Earlier this year, in Food Marketing Institute v. Argus Leader, the Supreme Court radically altered the scope of Exemption 4 under the Freedom of Information Act (“FOIA”).  Exemption 4 protects from disclosure “trade secrets” and “commercial or financial information obtained from a person [that is either] privileged or confidential.”  At issue in Argus Leader was the precise meaning of the term “confidential.”  Rather than accept the long-standing “competitive harm” standard developed by the D.C. Circuit nearly forty years ago, the Supreme Court instead held that “confidential” meant anything “customarily and actually treated as private by its owner.”  As Cause of Action Institute warned at the time, that “cramped reading” of Exemption 4 “failed to grapple with the historical and contextual meaning” of “confidential” and would “make it more difficult for the media and government-transparency groups to conduct oversight of the often-murky nexus between business and government.”

A recent decision in the U.S. District Court of the Northern District of California seems to confirm our warnings and highlights the problems with the new Exemption 4 standard.  In American Small Business League v. Department of Defense, a non-profit organization sought records concerning the Pentagon’s “Comprehensive Subcontracting Plan Test Program,” including various subcontracting records implicating Lockheed Martin and other defense contractors.  After the court ordered supplemental briefing and limited Rule 56(d) discovery following the Argus Leader decision, it revisited the Exemption 4 question and ruled largely in favor of the government and the intervening companies.

Three aspects of the case are worth exploring in detail.

What does it mean for information to be “customarily and actually” treated as private?

After ruling that a small number of records, including government assessments and evaluations of contractors, could be disclosed because they “stemmed from the government” and were not “obtained from a person,” the Court turned to applying the new Argus Leader standard to the remaining documents.  Were these records “customarily” and “actually” treated as “confidential” by Lockheed, Sikorsky, and others?

Pointing to the sworn testimony of company declarants, the Court determined that the companies had established how they “customarily and actually kept all . . . commercial information . . . confidential in the ordinary course of business” because they feared disclosure would offer “substantial insights” into their business operations to competitors.  Specifically, the companies explained how the data were subject to confidentiality agreements, restrictive markings and legends, password protection, and were only available on a “need to know” basis.  Damningly for the requester, even after several depositions of company representatives, the requester could not offer any evidence to rebut these representations aside from several press releases that merely disclosed generalities about top-performing business units.

The ease with which the intervening defense contractors were able to establish “customary” and “actual” confidential treatment is telling.  Under the new Argus Leader standard, commercial or financial information is effectively presumed exempt, unless a requester can prove that it is already publicly available.  But that can be an exceedingly difficult burden to meet, especially when discovery is limited and courts regularly defer to government declarants.  Moreover, the Argus Leader standard reflects an exceedingly subjective approach to determining “confidentiality,” which—as CoA Institute argued in its amicus brief—“no longer depends on the quality of the information at issue” but on “how an individual submitter intended to use it.”  Such an approach “disrupt[s] fair administration of the FOIA, upset[s] the predictability of Exemption 4’s application, and run[s] afoul of congressional intent.”

Interestingly, the American Small Business League court expressed similar frustration with the Argus Leader standard and opined that it tended to reduce the test for Exemption 4 to whether a defendant had “merely invoke[d] the magic words—‘customarily and actually kept confidential[.]’”  As the court explained, “unless [a] plaintiff can show that the information is in fact publicly available or possibly point to other competitors who release the information, defendants can readily ward off disclosure”—a result entirely at odds with FOIA’s underlying purpose.  Citing his long personal experience as a member of the bench and bar, Judge Alsup even warned “how prolifically companies claim confidentiality, including over documents that, once scrutinized, contain standard fare blather and even publicly available information.”

Does there need to be any “assurance of privacy” by the government?

In Argus Leader, Justice Gorsuch concluded that, “[a]t least where commercial or financial information is both customarily and actually treated as private by its owner and provided to the government under an assurance of privacy, the information is ‘confidential’ within the meaning of Exemption 4.”  In the eyes of many commentators, this formulation left open the question of whether an “assurance of privacy” is a necessary part of the new Exemption 4 standard, and whether such an assurance needs to be explicit.

Refusing to take a definitive position on the former question, the American Small Business League court nevertheless held that such an assurance of privacy, if required at all, could be given impliedly.  The court highlighted how the Department of Defense had never “suggested that it would not treat the [defense contractors’] information confidentially,” and it historically “anonymized” that information in “public settings, such as during congressional hearings.”  Further, the Court pointed to the Supreme Court’s understanding of Exemption 7 in Department of Justice v. Landano, where “generic circumstances” surrounding a putative confidential source’s provision of information implied a promise of confidential treatment.  Interestingly, as CoA Institute intimated in its amicus brief in Argus Leader, importing Landano to the Exemption 4 context could unintentionally resurrect the “competitive harm” standard, at least for evaluating the reasonableness of an implied confidential arrangement between a submitter and the government.

Whither the “foreseeable harm” standard?

Finally, the American Small Business League court addressed the issue of whether the FOIA Improvement Act of 2016, which codified the “foreseeable harm” standard, impacts Exemption 4 post-Argus Leader.  The requester and amicus in American Small Business League argued that an agency’s obligation to explain how disclosure of a record could be “reasonably foreseen” to “harm an interest protected by an exemption” effectively reintroduces National Parks’s “competitive harm” inquiry into Exemption 4.  On this view, the “interest” protected by Exemption 4 is not “confidentiality” per se but rather preservation of the government’s ability to obtain information in the future and avoiding substantial harm to the competitive position of a submitter.

Judge Alsup categorically rejected this approach and held that “confidentiality” itself was, in fact, the “interest” protected by Exemption 4: “Disclosure would necessarily destroy the private nature of [commercial or financial] information, no matter the circumstances” of a particular request or instance of disclosure.  Reintroducing “competitive harm” would offend Congress’s previous consideration of finding a “workable balance” between disclosure and secrecy when drafting Exemption 4.

A final argument unaddressed by American Small Business League is whether Exemption 4 qualifies as a “mandatory” exemption, which would obviate the need for any sort of foreseeable harm analysis.  Several federal agencies consider the disclosure of information protected by Exemption 4 to be “prohibited by law.”  Courts have yet to grapple with this distinction between “mandatory” and “discretionary” exemptions for purposes of the foreseeable harm standard, but it could prove key to resolving the matter.

Ryan P. Mulvey is Counsel at Cause of Action Institute