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November 6, 2000

 

FOIL-AO-12376

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

As you are aware, I have received your correspondence of September 30, as well as a variety
of related materials. In addition, as required by law, the Banking Department has forwarded
materials to this office.

In brief, the issue involves the propriety of a denial of access to certain records relating to the
application transmitted to the Department by the Credit Suisse Group (CSG) to acquire other
banking organizations. The most recent communication from the Department, a determination of
your appeal by Sara A Kelsey, Deputy Superintendent and Counsel, indicates that much of the
information sought has been disclosed. However, some aspects of the records were withheld.
Specifically, Ms. Kelsey wrote that:

"CSG notes that certain portions of the Redacted Text remain
qualified for the exemption from disclosure because they represent
CSG's counsel's privileged and confidential legal characterization
and assessment of (i) the nature of the particular claim, (ii) the
positions taken and filings made by other parties, and (iii) in some
cases the likely outcome of the claims. Specifically, CSG explains
that the legal characterization and assessment of the nature of the
claims were the product of attorney review of the cases and that the
disclosure of such information would necessarily reveal CSG's
counsel's opinion of the claims. Accordingly, CSG argues that since
disclosing information of this sort could be potentially useful to
CSG's competitors, the harm that would result to CSG's competitive
position in doing so must prohibit the disclosure.

"Additionally, CSG describes that other portions of the Redacted
Text contain information that is not publicly available from any other
source, particularly descriptions of certain legal and regulatory
proceedings. In this regard, for some cases, CSG indicates that
redaction was necessary because the rules of the particular forum
either preclude public disclosure of the substance of the proceedings,
or do not otherwise make publicly available certain documents
referred to. In other cases, CSG explains that redaction was made
because certain forums do not publicly disclose decisions until the
passage of specific time periods. CSG maintains that if disclosure of
these types of non-public information was made, its competitors
could obtain access to such information and use it to develop
competitive strategies that would be harmful to CSG. More to the
point because CSG would not have analogous information about its
competitors, CSG reasons that it would be significantly hampered in
developing responses."

From my perspective, it appears that Ms. Kelsey's determination is consistent with law. In
this regard, I offer the following comments.

First, 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.

The materials prepared by CSG's counsel appear to consist of communications subject to the
attorney-client privilege that were required to be submitted to the Department in conjunction with
its regulatory functions. The only situation of which I am aware in which the Freedom of
Information Law involved records that would be subject to the attorney-client privilege but which
were required to be submitted to an agency dealt with a decision to concerning the Public Service
Commission and a regulatory entity. In that case, North Star Contracting Corp. v. Department of
Public Service (Supreme Court, Albany County, April 24, 1985), the petitioner requested records
from the agency under the Freedom of Information Law that had been submitted to the agency by
the Consolidated Edison Company "in response to an inquiry by the Department." Following an in
camera review of the records and a finding that they consisted of material prepared for litigation and
were, therefore, properly characterized as privileged, it was held that "the exemption accorded such
privileged documents was not waived by Con Ed when it responded to the direction of the Public
Service Commission that it should submit its comments and copies of any technical analysis...This
is true particularly in light of the fact that Con Ed had specifically reserved its privilege when it
submitted such documents pursuant to a directive of the Commission."

Critical in my view is CSG's effort to preserve the privilege. In an Appellate Division
decision, it was held that: "Defendant waived any privilege that may have attached to its file when
it turned over to plaintiff's criminal defense attorney and to the Grand Jury without specifically
reserving its right to claim the privilege in subsequent proceedings..." [Ferraraccio v. Hartford
Insurance Company, 187 AD 2d 954, 955 (1992)]. In another New York State court decision, it was
held that:

"Several Federal courts have held that the involuntary disclosure of
privileged documents to a government agency does not waive the
privilege. (See. e.g., Osterneck v Barwick Inds., 82 FRD 81.83
Chase's production and disclosure, however, was voluntary, that is,
it did not seek to prevent the production by asserting the privilege.
Moreover, documents protected by the attorney-client privilege have
been voluntarily produced to a governmental agency on the condition
that the privilege will be maintained in subsequent proceedings, and
in those cases courts have held that, under the circumstances, the
privilege was not waived. (See. e.g., Teachers Ins. & Annuity Assn.
v Shamrock Broadcasting Co., 521 F Supp 638; Schnell v Schnall.
550 F Supp 650, 653. However, unless the right to assert the
attorney-client privilege in subsequent proceedings is specifically
reserved at the time disclosure is made to a governmental agency, that
disclosure is held to be complete waiver of that privilege. (See
Teachers Ins. & Annuity Assn. v Shamrock Broadcasting Co., supra,
at pp 644-645). Chase, by its own admission, made no reservation of
the attorney-client privilege at the time it produced these documents,
and thus it has waived that privilege with respect to the documents
disclosed...a mere hope or expectation that the District Attorney was
an ally and not an adversary does not convert the relationship into a
'community of interest'..." [People v. Calandra, 120 Misc. 2d 1059,
1060-1061 (1993).

Similarly, federal courts in the other contexts have found that "de facto compulsion" does not result
in the waiver of a privilege that might otherwise be asserted [see e.g., Niagara Mohawk Power
Corporation v. Stone & Webster Engineering Corporation, 125 F.R.D. 578 (1989); Transamerica
Computer Company v. International Business Machines, 573 F.2d 646 (1978)].

In sum, insofar as CSG could properly claim privileges under the CPLR concerning its
records, I believe that they would continue to be privileged and, therefore, exempted from disclosure
under the Freedom of Information Law due to CSG's attempt to preserve the privilege.

The other ground for denial, which might properly be asserted due to their nature, regarding
the materials discussed above and the remaining materials that were withheld is §87(2)(d). As you
are aware, that provision permits 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..."

In my opinion, 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.

Relevant to the analysis is a decision rendered by the Court of Appeals, 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., 419-420).

The Court also observed that the reasoning underlying these considerations is consistent with
the policy behind §87(2)(d) 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 (id.). In applying those considerations to Encore's request, the Court
concluded that the submitting enterprise was not required to establish actual competitive harm;
rather, it was required, in the words of Gulf and Western Industries v. United States, 615 F.2d 527,
530 (D.C. Cir., 1979) to show "actual competition and the likelihood of substantial competitive
injury" (id., at 421).

In most circumstances, I would agree that records exchanged between parties or submitted
to courts in legal proceedings should ordinarily be disclosed; in general, court records are public.
In this instance, however, as I understand the matter, CSG, a Swiss company, is involved in
proceedings outside of the United States. As indicated earlier, certain of the records submitted to
the Banking Department would apparently be confidential, at least for a time, in other jurisdictions,
and CSG has contended that disclosure could enable competitors to develop strategies to the
detriment of CSG.

From my perspective, if CSG's claim is accurate, that the records would be unavailable
elsewhere, and if disclosure would indeed cause substantial injury to its competitive position, the
determination by Ms. Kelsey would be consistent with law.

I hope that I have been of assistance.

Sincerely,

 

Robert J. Freeman
Executive Director

RJF:jm

cc: Sara A. Kelsey
Ted McElroy