June 7, 1996



Ms. Deborah Bachrach
Kalkines, Arky, Zall & Berstein
1675 Broadway
New York, NY 10019-5820

The staff of the Committee on Open Government is authorized to issue advisory opinions. The ensuing staff advisory opinion is based solely upon the information presented in your correspondence, unless otherwise indicated.

Dear Ms. Bachrach:

I have received your letter of May 8, as well as the correspondence attached to it. You have sought an advisory opinion concerning the propriety of a denial of your request for records by the State Department of Health. The records that you requested are described as follows:

"For each HMO and PHSP responding to the Department's Medicaid managed care RFP, a copy of the rate proposal for each premium group by county/region, its relationship to the rate range, and the rates offered by New York State, as attached to the March 22, 1996 letter from Elizabeth Macfarlane."

In response to the request, the Department's records access officer wrote that the RFP process had not been completed and that, therefore, the records could be withheld under §87(2)(c) of the Freedom of Information Law. He added that "[o]nce the RFP process is completed, access to the rate proposal portion of the HMO and PHSP bid would be denied" pursuant to §87(2)(d).

You have contended that "the portion of the RFP process which involves rate negotiations between the Department and managed care plans has now been completed", that "all rate proposals have either been accepted or rejected by both sides", and that "[t]he only remaining steps in the process are the completion of readiness reviews by the Department and the execution of contracts between plans and local social service districts." You also wrote that:

"While a managed care plan may have had an interest in maintaining the secrecy of its rate proposal during the RFP rate negotiation process, all rates have now been finalized, and therefore the disclosure of this information would not undermine the competitive position of any managed care plan. In most cases, a plan's proposed rates are identical to the plan's final rated, which the Department has agreed to ultimately disclose."

In an effort to learn more of the matter and to acquire their perspective, I have contacted officials of the Department of Health. Consequently, some of their remarks will be referenced in the ensuing commentary.

As a general matter, the Freedom of Information Law is based upon a presumption of access. Stated differently, all records of an agency are available, except to the extent that records or portions thereof fall within one or more grounds for denial appearing in §87(2)(a) through (i) of the Law.

Section 87(2)(c) permits an agency to withhold records to the extent that disclosure would:

"...impair present or imminent contract awards or collective bargaining negotiations..."

In my view, the key element of the language quoted above involves the extent to which disclosure would "impair" the ability of the Department to engage in optimal contractual relationships.

I was informed that the RFP involved a requirement that submissions be broken down into so-called "rate cells", plans for each of nine areas that are tied to cost and which in fact varied dramatically among submissions. Further, the Department established what it characterized as acceptable rate ranges relative to each of the rate cells and, after the receipt of the proposal, it offered submitters a second opportunity to accept rates within the ranges. I was told that 41 plans have been submitted that fall within the acceptable rate ranges, and that no contract has been awarded as yet.

The potential procurement in this instance involves 31 counties, as well as New York City, and the large combination of entities participating in a single proposal is apparently unprecedented. Concurrently, however, other plans in counties are negotiating individually with the Department by means of the same procedures as they had in the past. The Department has contended that if the information sought, particularly the rate ranges, are released now, those counties negotiating independently with the Department would be able to ascertain what the acceptable rates would be. As such, those plans in counties, while uninvolved in the process relating to the records at issue, would have an advantage in negotiating with the State.

In short, the Department, as I understand its concerns, is not contending that disclosure to the respondents to the RFP would impair the process with respect to the respondents; rather, because of the ongoing separate negotiations, disclosure would adversely impact the Department's negotiating status with those other entities.

I know of no judicial decision that deals directly with the kind of contention offered by the Department, i.e., that disclosure of records would not impair the contracting process with respect to those involved in the process, but rather with respect to different concurrent and related contract negotiations. From my perspective, because the contracts into which the Department will enter involve the same substance, if indeed disclosure now would place the Department at a disadvantage in negotiating with any of the potential parties to the contracts, it would appear that a denial on the basis of §87(2)(c) would be justifiable.

With regard to the assertion of §87(2)(d), it was argued that entities within a particular geographical area might have the ability to gain a competitive advantage by knowing the figures within rate cells. While it was recognized that any competitive disadvantage would be eliminated following the consummation of contracts, Department officials expressed the view that a denial of access could be justified now on the basis of §87(2)(d). That provision enables an agency to withhold records or portions thereof that:

"are trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise and which if disclosed would cause substantial injury to the competitive position of the subject enterprise."

As such, the question under §87(2)(d) involves the extent, if any, to which disclosure would "cause substantial injury to the competitive position" of commercial entities that have responded to the RFP.

With respect to the substance of the matter, the concept and parameters of what might constitute a "trade secret" were discussed in Kewanee Oil Co. v. Bicron Corp., which was decided by the United States Supreme Court in 1973 (416 (U.S. 470). Central to the issue was a definition of "trade secret" upon which reliance is often based. Specifically, the Court cited the Restatement of Torts, section 757, comment b (1939), which states that:

"[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers" (id. at 474, 475).

In its review of the definition, the court stated that "[T]he subject of a trade secret must be secret, and must not be of public knowledge or of a general knowledge in the trade or business" (id.). The phrase "trade secret" is more extensively defined in 104 NY Jur 2d 234 to mean:

"...a formula, process, device or compilation of information used in one's business which confers a competitive advantage over those in similar businesses who do not know it or use it. A trade secret, like any other secret, is something known to only one or a few and kept from the general public, and not susceptible to general knowledge. Six factors are to be considered in determining whether a trade secret exists: (1) the extent to which the information is known outside the business; (2) the extent to which it is known by a business' employees and others involved in the business; (3) the extent of measures taken by a business to guard the secrecy of the information; (4) the value of the information to a business and to its competitors; (5) the amount of effort or money expended by a business in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. If there has been a voluntary disclosure by the plaintiff, or if the facts pertaining to the matter are a subject of general knowledge in the trade, then any property right has evaporated."

In my view, the nature of the records, the area of commerce in which a commercial entity is involved and the presence of the conditions described above that must be found to characterize records as trade secrets would be the factors used to determine the extent to which disclosure of the records would "cause substantial injury to the competitive position" of a commercial enterprise. Therefore, the proper assertion of §87(2)(d) would be dependent upon the facts and, again, the effect of disclosure upon the competitive position of the entity to which the records relate.

Also relevant to the analysis is a recent decision rendered by the Court of Appeals, the State's highest court, which, for the first time, considered the phrase "substantial competitive injury" [Encore College Bookstores, Inc. v. Auxiliary Service Corporation of the State University of New York at Farmingdale, 87 NY2d 410 (1995). In that decision, the Court reviewed the legislative history of the Freedom of Information Law as it pertains to §87(2)(d), and due to the analogous nature of equivalent exception in the federal Freedom of Information Act (5 U.S.C. §552), it relied in part upon federal judicial precedent.

In its discussion of the issue, the Court stated that:

"FOIL fails to define substantial competitive injury. Nor has this Court previously interpreted the statutory phrase. FOIA, however, contains a similar exemption for 'commercial or financial information obtained from a person and privileged or confidential' (see, 5 USC § 552[b][4]). Commercial information, moreover, is 'confidential' if it would impair the government's ability to obtain necessary information in the future or cause 'substantial harm to the competitive position' of the person from whom the information was obtained...

"As established in Worthington Compressors v Costle (662 F2d 45, 51 [DC Cir]), whether 'substantial competitive harm' exists for purposes of FOIA's exemption for commercial information turns on the commercial value of the requested information to competitors and the cost of acquiring it through other means. Because the submitting business can suffer competitive harm only if the desired material has commercial value to its competitors, courts must consider how valuable the information will be to the competing business, as well as the resultant damage to the submitting enterprise. Where FOIA disclosure is the sole means by which competitors can obtain the requested information, the inquiry ends here.

"Where, however, the material is available from other sources at little or no cost, its disclosure is unlikely to cause competitive damage to the submitting commercial enterprise. On the other hand, as explained in Worthington:

Because competition in business turns on the relative costs and opportunities faced by members of the same industry, there is a potential windfall for competitors to whom valuable information is released under FOIA. If those competitors are charged only minimal FOIA retrieval costs for the information, rather than the considerable costs of private reproduction, they may be getting quite a bargain. Such bargains could easily have competitive consequences not contemplated as part of FOIA's principal aim of promoting openness in government (id.).

"The reasoning underlying these considerations is consistent with the policy behind (2)(b)--to protect businesses from the deleterious consequences of disclosing confidential commercial information, so as to further the State's economic development efforts and attract business to New York (see, McKinney's 1990 Sessions Laws of New York, ch 289, at 2412 [Memorandum of State Department of Economic Development]). The analogous Federal standard would advance these goals, and we adopt it as the test for determining whether 'substantial injury to the competitive position of the subject enterprise' would ensue from disclosure of commercial information under FOIL" (id., 995-996).

Lastly, it is noted that the courts have consistently interpreted the Freedom of Information Law in a manner that fosters maximum access. As stated by the Court of Appeals more than decade ago:

"To be sure, the balance is presumptively struck in favor of disclosure, but in eight specific, narrowly constructed instances where the governmental agency convincingly demonstrates its need, disclosure will not be ordered (Public Officers Law, section 87, subd 2). Thus, the agency does not have carte blanche to withhold any information it pleases. Rather, it is required to articulate particularized and specific justification and,if necessary, submit the requested materials to the courts for in camera inspection, to exempt its records from disclosure (see Church of Scientology of N.Y. v. State of New York, 46 NY 2d 906, 908). Only where the material requested falls squarely within the ambit of one of these statutory exemptions may disclosure be withheld" [Fink v. Lefkowitz, 47 NY 2d 567, 571 (1979)]."

In another decision rendered by the Court of Appeals, it was held that:

"Exemptions are to be narrowly construed to provide maximum access, and the agency seeking to prevent disclosure carries the burden of demonstrating that the requested material falls squarely within a FOIL exemption by articulating a particularized and specific justification for denying access" [Capital Newspapers v. Burns, 67 NY 2d 562, 566 (1986); see also, Farbman & Sons v. New York City, 62 NY 2d 75, 80 (1984); and Fink v. Lefkowitz, 47 NY 2d 567, 571 (1979)].

Moreover, in the same decision, in a statement regarding the intent and utility of the Freedom of Information Law, it was found that:

"The Freedom of Information Law expresses this State's strong commitment to open government and public accountability and imposes a broad standard of disclosure upon the State and its agencies (see, Matter of Farbman & Sons v New York City Health and Hosps. Corp., 62 NY 2d 75, 79). The statute, enacted in furtherance of the public's vested and inherent 'right to know', affords all citizens the means to obtain information concerning the day-to-day functioning of State and local government thus providing the electorate with sufficient information 'to make intelligent, informed choices with respect to both the direction and scope of governmental activities' and with an effective tool for exposing waste, negligence and abuse on the part of government officers" (id., 565-566).

I hope that I have been of assistance.



Robert J. Freeman
Executive Director


cc: Claudia Hutton
John Kaelin