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Friday, April 16, 2021

Commentary: Supreme Court ruling increases competitive protection for businesses

A recent opinion by the United States Supreme Court should give businesses cause to cheer. The court’s holding in Food Marketing Institute v. Argus Leader Media will strengthen companies’ ability to protect confidential commercial information provided to the federal government from mandatory disclosure.

As many businesses – especially those in highly regulated industries such as finance, banking and health care – can attest, disclosing information to the government carries significant risk. That’s because under the Freedom of Information Act (“FOIA”), government agencies must generally disclose agency records to any person upon request, including information obtained from private companies.

FOIA provides an exemption, however, for “commercial or financial information obtained from a person [that is] privileged or confidential” – also known as Exemption 4. This exemption was intended to encourage businesses to freely share sensitive commercial information with the government without concern of public disclosure.

But, in a nearly 50-year-old case called National Parks & Conservation Ass’n v. Morton, the D.C. Court of Appeals narrowed the scope of Exemption 4 by defining “confidential” information to mean information likely “to cause substantial competitive harm to the competitive position of the person from whom the information was obtained.”

“Substantial competitive harm” has proven to be an elusive concept. Many courts of appeals have diverged in their interpretation of “substantial competitive harm” since National Parks, and disagree on answers to questions such as the level of precision necessary to establish competitive harm; what constitutes a relevant market for purposes of assessing competition; or even whether embarrassment and bad publicity qualify as a competitive injury.

Moreover, the National Parks test required the government and private party resisting disclosure to devote significant time and resources collecting evidence necessary to establish that disclosure would cause substantial competitive harm. The costs of potentially having to defend its confidential information from disclosure has discouraged many businesses from voluntarily disclosing information to the government or participating in mutually beneficial government programs.

The “substantial competitive harm” standard also proved unworkable for a more fundamental reason. It required courts to make disclosure decisions based on forecasts of competitive conditions. But, as any company knows, market conditions are dynamic and subject to rapid and unpredictable changes. A court is ill-suited to anticipate how or where competition might arise in a particular industry. Indeed, the facts in Food Marketing Institute offer the perfect illustration of this point.

A journalist for Argus Leader Media submitted an FOIA request with the United States Department of Agriculture seeking the names and addresses of all retail stores that had participated in the national food-stamp program – also known as the Supplemental Nutrition Assistance Program (“SNAP”). The journalist also requested each store’s annual SNAP redemption data from the past five fiscal years.

The USDA declined to disclose the store-level SNAP data, stating that revealing store-level SNAP data would threaten the stores’ competitive position. Argus sued the USDA in federal district court to compel it to release the store-level SNAP data. The two-day trial focused on whether the release of store-level SNAP data was likely to affect a competing grocer’s decision to open a new store in that location. At that time, online retailers could not participate in the SNAP program, and therefore, neither the district court nor the Eighth Circuit Court of Appeals considered the potential for substantial competitive harm to traditional SNAP retailers should online SNAP retailers have access to the redemption data.

But after the trial concluded, the USDA announced a pilot program for online retailers to accept SNAP benefits. This post-trial development highlighted one of the major shortcomings of the “substantial competitive harm” test: it was backward looking. Although not foreseen by the courts, new online retailers were perfectly positioned to exploit the redemption data because their business model focused on targeting customers of existing brick-and-mortar grocers, not building new stores.

Fortunately for Food Marketing Institute and the retail grocers it represents, the U.S. Supreme Court’s recently issued opinion opts to eliminate the “substantial competitive harm” test and institute a new standard. Under the new standard, commercial or financial information that (1) is customarily and actually treated as private by its owner and (2) is provided to the government under the assurance of privacy, will be treated as “confidential” under Exemption 4. Because businesses rarely provide information without an assurance of privacy from the government, the potential disclosure of sensitive commercial information will primarily turn on how businesses themselves treat the information. If it is “customarily and actually treated as private” by its owner, the owner can expect it to remain confidential.

The new standard should lead to a significant reduction in the potential costs of doing business with the U.S. government, and promote public and private interests by encouraging companies to disclose useful information to the government, participate in mutually beneficial government programs, and for smaller businesses, seek available government benefits.

John Polzer is the hiring partner at Cantey Hanger and is an adjunct professor at Texas Christian University. Joshua Michaels is an associate attorney at Cantey Hanger and is a veteran of the U.S. Army. Cantey Hanger is a full-service law firm with offices in Fort Worth and Dallas. John can be reached at jpolzer@canteyhanger.com.

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