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FOIA Update: Protecting Business Information

FOIA Update
Vol. IV, No. 4

Protecting Business Information

This issue of FOIA Update is devoted to the theme of business information protection.

This special issue of FOIA Update was prepared in large part by a team of Office of Information and Privacy personnel headed by OIP staff attorney Melanie A. Pustay.

The free flow of business information into administrative agencies is essential to the effective functioning of our Federal Government. Much of this information is sensitive proprietary data the disclosure of which would likely cause harm to the commercial interests of the businesses involved. Exemption 4 of the Freedom of Information Act, which authorizes the withholding of "trade secrets and commercial or financial information obtained from a person and privileged or confidential," 5 U.S.C. § 552(b)(4), was designed to protect against such commercial harm.

When the FOIA was enacted, Congress recognized the need to protect confidential business information, emphasizing that a federal agency should honor the promises of confidentiality given to submitters of such data because "a citizen must be able to confide in his government." H.R. Rep. No. 1497, 89th Cong. 2d Sess. 10 (1966). Indeed, the early Exemption 4 cases focused on this consideration and permitted the withholding of commercial or financial information if a private entity supplied it to the government under an express or implied promise of confidentiality, see, e.g., GSA v. Benson, 415 F.2d 878, 881 (9th Cir. 1969), or whenever there was an objective expectation of confidentiality, see, e.g., M.A. Schapiro & Co. v. SEC, 339 F. Supp. 467, 471 (D.D.C. 1972).

That standard of business data protection has been largely ignored, however, since the decision in National Parks & Conservation Association v. Morton, 498 F.2d 765, 770 (D.C. Cir. 1974), which announced a two-prong test for determining the confidentiality of business data under Exemption 4. The test permits withholding when disclosure would (1) impair the government's ability to obtain such necessary information in the future or (2) cause substantial harm to the competitive position of the submitter.

The subsequent wide acceptance and application of this National Parks test prompted congressional hearings focusing on the fact that in practice it requires agencies to conduct extensive and complicated economic analyses, which often makes it exceedingly difficult to apply. See Business Record Exemption of the Freedom of Information Act:  Hearings Before a Subcomm. of the House Comm. on Government Operations, 95th Cong., 1st Sess. 2 (1977). At the same time it was acknowledged that, despite such problems with its application, the National Parks test's widespread acceptance "suggests that it will not be easy to find a simpler method of identifying information that should be protected from release." Id. (But see the article on pp.8-9 of this issue for a description of the challenge being made to the National Parks test in the First Circuit Court of Appeals.)

The Government Impairment Test

Since that time, some courts have effectively broadened the standards of National Parks in actual application. For example, it was initially doubted whether the first prong of the National Parks test could be satisfied by information not obtained by an agency voluntarily, on the theory that if an agency could compel submission of such data, its disclosure would not impair the agency's ability to obtain it in the future.

In Orion Research. Inc. v. EPA, 615 F.2d 551, 554 (1st Cir.), cert. denied, 449 U.S. 833 (1980), however, a notion of "impairment" broad enough to permit protection under such a circumstance was recognized. Similarly, in Timken v. United States Customs Service, 3 GDS ¶ 83,234 at 83,974 (D.D.C. 1983), it was recently held that where information has been "traditionally received voluntarily," an agency's technical right to compel the submission of information should not preclude withholding it under the National Parks impairment test.

On the other hand, one district court judge strictly applied the literal language of this test in finding that it was not satisfied where the impairment would be to an agency's receipt of information not absolutely "necessary" to the agency's functioning. 9 to 5 Organization for Women Office Workers v. Board of Governors of the Federal Reserve System, 551 F. Supp. 1006, 1010 (D. Mass. 1982) (appeal pending).

The Competitive Harm Test

The second prong of the National Parks test, which is the one upon which the overwhelming majority of Exemption 4 cases turn, has also been broadened somewhat by the courts. Five years after handing down National Parks, the D.C. Circuit Court of Appeals, in Gulf & Western Industries, Inc. v. United States, 615 F.2d 527, 530 (D.C. Cir. 1979), held that only a "likelihood of substantial competitive injury" need be shown to satisfy this test.

Additionally, some courts have permitted the use of a "mosaic" approach in determining the existence of competitive injury threatened by disclosure. See, e.g., Timken Co. v. United States Customs Service, 491 F. Supp. 557, 559 (D.D.C. 1980). Courts have also held that the age of commercial information does not per se disqualify it from satisfying this test. (See "FOIA Counselor Q&A" on p. 14 of this issue.)

Overall, many different items of data have been found, on a case-by-case basis, to satisfy the National Parks test. (For a compilation of the types of data found protectible, see the revised "Short Guide to the Freedom of Information Act," published in the 1983 Freedom of Information Case List, at p. 216.)

Nevertheless, both the difficulty and uncertainty of the National Parks test have prompted ongoing efforts by business groups and others concerned with protecting business information to seek to mute its effects through some legislative revision of Exemption 4. See Freedom of Information Act:  Hearings on S. 587, S. 1235, S. 1247, S. 1730, and S. 1751 Before the Subcomm. on the Constitution of the Senate Comm. on the Judiciary, 97th Cong., 1st Sess. 223-469 (1981); see also FOIA Update, Dec. 1981, at 7. It remains to be seen, particularly in the House of Representatives, whether such efforts to improve Exemption 4 will succeed.

"Reverse" FOIA

A closely related area is that of "reverse" FOIA, the term commonly applied to a case in which a submitter of business information disagrees with an agency's judgment as to its sensitivity and seeks to have the agency enjoined from disclosing it under the FOIA. The Supreme Court has held, in Chrysler Corp. v. Brown, 441 U.S. 281, 318 (1979), that such lawsuits can be brought under the Administrative Procedure Act, 5 U.S.C. §§ 701,et seq., pursuant to which they should ordinarily be adjudicated on the face of the agency's administrative record according to the minimal "arbitrary and capricious" standard of review.

To ensure the necessary predicate for such actions, the Department of Justice has issued guidance to all federal agencies on the necessity of business submitter notice and challenge procedures at the administrative level. See FOIA Update, June 1982, at 3. The FOIA reform bill currently awaiting passage in Congress would codify such procedures. See FOIA Update, Summer 1983, at 2. Since Chrysler, though, there has been surprisingly little "reverse" FOIA litigation.

Trade Secrets

An important question left un answered by the Supreme Court in Chrysler is the exact relationship between the FOIA and the Trade Secrets Act, 18 U.S.C. § 1905. In what has long promised to be a precedent-setting appeal on this issue, National Organization for Women v. Social Security Administration, No. 76-2119 (D.C. Cir.), the government has taken the position that the Trade Secrets Act is not an Exemption 3 statute and that it is in any event functionally congruent with Exemption 4. This appeal has been pending for an extraordinary period of time (it was argued and taken under advisement on May 1, 1980), but should soon produce a definitive ruling on trade secret protection in this context. Meanwhile, agencies continue to apply the independent trade secret protection contained in Exemption 4 itself. See, e.g., Public Citizen Health Research Group v. FDA, 704 F.2d 1280, 1288 (D.C. Cir. 1983).


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Updated December 9, 2022