FOIA Update: FOIA Counselor: Exemption 4 Under Critical Mass: Step-By-Step Decisionmaking

January 1, 1993

FOIA Update
Vol. XIV, No. 2
1993

FOIA Counselor


Exemption 4 Under Critical Mass: Step-By-Step Decisionmaking

The D.C. Circuit's new leading Exemption 4 decision in Critical Mass Energy Project v. NRC, 975 F.2d 871 (D.C. Cir. 1992) (en banc), cert. denied, 113 S.Ct. 1579 (1993), establishes a new analytical approach to determining whether commercial or financial information submitted to an agency is entitled to protection as "confidential" under Exemption 4 of the Freedom of Information Act, 5 U.S.C. § 552(b)(4). Under Critical Mass, a pivotal distinction must be drawn between information "required" to be submitted to an agency and information that was submitted "voluntarily."

For the "required" category of information, agencies should apply the longstanding standards of National Parks & Conservation Ass'n v. Morton, 498 F.2d 765, 770 (D.C. Cir. 1974). By contrast, the "voluntary" category of information now qualifies under Critical Mass for Exemption 4 protection "categorically," wherever it is found that the information "is of a kind that the provider would not customarily release to the public." 975 F.2d at 880; see also FOIA Update, Fall 1992, at 1-2. The following can serve as a step-by-step guide to Exemption 4 decisionmaking and provides practical guidance on the application of both the Critical Mass and National Parks standards.

STEP 1: Verify That The Threshold Requirements of Exemption 4 Are Satisfied

Before applying any Exemption 4 standard for determining whether requested information is "confidential," an agency should ensure that it has not overlooked the exemption's two threshold requirements. The language of Exemption 4 requires that the information in question be "obtained from a person" and also that it be "commercial or financial" in character. 5 U.S.C. § 552(b)(4). The primary limitation of this first threshold requirement is that it precludes Exemption 4 protection for any information generated by the federal government. See, e.g., Buffalo Evening News, Inc. v. SBA, 666 F. Supp. 467, 469 (W.D.N.Y. 1987). The second threshold requirement, especially the term "commercial," is by its nature a broad one. See, e.g., American Airlines, Inc. v. National Mediation Bd., 588 F.2d 863, 870 (2d Cir. 1978). Yet courts have cautioned that "the reach of the exemption . . . is not necessarily coextensive with the existence of competition in any form," Washington Research Project v. HEW, 504 F.2d 238, 244 (D.C. Cir. 1974), and that "not every bit of information submitted to the government by a commercial entity qualifies for protection under Exemption 4." Public Citizen Health Research Group v. FDA, 704 F.2d 1280, 1290 (D.C. Cir. 1983).

STEP 2: Determine Whether The Information's Sub-mission Was "Required" Or "Voluntary"

After this threshold verification, an agency should determine which category the information in question falls into under the new Critical Mass distinction: information that was "required" to be submitted to the government, or information that was submitted on a "voluntary" basis. To determine this, an agency should consider the full circumstances of the information's submission and focus on two closely related questions: Did it hold the legal authority to require that information submission and, if so, did it in fact exercise that authority in obtaining that information? The legal authority to require information submissions can be contained in statutes, executive orders, regulations (such as the Federal Acquisition Regulation), or "less formal mandates" issued by an agency that make the submission of information a condition of participating in an administrative process or of doing business with the government. See National Parks, 498 F.2d at 770. Such "less formal mandates" should include contract solicitations such as invitations for bids (IFB's) and requests for proposals (RFP's) that are issued as part of the federal procurement process. Once such an item of legal authority is issued and is in effect, it can be considered exercised and any information submission made in accordance with it will fall into the "required" category. For example, information submitted pursuant to a statute requiring drug manufacturers to submit safety data, or pursuant to a regulation requiring loan applicants to submit earnings statements, or pursuant to an RFP requiring offerors to submit cost breakdowns, all will fall into this category. It should be remembered that for purposes of this analysis, it does not matter that the underlying activity engaged in by the submitter (e.g., seeking a government contract or a loan) is one in which participation is purely voluntary. The key question under Critical Mass is whether those who choose to participate in the activity have information-submission requirements placed upon them as a lawful condition of their participation in that activity or an agency's related administrative process. If so, then any information submitted pursuant to such a requirement should be deemed "required." Under Critical Mass, it is possible that an agency might hold the authority to require submission of certain information, but not have exercised that authority. This could occur, for example, where an agency holds the authority to enact an information-submission regulation, but has not yet done so, or where it has the power to subpoena business records, but does not do so. Such unexercised authority, or the mere "power to compel" certain submissions, does not constitute an enforced "requirement"--which leaves any submission that is made under those circumstances an entirely "voluntary" one, as in the circumstances of the Critical Mass case itself. See 975 F.2d at 880.

STEP 3: For Information In The "Required" Category, Apply The National Parks Tests To Determine Whether It Is "Confidential"

If the information in question is found to fall within the "required" category under Critical Mass's new distinction, then its "confidential" status under Exemption 4 will be governed by National Parks and all existing National Parks tests should be examined to determine whether protection of the information is warranted. Significantly, the D.C. Circuit held in Critical Mass that the two primary National Parks tests -- commonly referred to as its "impairment prong" and its "competitive harm prong"--are "not exclusive." 975 F.2d at 879. Thus, there remains the possibility that other governmental or private interests may also be protected under Exemption 4 in the exceptional case. See, e.g., FOIA Update, Winter 1985, at 3-4 (citing National Parks, 498 F.2d at 770 n.17, as basis for "intrinsic value" protection). The significance of National Parks' "impairment prong" undoubtedly will be diminished by the distinct protection that is now afforded voluntarily submitted information under Critical Mass. Nevertheless, as the D.C. Circuit has recognized, there may arise situations in which agencies require the submission of certain information yet are concerned that FOIA disclosure could adversely affect the quality or reliability of that information. See 975 F.2dat 878. In such a case, an agency should consider whether protection on such a "qualitative impairment" basis is warranted. See, e.g., Washington Post Co.v. HHS, 690 F.2d 252, 268-69 (D.C. Cir. 1982) (finding that disclosure could adversely affect accuracy of statements required to be filed by consultants). Far more frequently, though, the National Parks test to be applied will be the "competitive harm prong," requiring a conventional assessment of the competitive sensitivity of each item of information involved. The established submitter-notice procedures prescribed in Executive Order 12,600, 3 C.F.R. 235 (1988), should be followed in making all such competitive harm determinations--with one important addition recommended in light of Critical Mass: In its initial notification letter, an agency should inform the submitter that the information at issue was required to be submitted and that therefore the National Parks standards apply. Such a step will place the submitter on notice at the outset of the process that the broader Critical Mass standards do not apply and that it must address the "competitive harm" standards of National Parks to justify any claim to Exemption 4 protection. (Agencies need not seek input from submitters regarding the "required" vs. "voluntary" nature of the submission; they ordinarily should make those determinations on their own and advise submitters accordingly.)

STEP 4: For Information In The "Voluntary" Category, Apply The Critical Mass Test To Determine Whether It Is "Confidential"

If the information in question is found to fall within the "voluntary" category, then its "confidential" status will be governed by Critical Mass, not National Parks. Under the Critical Mass test, such information is considered "confidential" if it is "of a kind that would customarily not be released to the public by the person from whom it was obtained." 975 F.2d at 879. To apply this test, an agency must examine all of the information contained within a voluntary submission and reach a judgment about the submitter's customary treatment of that information. Agencies should be mindful of the fact that a given submission might contain information that is not customarily provided to the public by the submitter, as well as information that is customarily made public -- such as through a company's promotional materials or its public securities filings, for example. Only the former information will be covered by Exemption 4, so voluntary submissions must be segregated carefully to ensure the disclosure of all nonexempt information. In the application of this test, it is the treatment of individual submitters that should be examined, not the customs of an industry as a whole. See id. at 872, 878, 879, 880 (articulating test precisely in such terms). It also should be remembered that this new "customary treatment" standard does allow for the submitter to have made some disclosures of the information, so long as those disclosures were not "public" ones. This is pointedly illustrated by the records that were at issue in the Critical Mass case itself -- records which had been provided (under a nondisclosure agreement) "to nearly everyone who may be interested except the public-at-large," Critical Mass Energy Project v. NRC, 644 F. Supp. 344, 347 n.5 (D.D.C. 1986), yet whichwere ruled exempt by the D.C. Circuit simply because they were "not customarily release[d] . . . to the public." 975 F.2d at 880.

Additional Submitter-Notice Steps

Because Executive Order 12,600 predates the Critical Mass decision, it contains no submitter-notice procedure regarding this "customary treatment" test for voluntary submissions. As a matter of sound administrative practice, however, agencies should employ procedures analogous to those set forth in Executive Order 12,600 when determining whether this test is satisfied for voluntary submissions. Accordingly, just as no notice is necessary where anagency is able to determine on its own that disclosure would cause a submitter competitive harm under National Parks, an agency likewise should be able to withhold information under the Critical Mass test without contacting the submitter -- wherever the agency already has a basis for being certain that that submitter does not customarily release any of that information to the public.

On the other hand, where an agency is uncertain of the submitter's customary treatment of any such information, the submitter should be requested to provide the agency with a description of its treatment of the information, including any disclosures that are customarily made and the conditions under which such disclosures occur. The agency should then make an objective determination as to whether the information "is of a kind that the provider would not customarily release to the public." 975 F.2d at 880. In so doing, agencies should be mindful of the fact that the D.C. Circuit specifically observed in Critical Mass that "the agency invoking Exemption 4 must meet the burden of proving the provider's custom." Id. at 879.

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