Introduction

The Freedom of Information Act (“FOIA”), 5 U.S.C. § 552, provides citizens the means to discover information about the operations of their government. Although less obvious, the FOIA also provides citizens the means to learn about each other, particularly in the realm of government contracting. This is a tremendous boon for smaller businesses wishing to obtain a competitive edge against larger, more sophisticated applicants. With a simple FOIA request, a company can view other contractors’ previous bid applications and increase its chances of obtaining lucrative contracts.

Although the FOIA serves as a powerful resource, those conducting business with the government should be aware that their communications with government employees, including the submission of any documents, may become agency records subject to disclosure upon a competitor’s request. Contractors should not assume that simply marking their material as “confidential” guarantees full protection. As demonstrated in a recent district court decision, what a contractor or government agency considers protected information may actually be disclosable depending on a court’s interpretation of applicable FOIA exemptions. This is particularly true in light of President Obama’s January 21, 2009 FOIA Memorandum, which makes clear that “in the face of doubt, openness prevails.”

Exemption 4 Of The FOIA

The FOIA requires agencies to disclose records upon request from any member of the public, subject to nine statutory exemptions. These exemptions include prohibitions against disclosing records containing national security information, personal information, deliberative communications, and information pertaining to law enforcement. Unless the requested records fall into one of the exemptions, an agency is required to disclose the records within twenty days, absent unusual circumstances. In reality, the process almost always takes at least several months to complete, depending on the complexity of the search and processing procedures.

Of the nine exemptions, Exemption 4 most frequently impacts information that contractors submit to the government. Exemption 4 protects two categories of information: (1) trade secrets and (2) commercial or financial information obtained from a person that is privileged or confidential. Exemption 4 is unique in that it is designed to ensure the availability and reliability of information submitted to the government by assuring submitters that their information will remain safeguarded to prevent competitive disadvantage.

Most courts define a trade secret as a commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities that result from innovation or substantial effort. Trade secrets may be found in a variety of documents, including contracts, manufacturing descriptions, schematics, or product formulas. Confidential material makes up a much broader category. In evaluating the applicability of Exemption 4 to confidential information, agencies consider whether the contractor provided the information voluntarily or involuntarily. If a contractor involuntarily submits information, the information is protected only if disclosure is likely to either impair the government’s ability to obtain necessary information in the future or cause substantial harm to the contractor’s competitive position. If a contractor voluntarily submits information, the information is protected only if the contractor would not customarily release it to the public. Under this more deferential standard, a contractor’s information is much more likely to be protected from disclosure. Information may also be withheld under Exemption 4 if it is privileged, including information subject to the attorney-client privilege, the critical self-evaluative privilege, the confidential report privilege, or a protective order.

Potential Pitfalls For Government Contractors

Despite the protections afforded to trade secrets and confidential and privileged information under Exemption 4, contractors should still be mindful that risks remain. For example, the United States District Court for the Northern District of California recently ordered the Department of Defense (“DOD”) to disclose a contractor’s subcontracting information in response to a FOIA request, despite the agency’s Exemption 4 claim. See Order Den. Cross Mots. for Summ. J., Am. Small Bus. League v. Dep’t of Def., No. C 14-02166 WHA, 2014 WL 6662427(N.D. Cal. Nov. 23, 2014). The case arose after the American Small Business League requested the most recent master Comprehensive Subcontracting Plan (“CSP”) submitted by Sikorsky Aircraft Corporation for participating in the Comprehensive Subcontracting Plan Test Program for DOD. The CSP identifies all subcontract amounts a contractor awards to small businesses on all of its government contracts. When DOD failed to respond within the statutorily required timeframe, the requester sued to compel the production of records.

In its opposition, DOD claimed that it could not release the CSP pursuant to Exemption 4. In support of its claim, DOD filed the declaration of Amy Johnson, the Director of Supply Management at Sikorsky. Johnson’s declaration argued that the CSP contained Sikorsky’s protected information, including Sikorsky’s make-or-buy process, the type of supplies and services Sikorsky subcontracted, the techniques of identification and development of potential sources, subcontractor proposal evaluation criteria, and flow-down of subcontracting requirements, among other sensitive information. DOD also identified certain proprietary information, including training program information, dollar amounts of awarded subcontracts, Sikorsky’s small business goals, methodologies for spending allocation, and specific commodities for which Sikorsky subcontracts.

With this information, DOD contended that a competitor could determine Sikorsky’s approach to key manufacturing and sourcing decisions that DOD evaluates in its contract proposal review. A competitor might use this information to determine the strengths and weaknesses in Sikorsky’s proposals or to misappropriate operational and manufacturing strategies. This would allow a competitor to use Sikorsky’s business information in crafting its own proposals and marketing material for similar DOD contracts.

Despite DOD’s concerns about the sensitive nature of the information contained in the CSP, the court ultimately found that DOD failed to demonstrate that the requested information would be “likely to cause substantial competitive injury.” According to the court, Johnson’s declaration merely asserted that a competitor “could” use the information to assess the strengths and weaknesses of Sikorsky’s bid proposals. The court therefore denied DOD’s motion for summary judgment and required DOD to produce Sikorsky’s CSP.

Reverse FOIA Lawsuits: How Contractors Can Protect Sensitive Business Information

The above case is a prime example of the risks contractors face in submitting confidential information to the government. Fortunately for Sikorsky, DOD agreed that Exemption 4 should prevent the disclosure of the requested records. DOD was therefore able to adequately represent Sikorsky’s interests before the court. Other contractors, however, must fight the agency to prevent disclosure of their records.

To protect themselves, many contractors have initiated “reverse FOIA” suits. A reverse FOIA suit allows an individual that has supplied the government with data to file suit to prevent the agency from disclosing protected information. The procedure typically begins after an agency receives a FOIA request implicating a third party’s records. Executive Order 12600 contains certain pre-disclosure notification procedures that agencies must follow. First, the agency must provide the submitter a reasonable period of time to object to the disclosure of any requested records. If the agency disagrees with the submitter’s position, the agency must provide a written notification containing the agency’s explanation. This notification must be provided within a reasonable number of days prior to a specified disclosure date. Although FOIA requesters are entitled to administratively appeal an agency’s decision, submitters are not accorded this right.

After receiving the agency’s decision, a submitter may seek judicial review to enjoin the agency’s disclosure of its records through a reverse FOIA suit. The FOIA does not expressly provide a mechanism for such a suit, although the Supreme Court has held that the Administrative Procedure Act provides a basis for submitters of information to contest a proposed disclosure by claiming that the agency’s decision is arbitrary or capricious. Chrysler Corp. v. Brown, 441 U.S. 281, 317-18 (1979).

Conclusion

In light of the risks accompanying disclosure of sensitive business information, contractors should exercise caution before submitting information to government agencies and should check all applicable regulations to ensure conformance with any requirements for designating information as confidential or proprietary. In the event that a requester seeks protected information, contractors should be proactive and take advantage of pre-disclosure notification procedures by timely objecting to any proposed disclosures. If the agency nevertheless chooses to proceed, reverse FOIA suits are an important vehicle to ensure the agency complies with the requirements of Exemption 4 and may save a company from suffering a substantial competitive injury.