Wouldn’t your competitors love to know your confidential calculations used in contract bidding – your internal overhead costs, your indirect rates, your contract line item (“CLIN”) pricing, your proprietary technical and management information? Like most businesses, government contractors take elaborate internal measures to ensure protection of such sensitive corporate business information. Unlike most other businesses, however, government contractors’ information is necessarily shared with the government and may be disclosed directly to competitors at their request. This disclosure can be made available to any interested party who simply asks for the information through the Freedom of Information Act (“FOIA”), 5 U.S.C. § 552.
FOIA provides that “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.” 5 U.S.C. § 522(a) (3)(A). The basic policy underlying FOIA is one of public disclosure. This can be particularly disconcerting for government contractors, where such disclosure could allow a competitor to reverse-engineer the government contractor’s costs, and thereby gain a competitive advantage.
However, FOIA contains certain statutory exemptions that can be asserted by contractors to bar disclosure of their company information. Specifically, Exemption 4 prevents disclosure of trade secrets and commercial or financial information. A government contractor may use Exemption 4 to begin a “Reverse- FOIA” action to prevent disclosure of trade secrets and commercial or financial information—or CLIN pricing.
To mitigate the risk that the government may disclose your company’s information that could be protected under Exemption 4, the following preemptive actions should be taken:
- Include language in all documents submitted to the government that the information contained is confidential, and proprietary business and financial information, for example:
This information is protected and confidential and is protected from disclosure under the Freedom of Information Act Exemption 4
- Promptly respond to any notices from the government indicating that disclosure of the contractors’ information has been requested, and direct that the requested information be exempted from disclosure pursuant to FOIA Exemption 4
- Specifically identify the records or portions thereof that would be competitively harmful if disclosed and which are not available to the public
- Demonstrate why disclosure of each record or portion thereof would cause competitive harm, and explain how competitors would be able to derive information such as pricing structures, indirect rates, risk assessment, budgeting methodology, or some other unfair competitive advantage
- Explain the contractor’s practices and procedures to maintain the confidentiality of the requested information to illustrate that this information is considered and treated as confidential
If a government agency decides to release such sensitive or confidential information, the contractor should consider bringing a “reverse-FOIA” action to enjoin its release. The standards for what courts consider to be “confidential” varies by jurisdiction, but many courts have turned to the U.S. Court of Appeals for the District of Columbia (“D.C. Circuit”) for guidance. In particular, 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 the applicable tests to determine whether Exemption 4 applies to a particular category of information.
In National Parks, the court held that commercial or financial information is “confidential” under FOIA if the disclosure is likely: “(1) to impair the government’s ability to obtain necessary information in the future; or (2) to cause substantial harm to the competitive position of the person from whom the information was obtained.” 498 F.2d at 770. While this standard seems relatively clear, courts have struggled as to whether certain forms of information—particularly CLIN pricing—is confidential and exempt from disclosure.
In Critical Mass, the court followed National Parks, but adopted a more deferential test for information that the contractor has voluntarily provided to the government—such as information submitted in response to a procurement solicitation. The court held that if financial or commercial information is voluntary submitted, and is “the kind that the provider would not customarily release to the public,” such information is protected from disclosure under Exemption 4. 975 F.2d at 880.
The leniency of the Critical Mass standard means that a government contractor has a reasonable chance of demonstrating that information voluntarily provided is confidential and exempt from disclosure under FOIA Exemption 4. However, the likelihood of success hinges on how you have protected your information, whether you have demonstrated competitive harm from potential disclosure, and also the confidential or competitive nature of the information.
The courts and agencies have wrestled with whether CLIN pricing is protected from disclosure under FOIA Exemption 4. In the D.C. Circuit, the McDonnell line of cases have held that CLIN pricing is exempt from disclosure where the government contractor has demonstrated that substantial competitive harm would result from disclosure. McDonnell Douglas Corp. v. NASA, 180 F.3d 303 (D.C. Cir. 1999) (“McDonnell II”); McDonnell Douglas Corp. v. United States Dep’t of the Air Force, 375 F.3d 1182, 1190 (D.C. Cir. 2004) (“McDonnell IV”). However, after the McDonnell decisions were decided, both the Department of Defense and the Department of Justice issued a series of memoranda and Internet-based “FOIA Posts” explaining that McDonnell II and McDonnell IV were limited to the particular facts of those cases. Agencies frequently argue that a contractor’s claims of competitive harm are “conclusory” and typically do not consider CLIN pricing protected under Exemption 4.
What to Do Now
As a government contractor, you should be aware of FOIA and FOIA Exemption 4, and remember that a timely response to an FOIA-release notice or initiating a Reverse-FOIA action using Exemption 4 can be an effective means to prevent disclosure of sensitive business information to your competitors. You should be sure to articulate exactly what substantial competitive harm may result (particularly if the contract is or is likely to be subject to a rebid), and why that harm is particularly likely to manifest in your situation (e.g., if the contract is likely to be subject to a rebid, or if there is a very small number of competitors in the area, or if pricing is definitely the determining factor in the agency’s decision to grant a contract).
Steps taken to protect your competitive information—including marking it as confidential and not releasing it to the public—can establish a solid foundation to support an FOIA exemption. Responding promptly and thoroughly to government notices of FOIA requests can effectively deny the request and protect your confidential information from future public disclosure.
The leniency of the Critical Mass standard means that a government contractor has an increased chance of demonstrating that information is confidential and exempt from disclosure under FOIA Exemption 4, so you should be sure to carefully document all records that are voluntarily provided to government agencies in the course of your dealings.