Nasa by John Pavlick, Jr and Rebecca E. Pearson




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Originally appeared in The Winter 2000, issue of The Procurement Lawyer.

Release of Unit Prices After McDonnell Douglas Corp. v. NASA

By John Pavlick, Jr. and Rebecca E. Pearson

The Court of Appeals for the District of Columbia Circuit (D.C. Circuit), often considered the most influential circuit for Freedom of Information Act (FOIA) decisions, recently took a decidedly different course in the long-running issue of release of unit prices in an awarded contract. The decision, McDonnell Douglas Corp. v. National Aeronautics and Space Administration1, departed from prior precedent in finding that McDonnell Douglas’ line item prices in the awarded contract constituted confidential business information exempt from mandatory disclosure under Exemption 4 to the FOIA, 5 U.S.C. § 552(b)(4). The cryptic opinion has thrown into question the validity of the government’s general policy of releasing such prices and the specific Federal Acquisition Regulation (FAR) requirement found in FAR 15.503 to release such information to disappointed offerors as part of their statutorily required debriefing. The effect of McDonnell Douglas may be to restrict the release of such unit or tine item prices where the contractor argues that it will sustain competitive harm because its competitors, armed with this information, will be able to underbid it in future competitions. Several months after the decision, the ultimate effect of this opinion remains unknown.



The Freedom of Information Act

The FOIA requires agencies to release requested information unless an exemption applies.2 Exemption 4 to the FOIA protects from release “trade secrets and commercial or financial information obtained from a person that is privileged or confidential.”3 The contractor seeking to withhold unit prices contained in an awarded contract bears the burden of proving that the information is exempt from disclosure.4

In determining whether commercial or financial information is confidential, most courts have applied the test set forth in National Parks & Conservation Assn v. Morton:

commercial or financial matter is “confidential” for purposes of the exemption if disclosure of the information is likely to have - either of the following effects: (1) to impair the Government’s ability to obtain necessary information in the future; or (2) to cause substantial harm to the competitive position of the person from whom the information was obtained.5

Thus, under the National Parks test, the party seeking to prevent the release of its information must prove that either one of the two prongs is present. Normally, this entails proving that release will cause substantial harm to its competitive position. This is often difficult to prove through demonstrable evidence.6

The burden was lightened when, in Critical Mass Energy Project v. Nuclear Regulatory Commission7, the D.C. Circuit modified the National Parks test for voluntarily submitted information. It reaffirmed the National Parks test “for determining the confidentiality of information submitted under compulsion.”8 However, for determining whether information submitted voluntarily was confidential, the court in Critical Mass stated a new test: “financial or commercial information provided to the Government on a voluntary basis is ‘confidential’ for the purpose of Exemption 4 if it is of a kind that would customarily not be released to the public by the person from whom it was obtained.”9 Thus, the party seeking to block release no longer had to prove the competitive harm if the information were voluntarily submitted.

Although the Critical Mass test relaxed the burden on submitters for proving that voluntarily submitted commercial information was confidential, it has had little practical effect on the release of information in government contracts. Most courts, in refining when information is voluntarily submitted, have rejected the argument that information is only required when the government has the power to seek sanctions against a party for failure to comply with informational requests.10 In the government contract context, most courts have recognized that even though contractors voluntarily decide whether to compete for government contracts, once they decide to compete, they must submit certain required information if they hope to win the contract.11 Consequently, most courts that have addressed the issue of “voluntary” and “required” submissions have held that information submitted as part of a bid or proposal, including unit price, is required to be submitted.12

Unit Prices Have Historically Been Held to be Releasable

Confidentiality Test: Release of Unit Prices Not Likely to Cause Competitive Harm

Most courts applying the National Parks test have found that release of a contractor’s unit prices is not likely to competitively harm the contractor. This issue turns on what is being released. Information that reveals the contractor’s specific overhead, indirect rates, or material cost mark-ups is considered confidential business information exempt from disclosure. Unit prices, however, normally reflect a set price for a defined piece of work and are built on many different cost variables, which fluctuate with the economy and the job. If the unit price is in a fixed-price type contract, it will include such variables as the contractor’s judgment of the costs to perform the work, including the cost of labor, materials, overhead, supervision, facilities, and equipment used in performance of the contract, plus the contractor’s profit. A unit price in a cost-type contract will include similar elements of cost lumped together, with the exception of the fee, which, if provided, is separately listed in the contract. In Acumenics Research & Technology v. United States Department of Justice13, the Court of Appeals for the Fourth Circuit held that unit prices contained “too many unascertainable variables” to allow competitors to derive a profit multiplier from which competitors could estimate a contractor’s unit prices on future contracts.14 14 The Exemption 4 analysis in Acumenics and cases following its holding turns on whether a competitor can take the information provided by release of a unit price and accurately project the contractor’s bid price on another contract. If a competitor can derive such information, the unit prices are protected; if it cannot derive such information, the prices are released. Not surprisingly, few contractors could meet their burden of proving competitive harm under Acumenics’ rationale.



Acumenics and its progeny appear to be based on the following assumptions: (1) contractors build unit prices from the bottom up; (2) consequently, a competitor cannot reasonably predict future prices without knowing individual cost elements; and (3) a contractor is not likely to suffer substantial competitive harm absent its competitor’s ability to precisely predict future prices. These assumptions are questionable, especially given the sophisticated computer modeling now available to predict pricing strategies. No recent case prior to McDonnell Douglas, however, seriously challenged the notion that a contractor must demonstrate specifically how unit prices could reveal confidential elements before the contractor was able to show that release was likely to cause substantial competitive harm.15

Release Of Unit Prices As A Cost Of Doing Business With The Government

Additionally, several courts have placed their finding of competitive harm in the context that release of unit prices is a cost of doing business with the government.16 The U.S. General Accounting Office, in its bid protest decisions, has also adopted the view that disclosure of unit prices “charged the government ordinarily is a cost of doing business with the government.”17

This approach is based on the underlying policy of disclosure implicit in the FOIA that focuses on the public’s right to know how its government operates. For example, in Martin Marietta Corp. v. Dalton18, the D.C. District Court upheld an agency decision to disclose the following three categories of information: (1) “cost and fee information, including material, labor and overhead costs, as well as target costs, target profits and fixed fees; (2) component and configuration prices, including unit pricing and contract line item numbers (CLINS); and (3) technical and management information . . . .” In Martin Marietta, the Navy supported its release of such information based on the FOIA’s policy of disclosure. In finding that the release of such information would not constitute competitive harm, the court focused on the policy of disclosure, without meaningfully analyzing whether release would in fact cause competitive harm. The court failed to explain how the public’s interest in knowing how public funds are spent related to competitive harm and the National Parks test. The court explained that:

[t]he public, including competitors who lost the business to the winning bidder, is entitled to know just how and why a government agency decided to spend public funds as it did; to be assured that the competition was fair; and, indeed, even to learn how to be more effective competitors in the future. In the instant case, NAVAIR concluded that neither the revelation of cost and pricing data nor proprietary management strategies were likely to result in such egregious injury to Martin Marietta as to disable it as an effective competitor for NAVAIR’s business in the future.... Mania Marietta might prefer that less be known about its operations, and that the reasons for its past successes remain a mystery to be solved by the competitors on their own. But it has not shown NAVAIR or this Court, on the basis of this record, that it will in fact be unable to duplicate those successes unless NAVAIR acquiesces in keeping the competition in the dark.19

Thus, to show competitive injury, the court required the awardee to show that it would no longer be an effective competitor in the future. This language suggests a higher standard than National Parks requires.

Moreover, by emphasizing the public’s right to know as the basis for release, Martin Marietta20 implied that the issue of whether information should be withheld as confidential involves balancing the public’s right to know how public funds are spent against the submitter’s right to protect confidential commercial information. Such a de facto balancing test, however, is not suggested by the language in FOIA Exemption 4 or in National Parks. The FOIA is a release statute and was enacted to provide the fullest possible access to government information by the public, unless one of the statutory exemptions applies. The burden is placed on a submitter to prove that its information is confidential and hence within the ambit of Exemption 4. However, the test for whether commercial or financial information is confidential is an objective one that does not involve balancing competitive harm to the submitter with the public’s interest in release.



FAR Provides For The Release Of Unit Prices, But Prohibits Release Of Confidential Commercial And Financial Information

Since its promulgation, the FAR has seemed to require the release of unit prices after an award has been made21, while at the same time it has prohibited the release of confidential commercial and financial information. The current FAR provision governing notifications to unsuccessful offerors, FAR 15.503(b)(1)(iv), states that the written notice to unsuccessful offerors shall include “the items, quantities, and any stated unit prices of each award.” FAR 15.503(b)(1)(v), however, prohibits the release of “confidential business information.” Similarly, the FAR provision governing post-award debriefing of offerors, FAR 15.503(b)(1)(iv), requires that the debriefing, at a minimum, include the awardees’ unit prices. FAR 15.506(e), however, also states that “the debriefing shall not reveal any information ... exempt from release under the Freedom of Information Act (5 U.S.C. § 552). . . .” The FAR prohibitions on release of “confidential business information” allow the FAR to operate within the restrictions of the governing law for information release established in the F0IA.22

Read together, the FAR mandate to release unit prices in awarded contracts, but not confidential business information, reflects a presumption that unit prices are almost per se not confidential business information. The FAR 15.506 juxtaposes unit prices with “[c]ommercial and financial information that is privileged or confidential, including cost breakdowns, profit, indirect cost rates, and similar information.” The FAR presumption th; - unit prices are releasable was supported by the prior case law discussed above that imposed a heavy, almost insurmountable, burden on contractors to prove the likelihood of competitive harm. However, all that changed with the McDonnell Douglas decision.

The McDonnell Douglas Decision

In McDonnell Douglas, the FOIA Group, Inc. requested a copy of McDonnell Douglas’ contract for “medium-tight expendable launch vehicle” services for NASA satellites.23 McDonnell Douglas objected to the release of line item pricing information, among other requested information, because it would cause competitive harm for two reasons:

[I]t would permit its commercial customers to bargain down (“ratchet down”) its prices more effectively, and it would help its domestic and international competitors to underbid it.24

The district court rejected this argument both initially and on reconsideration, prompting the appeal to the Court of Appeals for the District of Columbia.

Before the court of appeals, NASA argued that the National Parks test applied because McDonnell Douglas was obligated to provide the information in the contract.25 McDonnell Douglas claimed that because its decision to enter the contract was voluntary, the bid pricing was voluntary and the Critical Mass test applied.26 Further, McDonnell Douglas alleged that the Department of Justice’s instruction to agencies to treat most information submitted to the government as “required” effectively nullified the Critical Mass decision.27 Consequently, McDonnell Douglas asked the court to overrule National Parks.28

The court refused to overrule National Parks, but noted that “it seems somewhat troubling that justice, in 1993, instructed the agencies that they ‘should’ treat’most’ information given to the government as ‘required,’ without any serious effort analytically to distinguish voluntarily supplied information from that which is required within the meaning of Critical Mass.29 However,’the court itself declined to decide whether bid information submitted as part of a contract was voluntary or required because it held that the information was confidential commercial information under the National Parks test.”30 In declining to rule on the issue, the court missed an excellent opportunity to provide further analysis and clarification as to what “required” and “voluntary” mean under Critical Mass.

NASA sought to justify release of the pricing information with the well-recognized position that the disclosure of unit prices was the “price of doing business’ with the government.”31 NASA also indicated that the Federal Acquisition Regulation had “codified the longstanding practice of disclosing prices in an awarded contract with the Government, by providing that the prices of the winning bidder must be publicly disclosed to the losing bidders.”32 NASA also noted the inconsistency in appellant’s criticism of district court cases holding that release of unit prices is a “cost of doing business” with the government while at the same time citing authority recognizing that “this principle is reasonable as a general proposition.”33 Despite the fact that NASA’s response was consistent with prior D.C. District case law,34 the Comptroller General, and the FAR, the court of appeals characterized NASA’s assertion that release of unit prices was the cost of doing business as “mystifying.”35

Without addressing the government’s contention that the FAR required that the prices of the winning bidder be disclosed, the court determined that “the government does not claim that it or NASA has any independent legal authority to release line item pricing information.”36 The court found NASA’s “long and consistent practice” of releasing unit prices to be “of no consequence.”37 The court opined, “[i]f commercial or financial information is likely to cause substantial competitive harm to the person who supplied it, that is the end of the matter, for the disclosure would violate the Trade Secrets Act.38 The court’s language would generally equate release of confidential business information with violations of the Trade Secrets Act, a position not generally accepted. The court’s harsh dismissal of the view that release of unit prices is a cost of doing business with the government would seem to terminate the practice of balancing competitive harm to the submitter with the public’s right to know.

NASA also supported its decision to release unit prices by contending that because price is only one of the factors the government uses in awarding contracts, the disclosure of unit prices would not likely cause underbidding.39 Surprisingly, the court of appeals characterized that response as “too silly to do other than state it, and pass on.”40 The court’s statement reveals a fundamental misconception or a lack of understanding of the factors an agency may consider when procuring goods or services through a “best value” procurement, especially sophisticated services such as launch vehicle services. This misconception was evident during the hearing, when one of the judges opined that he doubted that there could be other factors more important than price.41

Additionally, the court interpreted NASAs recognition that it would be advantageous for a competitor to receive line item price information as an admission that release of price information was likely to cause competitive harm.42 The opinion appears to suggest that the determination that information is advantageous to a competitor is tantamount to a finding that the information is likely to cause competitive harm. This test is much easier to prove than showing precisely how a competitor will derive a profit multiplier from a line item price. Presumably, most competitors expend the money and effort to request unit prices because such information will help them in future competitions.

Significantly, in determining that release of the unit prices was likely to cause competitive harm, the court focused on the harm caused by underbidding.43 It failed to address the government’s argument that “information to be released did not reveal cost or profit, company overhead, general and administrative rates, or individual labor rates by categories.”44 This historically has been the type of information that the courts have withheld under Exemption 4. During oral argument, the government attempted to raise the issue “[t]hat what was being sought to be withheld was not cost profit figures, general and overhead rates or technical data.”45 The court responded, “What’s that got to do with the price of tea? The only question is whether unit prices caused competitive harm… Not whether other information might have caused even more competitive harm.”46 Consistent with this simplistic reasoning, the court in its opinion, accepted without analysis that release of unit prices alone would allow a competitor to calculate its actual costs.

The court’s failure to address in its decision specifically how disclosure of unit prices would reveal proprietary elements of price and the court’s comments during oral argument suggest that the D.C. Circuit envisions a much lesser burden for showing competitive harm than previous case law imposed. The court essentially accepted, without substantial comment, McDonnell Douglas’ basic argument that release of unit prices would allow commercial customers to bargain down prices and competitors to under bid it. The court simply accepted these arguments characterizing them as “indisputable.”



Conclusion

The McDonnell Douglas decision may signal the D.C. Circuit’s frustration with the impossible standard that agencies and prior case law had created for submitters to prove that release of pricing was likely to cause them competitive harm. Most district courts follow the D.C. Circuit Court of Appeals’ lead in addressing FOIA. Therefore, the McDonnell Douglas opinion is certain to influence the discussion of the burden that a submitter bears in seeking to protect its information under FOIA Exemption 4.

If the test for determining whether information is confidential is now whether the information will be competitively advantageous, as intimated in the decision, then McDonnell Douglas will dramatically lower the burden on submitters seeking to protect unit prices. At the very least, McDonnell Douglas appears to have eliminated the de facto balancing test that some courts had applied between competitive harm and the public interest in release of information.

The ultimate effect of McDonnell Douglas, however, is uncertain. While clearly a departure from prior reasoning, the decision does not contain sufficient analysis to provide a clear road map for future decisions. For example, the court did not support its finding of competitive harm with a detailed explanation of how line item prices in this case would specifically and predictably show a profit multiplier and other propriety elements of price. Presumably submitters can show likely competitive harm with less specificity. Unfortunately, its summary acceptance of McDonnell Douglas’ assertion provides little guidance.



Currently, there do not appear to be any plans to modify the existing FAR provisions on release of unit prices. Additionally, no official government guidance has been issued to specifically address the decision or indicate how agencies should respond to arguments against release similar to those made in the McDonnell Douglas decision. It remains to be seen if this decision will mark a sea change in withholding information under Exemption 4 or simply an interesting aberration.

1 180 F.3d 303 (D.C. Cir. 1999).

2 NLRB v. Robbins Tire & Rubber Co., 437 U.S. 214, 220-21 (1978); Department of the Air Force v. Rose, 425 U.S. 352, 361-62 (1976).

3 5 U.S.C. § 552 (b) (4).

4 Frazee v. United States Forest Serv., 97 F.3d 367, 371 (9th Cir. 1996).

5 498 F.2d 765, 770 (D.C. Cir. 1974)

6 See, e.g. Pacific Architects & Engineers, Inc. v. United States Dep’t of States, 906 F.2d 1345, 1347 (9th Cir. 1990) (upholding agency’s release of the hourly rate the contractor charged the government for services provided for each job category because unit prices are made up of fluctuation variables); Acumenics Research & Technology v. United States Dep’t of Justice, 843 F.2d 800, 808 (4th Cir. 1988) (holding that release of unit prices would not allow a competitor to derive the bidder’s profit multiplier because price contained “too many unascertainable variables” and, and thus, release was not likely to cause competitive harm); Comdisco, Inc. v. General Servs. Administration, 864 F. Supp. 510, 516 (E.D. Va. 1994) (finding that releasing unit prices of peripheral equipment and services “in no way reflect[s] Comdisco’s risk assessment for the contract,” and thus, was not likely to result in competitive harm); Comdisco, Inc. v. General Servs. Administration, 864 F. Supp. 510. 516 (E.D. Va. 1994) (finding that releasing unit prices of peripheral equipment and services “in no way reflect[s] Comdisco’s risk assessment for the contract” and thus, was not likely to result in competitive harm); CC Distributors, Inc. v. Kinzinger, No. 94-1330, 1995 WL 405445 (D.D.C.) (unreported) (rejecting contractor’s contention that release of unit prices would allow competitors to “reverse-engineer” its confidential pricing method). But see Sperry Univac Div. v. Baldridge, No. 82-00045-A (E.D. Va. 1982) (unpublished) (withholding unit prices because information was specific enough to provide insight into the submitters’ pricing strategy), appeal dismissed, No. 82-1723 (4th Cir. 1982).

7 975 F.2d 871 (D.C. Cir. 1992).

8 Id. at 879.

9 Id.

10 See, e.g. Trifid Corp. v. National Imagery and Mapping Agency, 10 F. Supp. 2d 1087, 1098 (1998) (rejecting requester’s argument “that under Critical Mass, the bright line between ‘voluntary’ and ‘required’ submissions is whether the government has the power to seek or levy sanctions against a party for failing to comply with information requests”).

11 Martin Marietta Corp. v. Dalton, 974 F. Supp. 37, 39 (D.D.C. 1997).

12 See e.g., Trifid, 10 F. Supp. 2d at 1098 (“Financial and commercial information contained in government contracts is uniformly held to be ‘required’ in the context of FOIA exemption four analysis”); Martin Marietta, 974 F. Supp. at 39 (“[F]inancial/commercial information found in the Martin Marietta-NAVAIR CASS contracts was ‘required’ in the National Parks sense of the term by Federal Acquisition Regulations, 48 C.F.R. §§ 15.402, 15.804-6(b) (requiring bidders to include cost and pricing information), and therefore subject to the National Parks test”); McDonnell Douglas Corp. v. National Aeronautics & space Administration, 895 F. Supp. 316 (D.D.C. 1995) (holding that “prices in the contract were essential and required” and “precedent from other judges of this court supports the conclusion that pricing information necessary for a government contract is considered involuntary for a FOIA exemption four analysis”). But see Cortez III Serv. Corp. v. National Aeronautics and Space Administration, 921 F. Supp. 8, 12-13 (D.D.C. 1996) (holding that the contractor voluntarily submitted G&A ceiling rates because they were not a mandatory part of the cost proposal); Environmental Technology, Inc. v. United States Environmental Protection Agency, 822 F. Supp. 1226, 1229 (E.D. Va. 1993) (ruling that unit prices were voluntarily submitted).

13 843 F.2d 800, 808 (4th Cir. 1988)

14 Id.

15 See, e.g., CC Distributors, 1995 WL 405445, at *5 (upholding agency’s decision to release unit prices where contractor was not able to demonstrate with any specificity how competitors could “reverse-engineer” its pricing methods).

16 Racas-Milgo Gov’t Sys. v. SBA, 559 F. Supp. 4, 6 (D.D.C. 1981) (“Disclosure of prices charged the Government is a cost of doing business with the Government. It is unlikely that companies will stop competing for Government contracts if the prices contracted for are disclosed”); accord CC Distributors, Inc. v. Kinzinger, 1995 WL 405445 (D.D.C. 1995) (opining that although the statement in Racal-Milgo that release of unit prices is a cost of doing business with the government was dictum, that statement was “reasonable as a general proposition”).

17 Grant’s Janitorial and Food Serv., Inc. B-244170, May 28, 19991, 91-1 CPD ¶ 512 (denying protest of agency’s disclosure of incumbent’s option unit prices at the pre-proposal conversence because such prices are generally available to the government); JL Assoc., Inc. B-239790, Oct. 1, 1990, 90-2 CPD ¶ 261 (rejecting protest over disclosure of incumbent’s option unit prices for freezer storage services in a solicitation because “[c]ontract prices are generally available under the Freedom of Information Act, [citation omitted] since the disclosure of prices charged the government is ordinarily a cost of doing business with the government) (citing FAR § 15.1001 (c) (iv) (FAC 84-58)).

18 974 F. Supp. 37, 38 (D.D.C. 1997).

19 Id. at 41.

20 See also note 15, supra.

21 When the FAR was first promulgated, the language requiring release of unit prices appeared in 48 C.F.R. § 15.1001 (c) (iv) (1984).

22 Environmental Technology, Inc. v. United States E.P.A., 822 F. Supp. 1226, n. 4 (E.D. Va. 1993) (holding that “[t]he FAR in fact prohibits the release of such data in situations in which it constitutes ‘confidential business information’”). The FAR, as a regulation, cannot override the FOIA, a statute. Cf. Teich v. Food and Drug Admin., 751 F. Supp. 243, 247 (D.D.C. 1990) (ruling that an agency regulation cannot be implemented to frustrate the purpose of FOIA).

23 McDonnell Douglas Corp. v. National Aeronautics and Space Administration, 108 F.3D 303, 304 (D.C. Cir. 1999).

24 Id. at 306.

25 Id. at 305.

26 Id.

27 Id.

28 Id. at 306.

29 Id.

30 Id.

31 Id. at 306; see also Brief for Appellee at 29, McDonnell Douglas Corp. v. National Aeronautics and Space Administration, 180 F.3d 303 (D.C. Cir 1999) (No. 98-5251).

32 Id. at 30.

33 Id. at 29, n. 23 (quoting CC Distributors, Inc. v. Kinzinger, No. 94-1330, 1995 WL 405445 at 6 (D.D.C. 1995)).

34 See Racal-Milgo Gov’t Sys. v. SBA, 559 F. Supp. 4, 6 (D.D.C. 1981); Martin Marietta Corp. v. Dalton, 974 F. Supp. 37 (D.D.C. 1997).

35 180 F.3d at 306.

36 Id.

37 Id.

38 Id.

39 Id.

40 Id.

41 The court stated, “Well, I mean, for instance she says gee there are other factors that are more important than competition, other than price. Even if that’s true, which I doubt, but assuming that is true, that certainly doesn’t establish that unit price is not important.” Transcript of Proceedings at 40, lines 3-7, McDonnell Douglas Corp. v. National Aeronautics and Space Administration, 180 F.3D 303, 304 (D.C. Cir. 1999) (98-5251). The Court also stated, “But surely the consumers are, I mean I would think the single most important figure would be the dollars per pound [for launching vehicles into space]. I’m sure there are other very important variables. But, if you’re saying that they have different ways of getting pounds into space, and that’s the big difference –.” Id. at 37, lines 4-9.

42 180 F.3d at 306-07.

43 See id.

44 Brief of Appellee at 28, n. 22, 29, McDonnell Douglas.

45 Transcript at 33, lines 9-10, McDonnell Douglas.

46 Id. at lines 11-16.


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