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October 2, 2001

FOIL-AO-12980

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

I have received your letter in which you sought an opinion "as to whether records containing
certain financial information pertaining to group self-insured trusts must be disclosed under the
Freedom of Information Law."

Attached to your letter are new regulations concerning group trusts that include requirements
that trusts file annual financial statements indicating that a group "maintains an aggregate net worth
of at least one million dollars and a combined annual payroll of at least five hundred thousand
dollars." To enable trusts "to gradually come into compliance with the financial portions of the new
regulations by January 2002", pursuant to §317.19 of the regulations, the Board is requiring the trusts
"to file reports evidencing proper capitalization and integrity of trust funds no later than 120 days
after the close" of their fiscal year. You stressed that "[i]t is the during the period from today until
January 2002, that the groups will be the most vulnerable to competition, and allegations of less than
adequate financial footing." That being so, you wrote that the Board "prefers not to subject the
group self-insured trusts to competitive harm" by means of disclosure, and you questioned whether
the records in question could be withheld until January, 2002. At that point, the records would be
"subject to existing exceptions contained in the Public Officers Law", and any group not in
compliance would be subject to possible revocation of group self-insured status.

In this regard, as you are aware, 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.

If my recollection is accurate, we discussed the issue several months ago, and I suggested at
that time that most of the grounds for denial appearing in §87(2) are based on an intent to enable
government agencies to withhold records insofar as disclosure would result in some sort of harm.
In many instances, the harm that the Legislature sought to avoid is expressed by means of a standard
presented in an exception. I believe that it was also suggested that often the harmful effects of
disclosure may diminish or even disappear due to the occurrence of certain events or the passage of
time. Those kinds of considerations are, in my opinion, relevant to the matter at issue.

The pertinent exception, §87(2)(d), 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..."

From my perspective, 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).

Based on my understanding of the matter and our discussion, disclosure of certain financial
statements now, as those groups are attempting to reach the levels compliance required by the
regulations in 2002, could result in a perception that those groups may be weak and, therefore,
vulnerable vis a vis their competition. If that is so, disclosure could apparently "cause substantial
injury to the competitive position" of a group, and §87(2)(d) would serve as a valid basis for a denial
of access.

I note that I have been contacted by attorneys who represent group self-insured trusts. They
expressed agreement with the notion that the public should have the right to know whether a group
meets the requirements concerning aggregate net worth and combined annual payroll, but it was
suggested that other aspects of the records submitted by a group to the Workers' Compensation
Board might properly be withheld under §87(2)(d). In short, while there is a public interest in
knowing that a group is solvent, some of the information transmitted to the Board would, in their
view, have no purpose if disclosed other than marketing by competitors. For instance, it is my
understanding some of those records include information relating to particular members of a group,
items involving contribution rates and insurance experience. I was also informed that, in some cases,
the by-laws of a group are unique and analogous to operating procedures, and that they may contain
specific information in the nature of workers' compensation history and other items which, if
disclosed, could result in an advantage to competitors. Insofar as those contentions are accurate, it
appears that portions of the records could be withheld, even after the period of vulnerability to which
you referred in your letter.

As you are aware, pursuant to §89(5) of the Freedom of Information Law, a commercial
enterprise required to submit records to a state agency may identify those portions of records
considered to be deniable under §87(2)(d) at the time of their submission. If the agency accepts the
claim made by that entity, it essentially would agree to keep the records confidential. If a request
is later made under the Freedom of Information Law, or if the Board, on its own initiative, seeks to
disclose records that had been accorded protection, the Board would be required to inform the entity
claiming the exemption from disclosure and offer the entity an opportunity to explain why disclosure
would "cause substantial injury" to its competitive position. If, following the exhaustion of
administrative remedies by either a person seeking the records claimed to be exempt or by the entity
claiming the exemption, a judicial proceeding is commenced, it would have to be proven that the
records would cause substantial injury to the entity's competitive position if disclosed. The burden
would be on the Board if it has denied access based on its agreement with the entity that the records
are exempt under §87(2)(d). On the other hand, if the Board believes that the record should be
disclosed, the entity would have the burden of proof.

Perhaps guidance regarding the Freedom of Information Law, particularly §§87(2)(d) and
89(5), could be offered to group trusts prior to their submission of documentation to the Board. In
my view, any such communication should emphasize that a mere assertion that records are
proprietary or confidential is insufficient, that those portions believed to fall within the exception
should be identified, and that an exception may not be permanent. As we discussed, with time, often
the harmful effects of disclosure described in an exception to rights of access diminish; disclosure
of current information concerning a trust's financial condition could be damaging, but disclosure of
the same information two years from now may be innocuous.

If you would like to discuss the matter, please feel free to contact me.

I hope that I have been of assistance.

Sincerely,

 

Robert J. Freeman
Executive Director

RJF:jm
cc: Barbara J. Ahern
Thomas J. Gosdeck