The protection of sensitive corporate business information such as overhead costs, indirect rates, and technical and management information is vital to the success of any government contractor. Companies take elaborate internal measures to ensure protection of this data, and provide this information in confidence to the government as part of submitting proposals for government contracts. These same companies then are often surprised by the prospect that their confidential and sensitive business information may be disclosed by the government directly to competitors through the Freedom of Information Act ("FOIA").¹

FOIA "requestors" may seek to discover proposal information from the successful bidder and contract awardee, as well as from unsuccessful bidders. Action taken under one of the statutory exemptions, commonly referred to as a "reverse-FOIA" action, is necessary to prevent disclosure.

The traditional analysis to prevent disclosure under the statutory exemption protecting trade secrets or commercial or financial information ("Exemption 4") applies a two-part test to determine whether the information is ultimately disclosable. However, the interplay between Exemption 4 and the statutory exemption preventing disclosure of information specifically exempted by statute ("Exemption 3"), adds a third "prong" to the analysis that is especially helpful in protecting the sensitive corporate business information of unsuccessful offerors on Department of Defense ("DOD") contracts.

II. Background 

A. FOIA

Under FOIA, "each agency, upon any request for records which (i) reasonably describes such records and (ii) is made in accordance with published rules. . . shall make the records promptly available."²  Each agency is responsible for rules which outline the specific process by which a FOIA request is made, how particular interested parties are notified, how an appeal of either a grant or a denial of a FOIA request is made, and the associated time requirements. While the "basic policy behind FOIA is one of disclosure,"³  FOIA contains statutory exemptions that prevent disclosure.⁴ 

B. Reverse-FOIA Actions

 

The most common exemption asserted in a reverse-FOIA action to protect sensitive business information is Exemption 4, which prevents disclosure of trade secrets and commercial or financial information that was provided to the government with an implicit understanding on the part of the submitter that the information would be retained by the government on a privileged or confidential basis. A body of case law interpreting Exemption 4 has developed in the federal courts, with most courts turning to the U. S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") for guidance.

 

The two most cited cases, National Parks and Conservation Assoc. v. Morton, 498 F.2d 765 (D.C. Cir. 1974)("National Parks") and Critical Mass Energy Project v. Nuclear Regulatory Comm'n, 975 F.2d 871 (D.C. Cir. 1992) ("Critical Mass"), outline tests used to determine whether FOIA Exemption 4 applies to a particular category of information. While the trend in the past may have been towards disclosure absent a clear showing of a "substantial competitive harm," a recent case from the D.C. Circuit, McDonnell Douglas Corp. v. NASA, 180 F.3d 303 (D.C. Cir. 1999) ("McDonnell II"), arguably shifts the balance towards nondisclosure, thus equating the requestor's gaining a competitive advantage from a disclosure with a corresponding competitive harm to the submitter from that disclosure.

 

As discussed in greater detail below, a second method for a submitter to prevent disclosure under a reverse-FOIA action, and which is especially helpful to an unsuccessful offeror in DOD procurements, is Exemption 3 applied in conjunction with 10 U.S.C. §2305(g). Exemption 3 prevents disclosure of information specifically exempted by statute. Concomitantly, 10 U.S.C. §2305(g) protects information contained in proposals submitted to DOD and the military departments, the Coast Guard, and the National Aeronautics and Space Administration.

 

While there is a well developed body of law discussing the applicability of Exemption 4, there are no reported cases interpreting the use of Section 2305(g) in conjunction with Exemption 3. However, on a plain reading of the statute, so long as the information contained in the proposal is not subsequently "set forth or incorporated by reference in a contract entered into between the Department and the contractor that submitted the proposal,"⁵  the information is protected from disclosure.

 

Because an unsuccessful offeror's proposal obviously will never be "set forth or incorporated" into a government contract, Exemption 3 and Section 2305(g) provide a clear, non-discretionary tool to prevent disclosure of unsuccessful proposals under FOIA. DOD has issued guidance on Section 2305(g)'s applicability in the form of the DOD FOIA Regulation.⁶ 

III. Exemption 4

A. 'Required' Information

 

If the information is in the "required" category, then, under the National Parks test, whether the information is protected from disclosure under Exemption 4 depends on whether such disclosure will either:

(1) impair the government's ability to obtain necessary information in the future; or,

(2) cause substantial harm to the competitive position of the person from whom the information was obtained.⁸ 

The courts have consistently held that while a contractor's initial decision to submit a proposal in response to a government solicitation is submitted "voluntarily," once that decision has been made, for the purpose of an Exemption 4 analysis, all subsequent submissions are deemed "required." Therefore, the two-prong National Parks test applies for determining whether disclosure is appropriate.⁹ 

 

The courts have also consistently held that an appropriate disclosure will not impair the government's ability to obtain information in the future, going so far as to hold that such a disclosure is merely one of the "costs of doing business with the government."¹⁰  Thus, under the second prong of National Parks, whether the requested information is disclosed becomes an evidentiary battle, with the submitter having to demonstrate that disclosure will, in fact, cause "substantial harm."

B. 'Voluntary' Information

In Critical Mass, the D.C. Circuit reexamined National Parks, and held that when the information sought under FOIA was submitted "voluntarily," and was in the nature of information that "would not customarily be released by the person from whom it was obtained," the information is protected from disclosure under Exemption 4.¹¹  The reasoning behind the distinction between "voluntary" and "required" is that disclosure of this voluntarily-provided information could impair the government's ability to obtain similar information in the future from now-reluctant submitters. Therefore, Critical Mass complements National Parks by defining a class of information that, if disclosed, would satisfy the first prong of the National Parks test.

C. Recent Case Developments

Two recent cases, Martin Marietta Corp. v. Dalton, 974 F. Supp. 37 (D.D.C. 1997) ("Martin Marietta") and McDonnell II, illustrate very different views of the National Parks "substantial competitive harm" test. In Martin Marietta, the court found no competitive harm arising from disclosure, and permitted the disclosure of the contractor's line-item pricing information because, in its opinion:

The public, including competitors who lost the business to the winning bidder, is entitled to know just how and why a government agency decided to spend the public funds as it did; to be assured that the competition was fair; and, indeed, even to learn how to be more effective competitors in the future.¹² 

However, in McDonnell II, the D.C. Circuit reviewed and reversed the district court's decision in McDonnell Douglas Corp. v. NASA, 981 F. Supp. 12 (D. D.C. 1997) ("McDonnell I"), which held that the line-item pricing information was not protected from disclosure under FOIA Exemption 4 because the contractor "did not provide the required level of detail evidencing substantial competitive harm."¹³  In addition, the district court in McDonnell I said that release of the contractor's line-item pricing information would not rise to the level of "substantial competitive injury" because bidders for government contracts compete on a variety of different factors, and because any subsequent competitive disadvantages arising from the disclosure "should be as the cost of doing business with the government."¹⁴  This last proposition--that disclosure of proprietary and other company-sensitive information that would aid the submitter's competitors would not cause substantial harm to the submitter's competitive position--was rejected by the D.C. Circuit in McDonnell II.

 

The D.C. Circuit in McDonnell II characterized as "silly" the lower court's reasoning that disclosure of the requested cost or pricing data would not cause competitive harm through underbidding by competitors because price was only one factor used by the government in awarding contracts.¹⁵  The D.C. Circuit explained that the agency had "implicitly recognized that it would be to the competitor's advantage to receive. . . line item pricing information,"¹⁶  and determined that "it follows that appellant will be competitively harmed by that disclosure."¹⁷  Accordingly, McDonnell II seemingly holds that when access to sensitive or proprietary information would allow a FOIA requestor to gain a competitive advantage, the submitter meets the "substantial competitive harm" test to apply Exemption 4 and prohibit the disclosure.

D. Post-McDonnell II DOD Guidance

On March 3, 2000, DOD's Directorate of Freedom of Information and Security Review issued a memorandum ("DOD Memorandum") explaining the agency's policy regarding the release of unit prices following the D.C. Circuit's decision in McDonnell II. It rejected the proposition that any commercial advantage gained through disclosure by the requestor is necessarily a "substantial competitive" harm under Exemption 4 to the submitter.

 

Incorporated into the memorandum is a Department of Justice analysis of McDonnell II, in which DOJ maintains that McDonnell II was a fact-specific case and did not establish a new rule of law or a new category of information exempt from disclosure. In support of this position, the memorandum cites FAR 15.506,¹⁸  which allows the release of the "overall evaluated cost or price (including unit prices)"¹⁹  of the awardee as part of a postaward debriefing.

 

The DOD Memorandum apparently makes clear DOD's intent not to follow the D.C. Circuit's opinion in McDonnell II regarding the release of line-item pricing, and apparently equates unit pricing with line-item pricing--which are not necessarily one and the same. However, the memorandum offers useful guidance regarding release of the procurement information of unsuccessful offerors. It states that "unit prices within unsuccessful proposals are protected from disclosure pursuant to 10 U.S.C. §2305(g)."

IV. Exemption 3

imposes a significant administrative burden on federal agencies receiving requests for release of contractor proposals even though most, if not all, of the information is exempt from the FOIA process. This provision is intended to allow federal agencies to dispense with the lengthy line-by-line reviews which are presently required to arrive at the non-disclosure determination for this material.²³ 

V. Summary