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August 26, 1999

Mr. O. Shelly
87-84 165 St. Apt. 110
Jamaica, NY 11432-3571

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 Mr. Shelly:

I have received your letter of August 1 in which you sought an opinion concerning access
to a portion of the State Insurance Fund's Claims-Medical Department Procedures Manual that
you characterized as "Procedure 90." You referred to the exceptions in the Freedom of
Information Law pertaining to inter-agency and intra-agency materials and to trade secrets, and
you contended that neither would apply. In addition, you indicated that the Manual is available
to many agency employees on an intranet.

In this regard, while I am unfamiliar with the contents of Procedure 90, an analogous
issue has arisen in the past, and as you inferred, the provision of primary significance is
§87(2)(d) of the Freedom of Information Law. That provision permits an agency to withhold
records 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."

I agree with your contention that the State Insurance Fund ("the Fund") "does not regulate
business." Your reference, however, to §89(5) is misplaced, for that provision deals with the
protection of records submitted by commercial enterprises to state agencies. In this instance, the
record at issue is a portion of a manual apparently prepared by the Fund.

As I understand its functions, the Fund essentially operates as an insurance company in
competition with other insurance carriers licensed to do business in the state. While the Fund as
a state agency is not typical of commercial enterprises, my understanding is that, in many
respects, it carries out many of its duties as an entity in competition with private firms in the
insurance industry. Most pertinent to the matter, I note that there is case law indicating that
when a governmental entity performs functions essentially commercial in nature in competition
with private, profit making entities, it may withhold records pursuant to §87(2)(d) in appropriate
circumstances (Syracuse & Oswego Motor Lines, Inc. v. Frank, Sup. Ct., Onondaga Cty.,
October 15, 1985). In this instance, assuming that the Fund is engaged in competition with
private firms engaged in the same area of commercial activity, I believe that §87(2)(d) would
serve as a potential basis for a denial of access.

The question under §87(2)(d) involves the extent, if any, to which disclosure would
"cause substantial injury to the competitive position" of a commercial entity. 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 record, 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
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])...

"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., 419-420)."

In sum, I believe that the State Insurance Fund could in the context of the preceding
remarks be characterized as a commercial entity and therefore, assert §87(2)(d). To the extent
that that provision or any other ground for denial may justifiably be asserted in accordance with
the preceding commentary, the record sought could, in my opinion, be withheld.

Lastly, the fact that the record may be available to Fund employees via an itranet is
irrelevant to public rights of access. Employees receive the record in the performance of their
official duties, not as members of the public seeking the record pursuant to the Freedom of
Information Law. Further, the record is the property of the Fund and cannot be disclosed by its
employees without authorization to do so ( see attached Information Security Policy).

I hope that I have been of assistance.

Sincerely,

 

Robert J. Freeman
Executive Director

RJF:tt
Enc.

cc: Jacob Weintraub