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Full Court Review Sought in McDonnell Douglas Unit Price Case

In an uncommonly significant litigation step, the Department of Justice on behalf of the Department of the Air Force has asked the full Court of Appeals for the District of Columbia Circuit to rehear a "reverse" Freedom of Information Act case involving the status under Exemption 4 of the unit prices that are contained in an awarded government contract.

Last week, the government filed a petition for rehearing and suggestion for rehearing en banc in McDonnell Douglas Corp. v. United States Department of the Air Force, 375 F.3d 1182 (D.C. Cir. 2004), a case in which a divided panel of the D.C. Circuit recently ruled against the Air Force on two of the three types of contract prices involved in the case. The Solicitor General authorized the filing of a full rehearing en banc petition based upon the strength of the Air Force's position, as reflected in a lengthy dissenting opinion, and in recognition of the "exceptional importance" of the issues that the case presents.

The case stems from a June 1998 contract entered into between the Air Force and McDonnell Douglas for maintenance of certain KC-10 and KDC-10 aircraft, which are used for aerial refueling of other military aircraft. The Air Force received a FOIA request for the entire contract and, after an exhaustive administrative process involving notice to McDonnell Douglas and the consideration of all disclosure objections raised by it, the Air Force determined that the prices in this awarded government contract were not protected by Exemption 4 of the FOIA and therefore were required to be disclosed. In 2000, McDonnell Douglas filed a "reverse" FOIA lawsuit under the Administrative Procedure Act ("APA"), 5 U.S.C. 706 (2000), seeking to prevent the Air Force from disclosing three categories of the contract's prices.

Applying the deferential "arbitrary and capricious" standard of review under the APA, the district court upheld the Air Force's determination that release of any of the categories of Contract Line Item Number (CLIN) prices at issue -- option year prices, vendor prices, and "over and above" prices -- would not be likely to cause substantial competitive harm to McDonnell Douglas, because the Air Force had "presented reasoned accounts of the effect of disclosure based on its experiences with government contracting." McDonnell Douglas Corp. v. United States Dep't of the Air Force, 215 F. Supp. 2d 200, 209 (D.D.C. 2002); see also FOIA Post, "New McDonnell Douglas Opinion Aids Unit Price Decisionmaking" (posted 10/4/02) (discussing district court decision). McDonnell Douglas then appealed to the D.C. Circuit Court of Appeals.

On July 27, in an opinion authored by Chief Judge Douglas H. Ginsburg and joined by Judge Harry T. Edwards, a majority of a D.C. Circuit panel reversed the district court's decision in large part by holding that two of the categories of line item prices, option prices and vendor prices, cannot be disclosed. See McDonnell Douglas Corp. v. United States Dep't of the Air Force ("McDonnell Douglas II"), 375 F.3d at 1191. Differently and inconsistently, the panel upheld the Air Force's decision to disclose "over and above" prices. See id. at 1192. Circuit Court Judge Merrick B. Garland strongly disagreed with the panel majority's rulings regarding the option and vendor prices, countering each of its stated justifications for those rulings in an extensive, highly detailed dissent. See id. at 1194-1204.

With respect to the option prices at issue in the case, McDonnell Douglas had argued that its competitors could "reverse-engineer" them and discern "sensitive" pricing factors. See id. at 1190 n.3. The Air Force had responded that the base year prices and the option year prices were made up of too many factors and unknown variables for a competitor to be able to derive any sensitive information from them. See id. at 1200 (dissenting opinion). The panel majority did not address this aspect of the case, however. See id. at 1190 n.3. Instead, it focused on and completely rejected the Air Force's judgment that McDonnell Douglas was not likely to suffer competitive harm from disclosure of the option prices where price would be only one of many factors used to evaluate any possible future bid. See id. at 1189. It held, rather, that disclosure of the option prices "would significantly increase the probability McDonnell Douglas's competitors would underbid it in the event the Air Force rebids the contract" because, it declared, "price is the only objective, or at least readily quantified, criterion among the six criteria for awarding government contracts." Id. Despite the Air Force's uncontested factual showing that in any rebidding price would be considered together with five other factors, and then weighted equally with them, the panel majority nevertheless concluded that "[w]hether price will be but one of several factors to be weighted equally in any future [bidding process] . . . is necessarily somewhat speculative." Id.

Furthermore, the majority held that the Air Force's argument in this regard had already been "considered and rejected" by the D.C. Circuit in McDonnell Douglas Corp. v. NASA, 180 F.3d 303 (D.C. Cir. 1999) ("McDonnell Douglas I"). McDonnell Douglas II, 375 F.3d at 1189. After first positing an entirely new definition of the term "underbidding," the panel proceeded to rule that the district court wrongly held that the Air Force's argument in this case "differs markedly" from the argument that had been rejected in McDonnell Douglas I. Id. On this basis, it held that the option prices in the contract were protected by Exemption 4 and could not be disclosed by the Air Force.

Regarding the CLINs that McDonnell Douglas contended were made up primarily of vendor costs, McDonnell Douglas argued that its competitors probably obtained "the same or nearly the same" quotes from the same vendors and that disclosure of these CLINs therefore would allow them to calculate its "Vendor Pricing Factor." Id. at 1190. The Air Force determined that disclosure of these CLINs would not cause McDonnell Douglas substantial competitive harm because in its experience it is "not uncommon" for a vendor to quote different prices to its different customers. Id. Rather than examine the evidence (or lack of it) behind McDonnell Douglas's argument, though, the panel majority instead stated that the Air Force had "provided no actual evidence" to support this proposition, and it then declared that it is "probable as a matter of economic theory" that a subcontractor would quote its prime contractors similar prices. Id. at 1191. Based upon that theory of the case, and of the marketplace as well, the panel held that the Air Force's decision to disclose CLINs comprised of vendor prices was arbitrary and capricious. See id.

Finally, as to the CLINs consisting of "over and above" rates in the contract -- i.e., rates that McDonnell Douglas agreed to charge the Air Force for work not priced in the basic contract -- McDonnell Douglas had argued that their disclosure would allow a competitor to calculate its labor markup because the wages McDonnell Douglas was paying were common knowledge, but the Air Force had determined that McDonnell Douglas's wages were not publicly known and that in fact McDonnell Douglas had submitted significantly different "over and above" rates in a contract to service another type of aircraft at the very same facility. See id. at 1192. For this one category of prices, the panel held that the Air Force "reasonably concluded [that] McDonnell Douglas failed to carry its burden of showing release of the Over and Above CLINs was likely to cause it substantial competitive harm. Therefore, the decision of the Air Force to release the[se] CLINs was not arbitrary and capricious." Id.

Judge Garland vigorously disagreed with the panel majority's decision regarding both the option prices and the vendor prices, and he expressed great concern that the majority had "come perilously close to a per se rule that line-item prices -- prices the government agrees to pay out of appropriated funds for goods or services provided by private contractors -- may never be revealed to the public through a [FOIA] request." Id. at 1194. Regarding the vendor pricing CLINs, Judge Garland accurately pointed out that "it is the opponent of disclosure -- not the requester -- who bears the burden of proving whether substantial competitive harm is likely to result," but that in this case the panel majority "st[ood] the burden of proof on its head" by requiring the Air Force to provide special evidence to support its stated judgment. Id. at 1196. Judge Garland also faulted the majority for using mere economic theory -- "a theory of the court's own invention" -- to support its decision that the vendor pricing CLINs are protected by Exemption 4. Id. at 1197. Further, among other criticisms, Judge Garland stated that "unless we reverse the burden of proof and deny the Air Force the deference it is owed, there is no basis for overturning its conclusion that disclosure of the prices it paid for McDonnell Douglas's services is unlikely to cause substantial harm to the contractor's competitive position." Id. at 1198.

Judge Garland also found errors in the majority's decision regarding the option prices in the contract. He recognized that the Air Force's argument regarding the option prices was not, in fact, the same argument that the D.C. Circuit had rejected in McDonnell Douglas I, and he observed that the panel majority was able to characterize the arguments in the two cases as the same by only "embellish[ing]" the definition of "underbidding." Id. at 1201. Judge Garland further faulted the majority for just dismissing the Air Force's determination that because price was only one of many evaluation factors used in awarding contracts the disclosure of option prices is not likely to cause substantial harm to McDonnell Douglas's competitive position. See id. at 1202. He pointed out that the contract at issue in this case was "not to supply cafeteria food, but to service planes that 'will be flown by American military personnel on highly dangerous missions,'" and that it therefore should not be surprising that "considerations of safety, quality, and confidence in an incumbent contractor would at least be the equal of price." Id. Judge Garland concluded that "[i]n dismissing the government's non-price factors argument and failing to address its reverse-engineering contention, my colleagues come perilously close to treating a contractor's claim of 'underbidding' as a talisman that bars disclosure of any line-item price." Id.

Presented with this extraordinary split decision on an issue of great importance to the adjudication of "reverse" FOIA cases under the APA, the Solicitor General authorized the exceptional step of seeking rehearing of this case by the D.C. Circuit's full membership (currently nine judges). In consonance with Judge Garland's dissent, the Justice Department's en banc rehearing petition argues that the panel majority's decision sharply conflicts with precedents of the D.C. Circuit on proper judicial review in APA cases, whereby reviewing courts are required to give at least some deference to agency determinations of this kind. See Petition for Rehearing and Suggestion for Rehearing En Banc, McDonnell Douglas Corp. v. United States Dep't of the Air Force, No. 02-5342 (filed Oct. 1, 2004). Beyond pointing out the panel majority's serious departure from APA principles generally, the petition argues that the panel strayed far afield of its proper role in a "reverse" FOIA case in particular. See id. at 4-9.

Most notably, regarding the option prices at issue, the petition argues that the panel not only did not give the Air Force's decision anything near the deference required under the APA, but it went so far as to substitute its own "facts" and rationales for those contained in the case's Administrative Record when it ignored the undisputed facts that were before the Air Force at the administrative stage and instead unilaterally declared that price would be "the most important" factor in any future competition. See id. at 6. The petition strenuously argues that due to this total lack of deference to the Air Force's judgment and experience with its bidding processes, the panel's decision stands in direct conflict with the D.C. Circuit's own precedent of CNA Financial Corp. v. Donovan, 830 F.2d 1132, 1153-55 (D.C. Cir. 1987), a "reverse" FOIA case in which it previously held that the "harm from disclosure is a matter of speculation, and that when a reviewing court finds that an agency has supplied an equally reasonable and thorough prognosis, it is for the agency to choose between the contesting party's prognosis and its own." Id. at 1155. Similar arguments apply to the issue of vendor prices as well.

The rehearing petition further notes that there is a nearly unbroken line of district court decisions that have faced this issue and have upheld agency decisions to disclose pricing information. See Freedom of Information Act Guide & Privacy Act Overview (May 2004), at 344-49 & nn.407-36. Even more significantly, it adds, the panel majority's decision most pointedly conflicts with longstanding "reverse" FOIA precedents in the Fourth Circuit Court of Appeals and the Ninth Circuit Court of Appeals in which those circuit courts upheld agency determinations that such contract pricing information was not protected by Exemption 4. See Pac. Architects & Eng'rs v. United States Dep't of State, 906 F.2d 1345, 1347-49 (9th Cir. 1990); Acumenics Research & Tech., Inc. v. United States Dep't of Justice, 843 F.2d 800, 807-09 (4th Cir. 1988). Ultimately, the Justice Department has sought rehearing en banc in an effort to alleviate the practical difficulties and uncertainties that loom large in this long-controversial area of FOIA law if this decision is left to stand.

In sum, government agencies now must await a final ruling in this case before knowing with certainty whether the law of the D.C. Circuit has conclusively shifted along the lines of the opinion written by the McDonnell Douglas II panel majority. Further action by the D.C. Circuit on the pending rehearing petition (or perhaps by the United States Supreme Court, if necessary) can be expected to have an impact on agency decisionmaking on such Exemption 4 issues as a matter of sound administrative practice and policy. No matter what conclusive development eventually occurs, the Office of Information and Privacy will provide governmentwide policy guidance based upon it -- and agencies should continue to follow existing policy guidance on the treatment of unit prices under the FOIA (see FOIA Post, "Treatment of Unit Prices Under Exemption 4" (posted 5/29/02); Freedom of Information Act Guide & Privacy Act Overview (May 2004), at 340 & n.384, 344 & n.406) in their FOIA decisionmaking in the meantime. Accord FOIA Update, Vol. IX, No. 2, at 3-4 ("OIP Guidance: Privacy Protection in the Wake of the Reporters Committee Decision") (advising that agencies "should continue" existing administrative practices in FOIA decisionmaking under comparable circumstances of further judicial review).  (posted 10/7/04)

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