that justify not releasing information received from other persons. In 9 to 5 Organization for Women Office Workers v. Board of Governors of the Federal Reserve System, the court recognized that government interests protected under Exemption 4 were not limited to those identified in National Parks. The court's analysis went beyond the possible impairment to the government process that might result from disclosure and included consideration of the substantive harm to the government's statutory responsibility that might be caused by the release of specific information. "The inquiry in each case," reasoned the court, "should be whether public disclosure of the requested commercial or financial information will harm an identifiable private or governmental interest which the Congress sought to protect by enacting Exemption 4 of the FOIA."
Exemption 5: The govern-ment's CBI. Exemption 5 allows the government to withhold inter-agency or intra-agency memorandums or letters that would not be available by law to a party other than an agency in litigation with the agency. It also protects economic information that the government itself generates and utilizes in the business arena, premature release of which would harm its competitive advantage. Governmental commercial transactions involving sensitive information include the purchase and exchange of real property interests by federal land management agencies, and the sale of surplus government property.
In Federal Open Market Committee v. Merrill, the U.S. Supreme Court recognized that the federal government has a qualified privilege for confidential commercial information not because the release of such information would hamper the flow of advice, but because disclosure would place the government itself at a competitive disadvantage.
It appears settled that the government's commercial interest in maintaining the confidentiality of appraisal reports during purchase negotiations rises to the level of protection under Exemption 5. But expansion of this commercial interest still hinges on the initial determination whether the documents requested are in fact inter- or intra-agency materials. The U.S. Supreme Court addressed this issue in Department of the Interior v. Klamath Water Users Protective Association, in the context of information on water rights that is passed between a federally recognized Indian tribe and the Bureau of Indian Affairs (BIA). The Supreme Court ruled that such information passed between Indian tribes and BIA was not intra-agency memoranda meeting the first threshold for withholding under Exemption 5. The Court reasoned that BIA does not act as counsel for the tribe and, despite a federal trust responsibility, the tribes and the government do not necessarily have a commonality of interests.
Procedural differences between Exemptions 4 and 5. Procedurally, there are substantial differences between the use of Exemption 4 and 5 to prevent release. Although the agency makes the determination in both cases, when the information is claimed as CBI by a submitter (and, thus, involves Exemption 4), the submitter must be given notice and an opportunity to comment prior to any proposed release of that submitter's information. In an Exemption 4 situation, a triangle of parties is involved-the agency, the requestor, and the submitter. In contrast, when the government is invoking its own commercial interest under Exemption 5, the matter proceeds as would any FOIA request, and the players are limited to the agency and the requestor.
When the competitive harm prong of Exemption 4 is the basis for withholding, supporting affidavits from the submitter are critical to establish the relevant competitive arena and the harm that likely would result from release. When either the impairment prong or "third prong" of Exemption 4 is the basis for withholding, supporting affidavits from government personnel are likewise important.
Once the agency makes its final determination, litigation can proceed along one of two routes. The proper means of enforcement for a private business seeking to keep its material from being disclosed to a FOIA requestor is an action under the Administrative Procedure Act (APA). The APA provides for a private right of action in which the reviewing court must set aside agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." This action is referred to as a "reverse FOIA" suit because the plaintiff is attempting to prevent release, not to compel it. A straight FOIA suit, brought by a FOIA requestor to compel the government to release information in which it or a submitter claims a competitive interest, proceeds under FOIA's judicial review provision.
Because the invocation of a FOIA exemption is generally a matter of agency discretion, a submitter looking to protect its competitively valuable information from disclosure must look outside FOIA for a hook to prevent agency disclosure. One such hook is the Trade Secrets Act (TSA), which prohibits and criminalizes the disclosure of a broad range of CBI by federal employees. The courts have specifically held that the scope of the TSA is "at least co-extensive with that of Exemption 4 of FOIA."
Stephen Gidiere practices environmental and natural resources law in the Birmingham, Alabama, office of Balch & Bingham LLP. Lawrence P. Mellinger is an attorney in the U.S. Department of the Interior's Office of the Solicitor in Washington, D.C.
This article is an abridged and edited version of one that originally appeared on page 288 of Natural Resources & Environment, Summer 2001 (16:1).