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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