Infotech and the Law

Protect Confidential Data from FOIA Scrutiny

Richard Rector

By Richard Rector

Contractors have long used the Freedom of Information Act (FOIA) as a means of gathering intelligence on the federal marketplace, including data on competitors' proposals and contracts. The law continues to evolve in this area, however, and greater protections now are available against competitors' requests for confidential data.

Passed by Congress in 1966, the Freedom of Information Act provides that any person has the right to obtain access to federal agency records, unless such records are protected by a statutory exemption. The exemption most commonly used in the context of government contracts is for trade secrets and confidential commercial or financial information.

Thus, in the first 30 years of the act's existence, a company could request a competitor's proposal or the contract awarded to a competitor, and the government was required to provide those documents unless the proposal or contract (or portions thereof) contained trade secrets or confidential commercial or financial information.

As a practical matter, the government generally would release only the portions of the proposal or contract that did not contain confidential information.

For example, the government typically would not release portions of technical, cost and management proposals that a contractor marked as restricted. Similarly, the government would protect certain sensitive financial information (profit rates, indirect cost rates, labor costs, material costs) that may be included in contracts.

Unfortunately, there have been more than a few horror stories about breakdowns in the FOIA system in which sensitive data either were not protected by agency officials or were released inadvertently. In addition, the government's FOIA practices and interpretations often have varied among agencies and even among officials within the same agency. Thus, contractors were not always provided fair treatment under the FOIA law, and the courts have been called upon periodically to decide FOIA disputes.

The law changed significantly in 1996, when Congress included a provision in the National Defense Authorization Act for fiscal 1997 that prohibits the release of certain proposals through the FOIA process. Specifically, the law prohibits the release of a proposal or any part of a proposal submitted by a contractor in response to a competitive solicitation. The only exceptions are for unsolicited proposals, proposals in the possession of NASA or the Coast Guard or any proposal that is set forth or incorporated by reference in a contract.

Therefore, all unsuccessful proposals are now exempt from disclosure under FOIA, as are all successful proposals that are not incorporated into the resulting contract. For all other types of proposals (unsolicited proposals and proposals that are incorporated into a contract), the standard FOIA analysis, whether the proposal contains trade secrets or confidential commercial or financial information, applies.

Because this change is a significant departure from prior practice, and old habits die hard, contractors should continue to be vigilant in ensuring that government customers understand and follow the new rules regarding disclosure of proposals. Also, contractors now have another reason to think hard about agreeing to the incorporation of a successful proposal into a contract; at a minimum, it should be a point for negotiation.

With regard to release of contract-related information through the FOIA process, a recent court case also suggests that greater protection may be available for contractors in the future. Specifically, the Court of Appeals for the D.C. Circuit, a leading authority on FOIA cases, held in June that line-item prices in a NASA contract were exempt from disclosure under FOIA.

The case was significant due in part to the court's acceptance of the fact that disclosure of line item pricing would cause "substantial harm" to the contractor's competitive position. Previous decisions from the lower courts had rejected similar arguments regarding such harm, with one case even suggesting that a company must show "egregious injury" that would keep it from being an effective competitor.

Although the full effect of the court's decision remains to be seen, it is an encouraging sign that, in the future, contractors who are diligent in protecting confidential information will be adequately protected under the FOIA process.


Richard Rector is a partner in the government contracts group of Piper & Marbury LLP in Washington. His e-mail address is rrector@pipermar.com.

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