What the federal Freedom of Information Act exemptions, the definition of “confidential,” and a recent SCOTUS ruling mean for trade secrets.
According to Merriam-Webster, the “Word of the Year for 2019 is “they” when used in the singular, typically to avoid ascribing a gender to the person being referred to. The larger point is this: language matters. Since this is a space dedicated to secrecy, let’s consider how we use language to determine who gets access to our trade secrets. For today, we’ll be looking specifically at how government does this. After all, they write the laws and so should be practiced at defining exceptions to property rights.
Government Interest in Your Secrets
Why should the government care at all about business secrets? Examples will help us here. Locally, the fire department needs to know what hazardous chemicals you might be storing at your plant, in case they have to come and put out a fire there. For different but equally compelling reasons, the Food and Drug Administration (FDA) insists on knowing exactly how drugs are made, and the Environmental Protection Agency (EPA) requires submission of pesticide ingredients. And then there is the government as consumer: last year the U.S. spent over $550 billion on purchasing goods and services from the private sector, and with all that economic clout comes the right to demand access to a lot of related data.
Government purchases are regulated by the Federal Acquisition Regulation (FAR), a law only somewhat less complex than the tax code. But for “commercial items” the FAR gives the government no data rights. The seller can provide “limited rights,” allowing the government to use information only for internal purposes and repairs, protecting it from public disclosure.
Although not everyone sells to the government, many businesses are required to give the government a great deal of information that they don’t want the competition to see. A federal statute, aptly named the Trade Secrets Act, has been in place for over a century, making it a crime for federal employees to disclose valuable business information. In addition to the FDA and EPA, this law and other regulations designed to protect trade secrets apply to mandatory disclosures made to the Securities and Exchange Commission, the Consumer Product Safety Commission, the Occupational Health and Safety Commission, and even the Post Office.
Over the first half of the 20th century, as the federal government broadened its regulatory functions, keeping business data confidential was straightforward: companies would mark their records “confidential” and agencies would keep them sealed from public inspection. Then came the Freedom of Information Act (FOIA, pronounced with delight or disdain, depending on your interest, as “FOY-YAH”).
Originally adopted in 1966, FOIA was expanded in 1974 following the Watergate scandal, to allow broader and easier access to government by the public. It requires that federal agencies promptly make available to any “person” any requested record unless it is “exempt” from disclosure. Two aspects of “Exemption 4” are relevant here. The first is for “trade secrets,” which one might expect allows companies to breathe easy about the risk of disclosure. However, the courts soon interpreted the phrase “trade secrets” under a 1939 guide (the Restatement of Torts) to have a very narrow meaning, so that part of the exemption was not much help.
Proving Competitive Harm
A second part of the exemption applied to “confidential commercial information,” and this at first seemed to provide comfort for submitters. But the courts eventually narrowed the meaning of this phrase, too, adding the requirement that, to prevent disclosure, a submitter had to prove “substantial competitive harm.”
This “competitive harm test” might not have been much of a problem if the issue were always resolved privately between the government and the owner of the secret information. But another actor was usually involved. Almost from the outset of FOIA, a statute intended to inform the public about the workings of their government, the most frequent applicant for disclosure has been — no prize for guessing — commercial entities. With the potential of access to information saving years of expensive research, competitors would challenge the exemption in court, leaving the trade secret owner to argue over the vague and speculative concept of “substantial harm.”
Not anymore. A few months ago the U.S. Supreme Court issued its first opinion on the meaning of Exemption 4. In a case called Food Marketing Institute v. Argus Leader Media, the issue was whether information about food stamp redemption at individual grocery stores, submitted by them to the FDA, had to be revealed under FOIA. Examining the text and history of the statute, the court held that “confidential” has an ordinary, dictionary definition and applies to any information that a business would customarily treat as “private.” The “competitive harm test” had been improperly added by the courts.
No Time for Complacency
For companies that need to share competitively sensitive information with the government, this ruling provides much more certainty about keeping the information from competitors. But while celebration may be in order, it’s no time to relax. Agencies, and the people that work for them, can make mistakes. Just ask Monsanto, whose RoundupÒ herbicide dominates the market because it is effective against a large range of annual and perennial weeds and allows planting soon after spraying. In 1982, the EPA gave the secret formula to a lawyer for one of the company’s competitors. (The information was later retrieved.) And then of course there are state and local agencies to deal with.
What should companies do to protect themselves against the risk of disclosure by the government? First, put prominent labels on all sensitive records before they are submitted. This kind of marking may be required by a special statute or regulation that applies to your industry; but even if it isn’t required, it’s common sense to communicate boldly your claim of confidentiality to those who are handling your data.
Another way to control the risk of disclosure is to get an agreement from the agency involved. This is more cumbersome than just marking your documents, but it increases the odds that the information will be handled with care, and that the agency will refuse to disclose it to an outside party.
Finally, closely examine your draft submissions. Try to find a way to supply the required information without revealing your business secrets. To the extent that you achieve that goal, then your data will have the best possible protection against government disclosure.
The “Word of the Year” for business in 2020 is “confidential.”