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09/29/87 Cna Financial Corporation, v. Raymond J. Donovan

September 29, 1987

CNA FINANCIAL CORPORATION, ET AL., APPELLANTS

v.

RAYMOND J. DONOVAN, SECRETARY OF LABOR, ET AL. 1987.CDC.416 DATE DECIDED: SEPTEMBER 29, 1987



Wald, Chief Judge, Robinson and Mikva,* Circuit Judges.

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

Appeal from the United States District Court for the District of Columbia, Civil Action No. 77-00808.

APPELLATE PANEL:

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE ROBINSON

This reverse-Freedom of Information Act case *fn1 features two important issues: the exact scope of 18 U.S.C. § 1905, commonly referred to as the Trade Secrets Act, *fn2 and its relationship to FOIA Exemptions 33 and 4.4 In past cases, we have repeatedly touched upon these difficult questions, but never squarely decided them.5 We resolve them definitively today. I. BACKGROUND

We begin by reducing the background of this appeal to its essence. Appellant CNA6 is an insurance company doing business with the Federal Government.7 As a condition of receiving federal contracts, and by virtue of the mandate of Executive Order 11,246,8 it must submit to the appropriate governmental agency various materials demonstrating its performance in hiring, promoting, and otherwise utilizing women and minorities, as well as its affirmative action goals for the future.9 These materials take the form of EEO-1 reports and affirmative action programs.10 In 1977, when the FOIA requests instigating the present dispute were made, the agency charged with enforcing the insurance industry's compliance with Executive Order 11,246 was the Department of Health, Education and Welfare , which in turn had delegated this responsibility to the Insurance Compliance Staff of the Social Security Administration.11

In April of 1977, a group called Women Employed requested from ICS12 copies of the 1976-77 affirmative action programs and EEO-1 reports for CNA's midwest regional office, the 1974-75 affirmative action programs and EEO-1 reports for CNA's home office, and several documents prepared by ICS concerning CNA's compliance with the executive order.13 On being notified by ICS both of the FOIA request and of the agency's intention to honor it,14 CNA sought and obtained from the District Court an order restraining release pending completion of the administrative appeal process.15

Then began the long and tortuous journey of this case, in the course of which it traveled back and forth between the District Court and the agency, with one fairly brief stop in this court. The specifics of this five-year odyssey are reserved for a later section of this opinion, wherein CNA's procedural challenges are discussed.16 It is sufficient for the present to note that in determinations rendered in November, 1980, and July, 1981,17 the Office of Federal Contract Compliance Programs of the Department of Labor - which by then had assumed the enforcement responsibilities previously exercised by ICS18 - decided to release, pursuant to FOIA and regulations of OFCCP, all the material requested.19

In thus discarding CNA's objections to disclosure, OFCCP decided that the Trade Secrets Act is not a withholding statute within the meaning of Exemption 3.20 It then proceeded to consider whether the requested material fell within Exemption 4. Applying the test established by this court in National Parks & Conservation Association v. Morton,21 OFCCP discounted CNA's claim that revelation of its affirmative action programs and EEO-1 reports would precipitate substantial competitive harm.22 CNA had asserted, through various affidavits and depositions, that any such disclosure would, inter alia, facilitate raiding of its employees, with a concomitant increase in recruiting and training costs; deleteriously affect employee morale; generate adverse publicity by virtue of public "misconstruction" of the data; and reveal to competitors CNA's plans to enter, expand, or contract different markets and product lines.23 OFCCP dismissed these concerns as overstated and speculative; it concluded that the information in the affirmative action programs and EEO-1 reports was neither so detailed nor so specific to CNA that it would have any particular competitive value to a rival.24 The agency's estimates in this regard were buttressed by its view that the data at issue, which were by then four to seven years old, were stale.25 Having found no threat of competitive harm that would bring the requested material within Exemption 4, OFCCP concluded that FOIA mandated its disclosure.26

The District Court sustained OFCCP's final determination.27 It agreed that the Trade Secrets Act is not an Exemption 3 withholding statute, and that substantial competitive harm was the appropriate standard for resolving the Exemption 4 question.28 After denying CNA's request for a de novo evidentiary hearing, the court held that OFCCP's determination was not "arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law."29 Accordingly, it granted summary judgment for the agency and directed that the documents be released within fifteen days.30 We granted a stay of this direction pending appeal.31

CNA now complains vigorously that it has not been afforded at any point -- either before the agency or in the District Court -- an evidentiary hearing on its claims of competitive harm.32 CNA's procedural challenges were largely resolved by our holding in National Organization for Women v. Social Security Administration ,33 and are discussed in Part IV of this opinion. Parts II and III address CNA's substantive claims respecting the scope and interrelationship of the Trade Secrets Act and Exemptions 3 and 4 of FOIA, and review CNA's contention that OFCCP improperly applied Exemption 4. II. THE TRADE SECRETS ACT AND EXEMPTION 3

The third exemption of FOIA, as amended in 1976,34 excepts from mandatory disclosure material

specifically exempted from disclosure by statute (other than [the open meeting provisions of 5 U.S.C. § 552b]), provided that such statute requires that the matters be withheld from the public in such a manner as to leave no discretion on the issue, or establishes particular criteria for withholding or refers to particular types of matters to be withheld.

35

We have had occasion in the past to recount the events leading up to the 1976 amendment, and to explicate the legislative goals that must inform our resolution of Exemption 3 questions.36 Without reiterating that now-familiar history, we note simply that Subsections and were designed to narrow the scope of the prior-existing exemption by excluding those broadranging statutes that give an agency " cart blanche [sic] to withhold any information [it] pleases."37 The "unmistakable thrust" of Exemption 3 as amended is "to assure that basic policy decisions on governmental secrecy be made by the Legislative rather than the Executive branch."38

CNA contends that the Trade Secrets Act qualifies under both Subsections and as an Exemption 3 withholding statute. That Act reads as follows:

Whoever, being an officer an employee of the United States or of any department or agency thereof, publishes, divulges, discloses, or makes known in any manner or to any extent not authorized by law any information coming to him in the course of his employment or official duties or by reason of any examination or investigation made by, or return, report or record made to or filed with, such department or agency or officer or employee thereof, which information concerns or relates to the trade secrets, processes, operations, style of work, or apparatus, or to the identity, confidential statistical data, amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, corporation, or association; or permits any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law; shall be fined not more than $1,000, or imprisoned not more than one year, or both; and shall be removed from office or employment.

39

After careful consideration, we believe the Trade Secrets Act does not satisfy the strictures of either Subsection or .

We have heretofore explained that Subsection "is too rigorous to tolerate any decisionmaking on the administrative level. It embraces only those statutes incorporating a congressional mandate of confidentiality that, however general, is 'absolute and without exception.'"40 CNA's insistence that the Trade Secrets Act is such a ban on disclosure of trade secrets and other business data ignores the crucial phrase confining the prohibition to only those revelations that are " not authorized by law."41 If the sole possible source of disclosure-authorization were congressional enactment, we might agree that the Act contemplates no decisionmaking on the administrative level, and thereby satisfies Subsection of Exemption 3. The Supreme Court has made clear, however, that duly promulgated agency regulations reasonably related to the purpose and scope of a statutory grant of substantive rulemaking authority can provide the requisite legal sanction for disclosure.42 We think this potential for administrative authorization precludes the application of Subsection .43 Whenever an agency has power to adopt substantive regulations governing public access to its files, the decision whether the Trade Secrets Act is to bar divulgence of commercial and financial material contained therein ordinarily will be made by the agency, not by Congress. More specifically, disclosure will be "not authorized by law"44 just to the extent that the agency elects not to endorse release.

Of course, the fact that an agency possesses discretion to control the applicability of the Trade Secrets Act is fatal only to a Subsection claim. Even statutes conferring considerable amounts of administrative discretion can fall within Subsection of Exemption 3 if they either establish "particular criteria for withholding" or refer to "particular types of matters to be withheld."45

To meet the first prong of Subsection , the statute must "incorporatea formula whereby the administrator may determine precisely whether disclosure in any instance would pose the hazards that Congress foresaw."46 The Trade Secrets Act is patently deficient in this regard. As we have already explained, the Act, by prohibiting only unauthorized disclosures, leave at least some agencies in a position to opt out of its strictures. Yet nothing in the Act directs or guides an agency in deciding whether it ought to exercise its power to authorize revelation of officially collected commercial and financial data.

Moreover, going a step beyond the agency's initial decision to permit some disclosure, the Trade Secrets Act in no way channels the discretion of agency decisionmakers in supplying authorization for specific cases.47 Suppose, for example, an agency with substantive power to promulgate public access regulations duly adopts a rule stating:

Disclosure of trade secrets and other business information will be deemed 'authorized' for purposes of the Trade Secrets Act only when the administrator determines that release is consistent with the public interest.

This hypothetical regulation embodies the kind of administrative carte blanche that Congress intended to curb by its amendment of Exemption 3,48 yet nothing in the Trade Secrets Act suggests that such a wideranging regulation would be ineffective as a source of disclosure authority. Devoid of any normative content to steer the agency in determining when revelation of data would be deleterious, the Act is susceptible of invocation to bar disclosure at the whim of an administrator acting under such a regulation. Indeed, one of the fundamental difficulties with classifying the Trade Secrets Act as an Exemption 3 statute is that agencies conceivably could control the frequency and scope of its application through regulations adopted on the strength of statutory withholding authorizations which do not themselves survive the rigors of Exemption 3.49

The Trade Secrets Act is no more successful in meeting the second prong of Subsection . The language of the Act is exceedingly broad.50 Extending by its terms to information pertaining to "trade secrets," "processes," "style of work," "apparatus," "confidential statistical data," the amount or source of "income, profits, losses, or expenditures" and even the "identity" of "any person, firm, partnership, corporation, or association,"51 "encompasses virtually every category of business information likely to be in the files" of an agency.52 The "oceanic" quality of the Act53 is enhanced by the fact that it is addressed to every "officer or employee" of "any [federal] department or agency;"54 moreover, it applies to any information discovered "in the course of [the employee's] employment or official duties or by reason of any examination or investigation made by, or return, report, or record made to or filed with" the department, agency, or employee.55 In sum, the Trade Secrets Act appears to cover practically any commercial or financial data collected by any federal employee from any source in performance of the duties of his or her employment.

In determining in a prior case that Section 7(c) of the Export Administration Act56 does not satisfy the second prong of Subsection , we explained that a nondisclosure statute's

general applicability to anything that might happen to be encompassed within [an] array of information-gathering functions undermines any notion that [the statute] represents a congressional determination of the advisability of secrecy for any "particular typeof matter," if for no other reason than that the agency has the power radically to expand the quantity and diversity of information in its files to intercept ...


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