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Supreme Court Expands Trade Secrets Exemption from FOIA

Joshua R. Rich2019 Vol. 17 Issue 3 (snippets)

Businesses often worry that the information they provide to the government will be disclosed, and with good reason – such information is presumptively available to the public under the Freedom of Information Act (FOIA”).[1] There is an exemption for “trade secrets and commercial or financial information obtained from a person and privileged or confidential” (Exemption 4),[2] but courts have generally construed this exemption narrowly. Specifically, decisions under Exemption 4 have long required a showing of a likelihood of substantial competitive harm resulting from the disclosure of information before the government could withhold the information.[3] However, in Food Marketing Institute v. Argus Leader Media,[4] the Supreme Court considered the scope of Exemption 4 and found that no such showing of harm is required. Rather, to the relief of parties providing information to the government, the Supreme Court ruled that the only requirements for information to be withheld under Exemption 4 are (i) that a person outside government had provided it, (ii) that it be customarily and actually treated as private by the party providing it, and (iii) that the government customarily provide assurances that the information would remain secret.[5]

The earlier additional requirement that the disclosure of information would have to cause competitive harm to qualify under Exemption 4 arose out of a case from the U.S. Court of Appeals for the District of Columbia, National Parks & Conservation Assn. v. Morton.[6] Unlike the Federal Circuit, whose patent precedent has binding statutory authority over the district courts and U.S. Patent and Trademark Office, the D.C. Circuit’s precedent is not binding on any court or administrative agency other than the D.C. district court. However, its expertise in the administrative law forum is so respected that the National Parks test had not only been adopted by every other Court of Appeals and district court that had considered it, but it had also been implemented by the FOIA offices of Federal administrative agencies. Thus, under the National Parks test, FOIA required an agency to turn over information unless it showed that the information was not only secret, but also “likely . . . to cause substantial harm to the competitive position of the person from whom the information was obtained.”[7]

Here, the case arose in 2011 when the Argus Leader newspaper of Sioux Falls, South Dakota began working on an article on food stamp fraud. It had learned of concerns of “retailer trafficking” of benefits under the Supplemental Nutrition Assistance Program (SNAP), where retailers exchange SNAP benefits for cash. Under SNAP, program participants generally use electronic benefit cards to buy food from eligible retailers; the sales information is then electronically transferred to a state electronic benefits processor who approves or denies the transaction. The state processor subsequently reports the information to the U.S. Department of Agriculture (which administers the SNAP program for the federal government). To support the article, the reporter working on the story submitted a FOIA request to get store-level data for every store in America that accepted SNAP benefits.[8]

The USDA refused to produce the store-level information on grounds including Exemption 4. Eventually, when the Exemption 4 issue became ripe, the district court applied the National Parks test (which had been adopted by the U.S. Court of Appeals for the Eighth Circuit) and indicated that the USDA would have to show that disclosure of the information would likely “cause substantial harm to the competitive position of the person from whom the information was obtained.”[9] The district court held a trial where witnesses for the USDA testified that retailers closely guard their store-level data and that disclosure would harm their stores’ competitive positions by allowing competitors to model consumer behavior better. While the district court found that revealing the information would create a risk of harm to the stores, it found the risk was only incremental, not “substantial.” Thus, the district court ordered the USDA to turn over the information.[10]

The USDA alerted retailers who take part in the SNAP program that it would not appeal the district court’s ruling, and the Food Marketing Institute stepped in on behalf of the retailers to try to prevent the documents from being disclosed. In the meantime, the USDA provided assurances (and notice to the district court) that it would not turn the documents over until all appeals were exhausted. However, on appeal, the Eighth Circuit affirmed the district court’s decision finding that the potential harm – while real – would not be substantial, rejecting any argument that confidentiality alone would be sufficient to satisfy Exemption 4 and reaffirming the application of the National Parks test in the Eighth Circuit.[11]

The Supreme Court reversed on a six-to-three vote. Justice Gorsuch, writing for the Court, started his consideration of the scope of Exemption 4 with the language of the statute itself. The meaning of the key statutory term, “confidential,” was the same when FOIA was enacted in 1966 as it is today, “private” or “secret.”[12] Contemporary dictionaries suggested that confidentiality might therefore require two conditions. First, it must customarily be kept private (or at least closely held) by the person imparting it. Second, the person receiving the information must customarily provide an assurance that it will stay secret. Certainly, the first condition must be satisfied for information to be considered “confidential,” it is less clear that the second must also be satisfied.[13]

In this case, Justice Gorsuch felt no need to provide clarity on that point because he found that the requested data in this case unquestionably met both conditions to qualify as “confidential” under Exemption 4. The Food Marketing Institute had intervened specifically because the individual stores wanted to keep the information secret, and customarily had. And the USDA had promised the stores that it would keep the information secret unless it was ordered to turn it over. Thus, the Court found that the information need not be provided under FOIA, regardless of what test would be applied under Exemption 4.[14]

Despite the clarity of in the dictionary definitions on which it decided the case, the majority still decided to address the National Parks test. It found no basis for requiring that a disclosure result in “substantial competitive harm” in the statutory language, early case law, or any “other usual source.”[15] The D.C. Circuit had cited certain legislative history for FOIA in support of this test, but Justice Gorsuch referred to that as a “selective tour through the legislative history.”[16] To the majority, the plain language of the statute itself was sufficient to allow interpretation of Exemption 4. And there would be no good reason for applying the National Parks test when the information was required to be provided to the government, but not in cases where the information was provided voluntarily (as the D.C. Circuit had subsequently found in Critical Mass Energy Project v. NRC).[17] Thus, the majority rejected the D.C. Circuit’s National Parks decision in favor of the plain language of Exemption 4.

Justice Breyer, joined by Justices Ginsburg and Sotomayor, dissented from the decision based primarily on both the uniformity of decisions below and policy issues.[18] While the courts below had adopted somewhat different tests under Exemption 4, they had all required some showing of competitive harm for the exemption to apply. Thus, the majority’s decision differed more from all of the lower court precedent than any two lower courts differed from one another. It also increased the scope of Exemption 4 far more broadly than any lower court had previously. That was a fundamental concern for the dissenting Justices: that Exemption 4 might ultimately swallow FOIA whole. That is, the goal of FOIA has always been disclosure of information to increase the transparency of government functions (at least as balanced against certain specific, narrow policy exceptions). But if the question is just whether the parties providing information and the government agency working with those providing parties want to keep the information secret especially when the government is potentially subject to “capture” by the providing party, they the providing parties and government may work together to shield any information from disclosure under FOIA. Thus, the dissenting Justices fear that the decision will substantially narrow the beneficial effects of FOIA as a whole.

The Food Marketing Institute case should allow parties submitting information to the government to breathe a sigh of relief, but it reflects a sea change in the application of FOIA to confidential information. Previously, even trade secrets (as defined by the traditional definition under the Uniform Trade Secrets Act or Defend Trade Secrets Act) could be subject to disclosure under FOIA if the trade secret owner could not prove that the disclosure would cause it substantial competitive harm.[19] Now, Exemption 4 covers not only all traditional trade secrets, but also merely confidential business information that has been shared with the government under an expectation of secrecy. For example, even information that has not been subject to reasonable measures to protect its confidentiality may be shielded under Exemption 4. Thus, in many cases, information that previously would have been disclosed under FOIA will now be withheld under Exemption 4. In view of Food Marketing Institute, parties submitting information to the government should maintain a focus on whether there is an obligation for the government to keep their information secret and should make it clear in their submissions that they consider the information confidential. By contrast, parties seeking FOIA disclosures should scour the statute to find indications that the government does not intend the information to be held as confidential.

[1] For example, utility patent applications remain confidential until publication, either at 18 months after filing or upon issuance (whichever comes first, unless there is a request for non-publication until issuance in accordance with the statute). See 35 U.S.C. § 122.

[2] 5 U.S.C. § 552(b)(4).

[3] See Food Mktg. Inst. v. Argus Leader Media, 139 S. Ct. 2356, 2367 (2019) (Breyer, J., concurring in part and dissenting in part) (“Since 1974, when the District of Columbia Circuit decided National Parks and Conservation Assn. v. Morton, 498 F.2d 765, nearly every lower court has imposed some kind of harm requirement. See New Hampshire Right to Life v. Dep’t of Health & Human Servs., 136 S. Ct. 383, 384 (2015) (Thomas, J., dissenting from denial of certiorari) (noting that ‘every Court of Appeals to consider Exemption 4 has interpreted it [using] National Park[s]’); Critical Mass Energy Project v. NRC, 975 F.2d 871, 876 (CADC 1992) (en banc) (collecting cases).”).

[4] 139 S. Ct. 2356 (2019).

[5] Id at 2366.

[6]498 F.2d 765 (D.C. Cir. 1974).

[7] Id. at 770.

[8] See Argus Leader Media v. U.S. Dep’t of Agric., 224 F. Supp. 3d 827, 829-31 (D.S.D. 2016).

[9] See Argus Leader Media v. U.S. Dep’t of Agric., 889 F.3d 914, 915 (8th Cir. 2018).

[10] See Argus Leader Media, 224 F. Supp. 3d at 835.

[11] See Argus Leader Media, 889 F.3d at 917.

[12] Food Mktg. Inst. v. Argus Leader Media, 139 S. Ct. 2356, 2363 (2019).

[13] Id.

[14] Id. at 2366.

[15] Id. at 2363.

[16] Id. at 2364.

[17] 975 F.2d 871 (D.C. Cir. 1992).

[18] Food Mktg. Inst, 139 S. Ct. at 2366-69 (Breyer, J., concurring in part and dissenting in part).

[19] See id. at 2367 (discussing potential “serious harm” associated with disclosure that would not have been recognized under the National Parks test).