FOIA Post (2005): Treatment of Unit Prices After McDonnell Douglas v. Air Force

May 29, 2002

FOIA Post

Treatment of Unit Prices After McDonnell Douglas v. Air Force

Once
again, a decision by the Court of Appeals for the District of Columbia Circuit
has renewed questions as to the proper treatment of Freedom of Information Act
requests that seek government contract line item or "unit" prices. Though the
government had sought rehearing of the D.C. Circuit's decision in McDonnell
Douglas Corp. v. United States Department of the Air Force, 375 F.3d 1182
(D.C. Cir. 2004), reh'g en banc denied, No. 02-5342 (D.C. Cir. Dec.
16, 2004), a careful examination of all aspects of this decision confirms the
fundamental soundness of agencies continuing their practice of conscientiously
following the standard submitter-notice process and, assuming that disclosure
is required, creating a detailed administrative record to support their decisions
in such cases. Accord FOIA Post, "Treatment
of Unit Prices Under Exemption 4" (posted 5/29/02).


Denial
of Rehearing in McDonnell Douglas v. Air Force

In
McDonnell Douglas v. Air Force -- a "reverse" FOIA case brought by
a contractor seeking to prevent the Air Force from disclosing three categories
of unit prices -- a divided panel of the D.C. Circuit ruled against the government
on two of those price categories, option year prices and vendor prices, and
ruled for the government on "over and above" prices. See FOIA Post,
"Full Court Review Sought in McDonnell
Douglas Unit Price Case" (posted 10/7/04) (describing decision in full
detail). Following this partial loss the government filed a petition for rehearing
and suggestion for rehearing en banc. See id.

The
petition was circulated to the full court of appeals and a vote was taken, but
a majority of the judges did not vote in favor of the petition. See McDonnell
Douglas Corp. v. United States Dep't of the Air Force, No. 02-5342 (D.C.
Cir. Dec. 16, 2004). The Solicitor General decided not to petition the Supreme
Court for certiorari review in the case, thereby raising the question of the
potential impact of this most recent D.C. Circuit unit price decision.


Starting
Points for Consideration

In
assessing the impact of the McDonnell Douglas v. Air Force decision
on agency decisionmaking, there are a number of overarching initial points that
should be borne in mind. First, the D.C. Circuit clearly held that it was not
creating a per se rule that prices in awarded government contracts must be withheld.
See 375 F.3d at 1193 ("our analysis . . . does not come 'close to a
per se rule' that contract line-item prices 'may never be revealed to the public
through the [FOIA]'" (quoting dissenting opinion)). This reiterates the view
adopted by the D.C. Circuit in its previous unit price decision in McDonnell
Douglas Corp. v. NASA, 180 F.3d 303 (D.C. Cir. 1999), reh'g en banc
denied, No. 98-5251 (D.C. Cir. Oct. 6, 1999). See id., slip op.
at 2 (D.C. Cir. Oct. 6, 1999) (Silberman, J., concurring in denial of rehearing
en banc) (emphasizing that although the court there had overturned the agency's
disclosure decision, it did so based upon the record before it and was not creating
a per se rule that prices should "invariably" be withheld).

Second,
it is significant that in McDonnell Douglas v. Air Force the D.C. Circuit
ruled in the government's favor regarding one category of prices, agreeing with
the government that disclosure of the contract information in that category,
"over and above" prices, was not likely to cause the submitter substantial competitive
harm. See 375 F.3d at 1191-92. In ruling for the agency, the court
of appeals examined the arguments made by McDonnell Douglas for opposing release
of "over and above" prices -- i.e., prices for work not specifically required
by the contract -- and it found that the Air Force had "refute[d]" those arguments
in the administrative record. Id. at 1192. Consequently, the Air Force's
decision to release those prices was upheld. See id.

Thus,
unlike in the McDonnell Douglas v. NASA decision, the agency prevailed
in part in the McDonnell Douglas v. Air Force case, thereby showing
that the D.C. Circuit will uphold an agency's disclosure decision involving
contract unit prices so long as the agency's decision is fully supported by
the administrative record. See FOIA Post, "Treatment
of Unit Prices Under Exemption 4" (posted 5/29/02) (emphasizing importance
of creating adequate administrative record). In that important respect, the
Air Force case has significantly enhanced the landscape for the treatment
of unit prices in the D.C. Circuit.

Third,
McDonnell Douglas v. Air Force, like McDonnell Douglas v. NASA,
did not involve agency reliance on two disclosure provisions of the Federal
Acquisition Regulation (FAR) -- provisions which not only have long required
disclosure of unit prices in both the post-award notice to and debriefing of
unsuccessful offerors, see 48 C.F.R. §§ 15.503(b)(1)(iv),
15.506(d)(2) (2004), but which more recently have included an additional requirement
that "the items, quantities, and any stated unit prices of each award shall
be made publicly available, upon request," id. § 15.503(b)(1)(iv).
Most significantly, this latter provision is applicable to contracts solicited
after January 1, 1998, and now all three of these FAR requirements should serve
as the foundation for any agency decisionmaking concerning unit prices. See
McDonnell Douglas v. NASA, 180 F.3d at 306 (noting explicitly that NASA
had not based its disclosure decision on any "independent legal authority to
release line item pricing information").

In fact,
since its inception decades ago, the FAR has specifically provided for disclosure
of unit prices to unsuccessful offerors. See FOIA
Update, Vol. V, No. 4, at 4 (advising that FAR provides for disclosure
of unit prices). This is in keeping with longstanding practices in government
contracting that predated the FOIA's enactment. See, e.g., Armed Services
Procurement Regulations, 32 C.F.R. § 3-508(b)(iv) (1966).
Indeed, agency decisions to release unit prices are commonplace, they are not
often challenged in court, and the overwhelming majority of courts have upheld
those decisions.

To
date, the D.C. Circuit has not been presented with an administrative record
supporting disclosure of unit prices that has been based upon this historical
backdrop and these FAR provisions, so they remain fresh and sound authority
upon which to base a disclosure decision. At the same time, as the Office of
Information and Privacy has been advising agencies for the past three years,
see FOIA Post, "Treatment
of Unit Prices Under Exemption 4" (posted 5/29/02), because of the decisions
in McDonnell Douglas v. NASA, 180 F.3d at 306-07 (summarily overturning
agency disclosure decision based upon inadequate administrative record), and
MCI Worldcom, Inc. v. GSA, 163 F. Supp. 2d 28, 35-36 (D.D.C. 2001)
(viewing in alternative and in dicta agency disclosure decision based solely
on FAR provisions as insufficient, in absence of findings in administrative
record regarding Exemption 4), agencies still must be sure to create a detailed
administrative record addressing all aspects of any substantial competitive
harm claim made by a submitter so that they can best defend their disclosure
decisions.


Steps
to Unit Price Decisionmaking

Taking
all of this into account, agencies are best advised to take the following steps
whenever they receive a FOIA request that encompasses unit prices. First,
they should continue the sound administrative practice of providing notice to
the submitter in accordance with the requirements of Executive Order 12,600,
3 C.F.R. 235 (1988), reprinted in 5 U.S.C. § 552
note (2000), and in FOIA
Update, Vol. VIII, No. 2, at 2-3; see also FOIA
Update, Vol. VIII, No. 2, at 1, in order to obtain, in a timely fashion,
any objection to disclosure. See FOIA Post, "Treatment
of Unit Prices Under Exemption 4" (posted 5/29/02) (describing submitter-notice
process).

Second,
they should conduct a thorough competitive harm analysis, see id.,
always keeping in mind that it is the opponent of disclosure that bears the
burden of proof, accord Occidental Petroleum Corp. v. SEC,
873 F.2d 325, 342 (D.C. Cir. 1989) (explaining that "the statutory policy favoring
disclosure requires that the opponent of disclosure" bear the burden of persuasion).
For example, in ruling in the agency's favor on the "over and above" prices
in McDonnell Douglas v. Air Force, the D.C. Circuit held that "the
agency reasonably concluded [that] McDonnell Douglas failed to carry its burden
of showing [that] release of the ['over and above' prices] was likely to cause
it substantial competitive harm." 375 F.3d at 1192. This allocation of burden
thus is a significant aspect of the process.

Third,
after performing a thorough analysis of the specific arguments presented by
the submitter, and upon a determination that release is required, an agency
then should clearly set forth its analysis and the rationale for its decision
in the administrative record. As is clear from both McDonnell Douglas
decisions, the single most important thing that an agency can do to prepare
its disclosure decision for possible judicial review is to create an adequate
administrative record. Of necessity, that means precisely tailoring its decision
letter to the facts of the case and to the specific objections that are made
by the submitter within the time period allowed. In creating such a record there
are several key elements that an agency should be sure to include.


Key Elements
of an Administrative Record

•
First and foremost, in making any decision to disclose unit prices an agency
should consider the applicability of the FAR provisions that require prices
to be disclosed. See 48 C.F.R. §§ 15.503(b)(1)(iv),
15.506(d)(2). The FAR and its predecessor regulations have long required the
disclosure of unit prices to unsuccessful offerors. It is against this particular
historical backdrop of disclosure, coupled with the strong directives contained
in the FAR, that any submitter objections must be analyzed. Wherever applicable,
this should be relied upon and referenced in the administrative record.

Of
course, an agency also should ascertain whether the particular prices at issue
have already been disclosed in its own post-award notice or debriefing processes,
as those steps would independently serve as a basis for disclosure under the
FOIA. The D.C. Circuit has long recognized that "[t]o the extent that any [business]
data requested under [the] FOIA are in the public domain, the submitter is unable
to make any claim to confidentiality -- a sine qua non of Exemption 4." CNA
Fin. Corp. v. Donovan, 830 F.2d 1132, 1154 (D.C. Cir. 1987).

•
Next, wherever applicable, an agency decision letter reaching a disclosure outcome
should contain, as an alternative ground, a detailed explanation as to why the
agency has determined that disclosure of the information at issue would not
be likely to cause substantial competitive harm. This letter must be readily
understandable by a lay person who does not have a contracting background, and
it should comprehensively include all relevant aspects of the agency's decisionmaking
process.

•
Accordingly, even information that may be common knowledge or publicly known
among agency officials and the submitter should be taken into account and explicitly
set forth in the administrative decision letter. For example, the starting point
for any competitive harm analysis is that the bottom-line contract price is
required to be disclosed. See 48 C.F.R. § 5.303;see also McDonnell Douglas v. NASA, 180 F.3d at 306 (emphasizing that
"[i]t is undisputed that the total price of the contract may be made public").
Similarly, the passage of time also should be factored into the analysis. By
the time a FOIA request for contract prices is being processed by an agency,
events might have occurred under the contract, agency needs might have become
different, circumstances in the industry might have changed, etc. -- so any
competitive harm argument must be examined in light of such changed circumstances.
The circumstances as they exist at the time at which the contract information
is processed for disclosure under the FOIA govern the analysis and should be
described in the administrative decision letter.

•
The above caution is especially applicable to any claims made by a submitter
for the withholding of prices for contract option years. Fundamentally, contractors
and agencies alike know that contract options are almost invariably exercised.
This basic, threshold fact should be taken into consideration by the agency
when analyzing a submitter's claim regarding option year prices and should be
included by the agency in the administrative record. See McDonnell Douglas
v. Air Force, 375 F.3d at 1187-88 (refusing to consider argument regarding
likelihood of options being exercised because underlying factual point was not
mentioned in administrative record). Likewise, agencies need to explain why
there would be no harm to a submitter if the options were exercised. Agency
regulations on point -- such as those instructing an agency to take into account
its "'need for continuity of operations and [the] potential costs of disrupting
operations'" when deciding whether to exercise an option, id. at 1199
(dissenting opinion (quoting FAR provision found at 48 C.F.R. § 17.207(e)))
-- should be relied upon and cited wherever applicable. An agency's experience
with exercising options should also be included, as it can form part of the
basis for a disclosure determination.

Moreover,
in addition to including this strong presumption that option years will be exercised
and providing supporting evidence that this is so, agencies should be sure to
explain that even in the unlikely event that options are not exercised the reasons
for making such a decision ordinarily would be expected to have a corresponding
negative effect on any conceivable usefulness of the discarded option prices.
For example, if an agency were to determine that factors in the market have
changed considerably since the initial competition and have necessitated the
extraordinary step of recompeting the options, those same changes in the market
likely would diminish the value to competitors of knowing the option prices
that originally were proposed under those different conditions. This change
in conditions, in turn, would also impact the strategy to be employed by both
the original submitter and any competitors in proposing new prices. See
id. at 1188 (recognizing such arguments but disallowing them because they
were not contained in the agency's administrative record). All of these facts,
as well as any relevant experience that the agency has had with exercising options
in general, and with the contract at issue in particular (e.g., that the first
option year has been exercised), should be included in its administrative decision
letter.

•
Furthermore, in responding to competitive harm arguments agencies should avoid
use of arguably equivocal terms such as "it is entirely possible" or "it is
not uncommon" that an event occurs. Rather, the administrative letter should
be as definitive as reasonably possible. For example, instead of saying that
it is "not uncommon" for a subcontractor to quote different prices to different
prime contractors, an agency should specify how it knows that subcontractors
quote different prices to different primes. If this is based upon experience
with other contracts, or upon a review of the proposals that were submitted
with the very contract at issue, then the particular experience and supporting
evidence that forms the basis for the decision should be specified. It is noteworthy
in this regard that in McDonnell Douglas v. Air Force, the D.C. Circuit
expressly indicated that had the Air Force "offered some explanation or evidence
of the sub/prime contractor market at issue" (as Judge Garland did in his dissent),
"then perhaps its argument would be persuasive." Id. at 1191 n.6. Thus,
the D.C. Circuit has made clear that if an administrative determination or subsidiary
conclusion is capable of substantiation, its substantiation is best provided.
See id. at 1190-91. As much as anything, McDonnell Douglas v. Air
Force stands for the proposition that including substantiation details
in the administrative record can make a difference in a case's outcome.

•
Likewise, when analyzing a submitter's objections it often is useful to compare
the claims being made with what actually happened regarding the contract at
issue. For instance, if a submitter were to claim that a certain cost is always
the same, it could be quite effective to refute that argument by pointing to
any provision in the contract itself where in fact different costs are given.
See id.; accord Acumenics Research & Tech., Inc. v. United
States Dep't of Justice, 843 F.2d 800, 808 (4th Cir. 1988) (describing
how agency compared submitter's assertions against actual contract provisions).

•
Indeed, all agencies should be guided by the analysis set forth in the Acumenics
case by the Court of Appeals for the Fourth Circuit, see 843 F.2d at
807-08, and by the Court of Appeals for the Ninth Circuit in Pacific Architects
& Engineers v. United States Department of State, 906 F.2d 1345, 1347-48
(9th Cir. 1990), where appellate courts upheld agency disclosure decisions based
on agency findings that the aggregate figures that make up unit prices consist
of too many fluctuating variables to enable a competitor to glean confidential
information, such as a profit margin, from them. See Freedom
of Information Act Guide & Privacy Act Overview (May 2004), at
338-49 & nn.372-433 (discussing additional case authority). This "reverse-engineering"
argument was not addressed by the D.C. Circuit in McDonnell Douglas v. Air
Force, see 375 F.3d at 1190 n.3, and thus the agency decisions
that were upheld in Acumenics and Pacific Architects continue
to serve as models for agencies to follow in creating their own administrative
records in future cases.

In
sum, the decision in McDonnell Douglas v. Air Force reaffirms that
it is vitally necessary for agencies to continue to pay careful attention to
creating comprehensive, evidence-supported administrative records in dealing
with FOIA requests for unit prices. In doing so, they should (1) start with
the historical treatment afforded contract prices, coupled with the disclosure
imperatives contained in the FAR; (2) specifically analyze each particular argument
raised by the submitter, bearing in mind all of an administrative record's key
elements; and (3) assuming that disclosure is found to be required, take care
to justify concretely all bases for each decision. By consistently following
this approach in each case, agencies can ensure that they will be able to best
support and defend their decisions if challenged in "reverse" FOIA litigation.

(This
guidance supplements FOIA Post, "Treatment
of Unit Prices Under Exemption 4" (posted 5/29/02).)  (posted 9/8/05)

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