The University of Connecticut has a third well-publicized reason to celebrate, beyond its men’s and women’s basketball teams’ berths in the NCAA Tournament. The Connecticut Supreme Court recently held that the University’s databases of benefactors, season ticket holders, and others interested in University programs and departments were exempted from a FOIA request on the grounds that the databases were “trade secrets” under the state’s FOIA disclosure exemption.
In University of Connecticut v. Freedom of Information Commission, 303 Conn. 724, — A.3d — (Feb. 21, 2012), the Supreme Court rejected the state Freedom of Information Commission’s decision that the University’s databases could not be “trade secrets” under the disclosure exemption because the University was a public entity that did not engage in “trade.” Rather, the Supreme Court ruled that the FOIA trade-secret exemption said nothing about the alleged trade secret owner’s status as a private or public entity, and so long as the public agency presented sufficient evidence that the databases met the exemption’s definition of trade secrets, which the University did, the databases were exempted from disclosure. The Supreme Court further reasoned that the FOIA exemption’s definition of “trade secrets” was identical to that term’s definition under Connecticut’s Trade Secrets Act, and because the Trade Secrets Act’s definition of “person” specifically included government agencies, the FOIA exemption should likewise apply to the University, an undisputed government agency.
Interestingly, the Supreme Court effectively held, without expressly saying it, that the University does engage in trade. The Court noted that the trial court, which reversed the commission’s decision, held that “a government entity that sells things would have customers, as that term is commonly understood.” Thus, the University’s “customer” lists (i.e. season ticket holders, donors, theatre subscribers, prospective continuing-education applicants, etc.), generated significant revenue for the University, and thus conferred “independent economic value.” This value would be lost if the public could readily access the lists with a FOIA request. So, even though the Supreme Court did not come out and say the University engages in trade by selling tickets to its athletic, theatre, and cultural events, and by marketing its academic and vocational programs to potential applicants, that finding is quite clearly implied. In fact, the Supreme Court did say that:
“it cannot reasonably be questioned that the university expends considerable resources of the state, on its own or in partnership with others, for the research and development of intellectual property. The state’s ability to recoup the costs or reap the financial benefits of such efforts would be seriously undermined if any member of the public could obtain such information simply by filing a request under [FOIA].” (emphasis added).
“Reaping the financial benefits” apparently means that a public university should be able to profit from its investment in research and development, and not merely reimburse itself for its out-of-pocket costs. Turning a profit, and not just breaking even, is certainly at the core of engaging in “trade,” and some might say inconsistent with the mission of not-for-profit universities.
The impact of this decision may be extensive, and perhaps unintended by the Connecticut Supreme Court. First, public agencies across the country may cite this decision in support of their claims for exemptions under their corresponding FOI Acts. Many states’ FOI Acts have trade-secret exemptions from disclosure, and the Uniform Trade Secrets Act, which 46 states, the District of Columbia, and Puerto Rico have adopted, defines “person” in the same way as the Connecticut Trade Secrets Act – to include government agencies. Such agencies under these similar FOI and Trade Secrets statutes might now argue that the products or services they sell at a price (i.e. licenses, permits, utilities, tickets to municipal events, etc.) confer trade-secret disclosure exemption on buyer and subscriber information that otherwise would be subject to FOIA disclosure. Of course, public agencies would have to be prepared to prove that their lists or databases meet the requirements of trade secrecy (that is, that the information is valuable because it is secret, and was kept a secret). But assuming public agencies can jump that hurdle, we may see a spike in FOIA litigation across the country.
Second, will this decision provide ammo to the IRS or state taxing authorities to argue that certain public or quasi-public 501(c)(3) entities which sell products or services above cost should be stripped of their tax exempt status? Many state and local universities and other institutions are classified “charitable organizations” under 501(c)(3), and many of those same organizations have significant in-the-black earnings on ticket sales and merchandising. One may wonder if the IRS, which last year stripped the tax-exempt statuses of 275,000 501(c)(3) organizations for failure to properly renew or maintain their exemptions, will take a closer look at university operating statements in light of this decision.