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Posted on Tuesday, November 06, 2018

Bidders Are Both Helped and Hindered by the Freedom of Information Act

Bid proposal teams got some good news and bad news from two recent court decisions involving the Freedom of Information Act (FOIA). The good news is that their line item prices, including their mark-ups, on winning bids will rarely be seen by competitors. The bad news is that bid teams will rarely be able to get much usable intelligence on their competitors’ bidding strategy through FOIA requests for their competitors’ contracts. Now perhaps is a good time to look closer at exactly what bid information is available and what bid information is protected under FOIA as well as under FAR, which is often overlooked.

FOIA Disclosures

As its name indicates, FOIA is commonly referred to as a disclosure statute. The law’s most fundamental policy is that, generally, information the government has should be freely disclosed to taxpayers. However, FOIA limits disclosure of some information through a number of FOIA “Exemptions.”

Most relevant to government contractors is FOIA Exemption 4 which protects confidential information.  Here the issue is whether disclosure would “substantially harm” a government contractor’s “competitive position.”  Contractors have an easier job of protecting their information because they don’t have to prove “actual harm” – just that there is actual competition and a “likelihood of substantial competitive injury.” The main issue is whether disclosure of information in a government contract would allow the contractor’s competitors to estimate, and undercut, a contractor’s bids.

Disclosure of total contract price. Courts routinely allow an agency to disclose the total contract price. It’s hard for a contractor to prove that releasing the total contract price presents the likelihood of substantial competitive injury. That price typically includes a number of items that are variously priced; for example Direct Labor is loaded with fringe benefits, whereas items such as Other Direct Costs are not. Typically, therefore, the total contract price would be releasable to a competitor under FOIA, because it’s usually impossible to reverse engineer a contractor’s labor rate or indirect costs simply from the total contract price.

Line-item prices. These prices are more involved and typically, but not always, can be protected. In one recent case, NASA wanted to disclose a number of pricing components in a Northrop Grumman multi-year cost-reimbursement contract for the design and manufacture of the James Webb Space Telescope (JWST), a $9 billion NASA program.  One number NASA wanted to release was the contractor’s proposed “Wrap Rate” comprised of three indirect cost components: “related payroll expense,” “overhead,” and “general & administrative expense,” which were projected for each year of the contract, 2002-2009.

NASA made a number of unsuccessful but typical government agency arguments for release of the wrap rates, so it is useful to look at each government argument in detail.

One unsuccessful argument was the government’s argument that the contractor’s actual rates were not being disclosed and that the actual rates cannot be derived from the release of the proposed wrap rates. The court disagreed. First, although the contractor’s wrap rates were, indeed, proposed rates and “are not based on the actual indirect costs Northrop Grumman incurred in performing under the JWST contract, they are by no means unconnected to Northrop Grumman’s actual rates.” Second, the proposed wrap rates were contractor proprietary information.

Another unsuccessful government argument was that the contract was a “once in a generation contract” with no follow-on contract. Because any future contract for a space-based observatory “will contain different requirements,” NASA argued that it was “unlikely that competitors could simply incorporate obsolete [Northrop Grumman] wrap rate information contained herein to gain a definitive advantage needed to secure a contract for a related space-based infrared observatory, or other Federal procurement, of this magnitude.” The court disagreed, concluding that disclosure of the proposed wrap rates “would put Northrop Grumman at a competitive disadvantage in bidding on a range of specific aerospace solicitations,” and agreeing with the contractor’s argument that “given the multiple programs and opportunities that are on the horizon, the threat of competitive harm is not illusory but rather distinct and real.”

Related to this was NASA’s unsuccessful “they’re old rates” argument: that releasing Northrop Grumman’s proposed wrap rates would not cause competitive harm now because the wrap rates were used in 2002, were never updated and were, therefore, not current. Although much of the court’s rationale for not disclosing the proposed wrap rates was redacted, this much was clear: to protect the information from disclosure to a competitor, the contractor did not have to prove “that the release of information would allow a competitor to ‘model exactly or to pinpoint precisely’ information that would cause substantial harm.”

Identification of subcontractors and employees. Whether the identity of these critical elements of a contract can be disclosed is less clear.  In several cases, the identity of the contractor’s subcontractors and employees was protected from release. Release would reveal to competitors commercially sensitive information concerning the incumbent contractor’s internal operations and business practices. Moreover, a contractor spends years developing a network of available subcontractors. Competitors could be substantially benefitted by gaining access to these subcontractors without needing to expend the same time and resources.

In other cases, the identity of a contractor’s employees was not protected from disclosure but for more technical reasons: the agency and contractor did not give the court sufficient proof of competitive harm.

FAR FOIA References

No discussion of FOIA in the context of government contracts would be complete without mentioning FAR provisions dealing with FOIA.

Proposals not incorporated into a contract.  Competitive proposals in the possession of the government “shall not be made available to any person under the Freedom of Information Act.” However, the prohibition “does not apply to a proposal, or any part of a proposal, that is set forth or incorporated by reference in a contract between the Government and the contractor that submitted the proposal.” FAR 24.202.

Debriefing limits. According to FAR 15.505 and 15.506, debriefings “shall not reveal any information prohibited from disclosure by 24.202 or exempt from release under the Freedom of Information Act (5 U.S.C. 552) including—(1) Trade secrets; (2) Privileged or confidential manufacturing processes and techniques;(3) Commercial and financial information that is privileged or confidential, including cost breakdowns, profit, indirect cost rates, and similar information; and (4) The names of individuals providing reference information about an offeror’s past performance.”

Conclusion

We can see that FOIA is a mixed-bag for contractors: protecting their confidential information but, in the process, making it more difficult to get commercial intelligence on its competitors. In the long run, however, that mixed-bag may well be the most reasonable way to protect a contractor’s confidential information. As any BD team knows, there are other ways of getting competitive intelligence.

Berenzweig Leonard is teaming up with Red Team Consulting for a monthly newsletter featuring “Words of Wisdom” as well as upcoming contracts, key protest decisions, events, and more. This post was published in the November 2018 “Words of Wisdom” newsletter. To sign up for our govcon newsletters, please click here. 

Terry O’Connor is a Partner at Berenzweig Leonard. Terry and Stephanie Wilson  lead the firm’s Government Contracts practice. Terry can be reached at toconnor@berenzweiglaw.com.