Pssst.....Can You Keep A (Trade) Secret From Vendors? Managing To Protect The Theft Of Intellectual Property

Author(s):

Michael A. Jones
Michael A. Jones, Associate Professor of Marketing, Auburn University Montgomery, Montgomery, AL 36117, 334-244-3521, Mjones@monk.aum.edu

84th Annual International Conference Proceedings - 1999 

ABSTRACT. The theft and misappropriation of trade secrets is emerging as a vital management concern. In business to business transactions, employees whose responsibilities include safeguarding company secrets, need to be aware of the need to identify and protect their firm's secrets. Purchasing managers are often involved in the creation and implementation of interfirm agreements which result in the close cooperation of firms and the sharing of information that may be secret. Without knowledge of how to manage for the protection of loss of intellectual property, purchasing managers and their organization's can be at risk. This article/workshop explains the legislation which protect intellectual property and practical procedures for their protection.

INTRODUCTION. That vendors want information they are not supposed to have is nothing new for supply chain managers. Design specifications, names and terms of bids from other vendors, manufacturing processes, sales forecasts, plans and time-lines, long-term strategies and profitability are only a few. However, in the current business environment along with the increased use of strategic supply chain partnerships, supply chain managers are involved not only with the sharing of more information, but the increased risk of loss of information. A number of studies have documented this issue as one of the downsides of the partnering agreement (Hendrick and Ellram 1994). Other issues which are noted to contribute to the dilemma are the increased use of EDI, the lack of loyalty due to employee turnover and downsizing, and the increased use of foreign vendors (Budden, Jones & Budden, 1996).

The theft of trade secrets is nothing new either. It is widely believed that a major factor in the loss of the television manufacturing industry, which the U.S. once dominated, was lost to foreign Asian vendors, which, after stealing enough information on how to make TV's started, started manufacturing the complete product. The rest of the story is history........one wonders if purchasing managers unknowingly provided access to important information? (Jones and Budden 1998).

What is a trade secret? A trade secret is valuable information that is not generally known or legally knowable by others and from which its owner derives an economic benefit. What is a key part of the definition, is that it is not known (Budden, 1996). This makes trade secrets, and their protection through the Uniform Trade Secrets Act, different from Patents and Copyrights, in that the latter are known by at least some others.

Of course any employee can misappropriate intellectual property, and no area of management is exempt from risk. A review of the literature indicate that many areas of management are addressing the problem of trade secret loss. However, it seems that supply chain managers would face as much exposure to risk as any personnel, and arguably more. As the "window" to the supply chain, supply chain managers are involved in direct communication and the sharing of information. As partners, vendors are asked to do more and more, including design and innovation, even at the design and inception stage of new products. (Hendrick and Ellram 1993)

U.S. industry at large appears to be aware of the problem. A survey reported in Business Week showed a 323% increase in industrial espionage from 1992-1997, and cost U.S. firms an estimated $25 Billion in 1995 (Crock and Moore 1997). Enough pressure was put on Congress that in 1996 the Industrial Espionage Act was signed by President Clinton, which made the theft of trade secrets a Federal criminal offense. Business trade literature reflects and increased awareness in the problem. A recent computer literature search (ABI/Inform) of business periodicals generated over 150 articles on the topic in the past three years, many of these citing cases in progress. The computer industry is particular vulnerable, and quite aware of the problem.

The problem's global nature is underscored by the fact that many federal agencies and officials believe that the country's biggest security challenges arise from foreign individuals and organizations intent on stealing U.S. business secrets, rather than military secrets (Jones 1992; Datamation 1993). As an example, it was alleged that agents of the French government infiltrated IBM and Texas Instruments reportedly for the purpose of passing secrets back to the French government for potential use by French firms (Carley 1995).

However, it is uncertain as how informed and aware purchasing managers are to the problem of trade secret loss. Evidence suggests that as a whole, knowledge is this area is limited. Articles published in the supply-chain academic and trade literature are scant. One preliminary investigation of NAPM members, though limited in sample size, reported a limited knowledge of the trade secrets legislation and how to manage for the protection of loss (Jones and Budden, 1998) .

OBJECTIVES. The objectives of the workshop are:

  1. For the supply chain manager to understand what a trade secret is, and, the importance of trade secret protection.
  2. For the supply chain manager to understand the protection offered by the Uniform Trade Secrets Act (or other state legislation).
  3. Have the participant understand a management procedure for establishing protection under the Uniform Trade Secrets Act.

BACKGROUND OF TRADE SECRETS LEGISLATION. Most are familiar with Federal laws which protect intellectual property or identifying information: patent law, trademark law and copyright laws are well known for the protection they offer owners of intellectual properties and/or identifying information. These federal statutes encourage business innovation through the protection of exclusivity offered under their auspices. However, these federal statutes that offer protection for intellectual properties have weaknesses or limitations which make them less than ideal for providing adequate protection of trade secrets (Lake, Budden & Lett, 1991).

For example, the patent procedure as outlined by law, requires the applicant to disclose critical information in the application. The resulting disclosure makes the information available to others, including potential competitors.

Copyright registration also results in public disclosure of the information contained within the materials. Copyright law extends protection to the specific wording of documents or works of art, not to ideas described in documents or works of art. A firm would not desire to register a copyright on its customer list for instance, since to do so would make the information available to the public, and obviously to competing firms. As a result, copyright law does not encompass trade secrets protection nor would one desire to copyright a trade secret. Indeed, copyrighting a trade secret would negate the secrecy of the information, thereby negating the existence of the trade secret and removing any protection trade secrets law may have bestowed on the secret (Budden, 1996).

Still, in most instances involving allegations of trade secrets misappropriation, state trade secrets laws will be the primary vehicle under which firms will seek legal remedy (Ang & Budden, 1998). In every state, trade secrets acts and contractual laws have historically offered firms protection for their trade secrets. A major weakness that exists with these state acts involves the fact that their provisions and scope vary greatly, resulting in inconsistent legal rulings, confusion for trade secrets owners, and inconsistent legal protection.

In an effort to correct this legal shortcoming, the National Conference of Commissioners on Uniform State Laws, an independent commission composed of legal analysts, proposed a model law to the states that offers consistent definition and treatment for trade secrets protection. That model law, the Uniform Trade Secrets Act (UTSA) defines trade secrets and offers uniform legal protection to owners of trade secrets. As of this date, a total of 40 states and the District of Columbia have enacted laws based on the Act (Uniform Laws Annotated, 1996).

The UTSA defines trades secrets, offers legal protection to owners of trade secrets, and offers legal remedy should owners find themselves victims of secrets theft or misappropriation. Firms rely on the UTSA (and other state laws) for remedy because (1) the Industrial Espionage Act requires a minimum value of the secret involved to be $100,000; (2) a criminal prosecution requires a higher burden of proof than civil prosecution; (3) many cases involving trade secrets misappropriation do not involve interstate commerce but rather are intrastate complaints; (4) the fines levied, if any, are payable to the federal government; a civil suit would still be necessary to obtain damages; and (5) the case would have to be deemed serious enough or of such an egregious nature as to warrant federal intervention (Ang & Budden, 1998).

MANAGING FOR THE PROTECTION OF YOUR SECRETS. To begin with , your organization needs to develop and implement a plan of action aimed at protecting your secrets. It is necessary for the firm seeking legal protection to demonstrate that stolen information was in fact secret, and that specific steps were taken to prevent theft. (For a detailed review of the law and the procedures needed for protection, see the 1996 monograph by Michael Budden entitled Protecting Trade Secrets Under The U.S.T.A., Practical Advice For Executives, Quorum Books) Below is a series of steps which are recommended which can help in your planning for the protection of secrets.

  1. DECIDE WHAT IS SECRET, AND DESIGNATE IT AS SUCH. To get legal protection, trade secrets must be specific information which is designated as such. This involves determining what is of enough value that you will make a reasonable effort to protect. This could be designs, procedures, vendor evaluations, long term plans, contracts from vendors, quotes, etc. If information is not designated with a label such as "secret," "not for disclosure," or "confidential," it is not afforded protection. A hard legal lesson to learn is to sue for theft, but lose because you could prove that the what was stolen was in fact a designated secret. The logic sounds cruel, but once the thief has the information, others may have been informed, and it is no longer secret.

  2. ESTABLISH BARRIERS TO ACCESS. Once the specific information for which you desire trade secret protection is identified, establish physical barriers to access. Access to areas containing the information will have to be controlled, and the information should be consigned to locked files or record cabinets. Computer access procedures and codes should be developed for information stored in computer files. These barriers need to be monitored.

  3. DEVELOP POLICIES WHICH RESTRICT ACCESS. Delineate policy restrictions on who may have access to the information, and under what circumstances. Open and easy access to information is a sure sign that a firm will have trouble gaining legal protection of the information. Like any policy, consideration must be given on how this impacts others in their efforts to do their jobs.

  4. REQUIRE EMPLOYEE CONFIDENTIALITY AGREEMENTS. Use written employment agreements which include restrictive covenants and nondisclosure provisions. These agreements should include acknowledgement that certain information is confidential, that the employee will have access to this information, and that he or she may develop new confidential information, and commitment to non-disclosure to others. Your firms attorney will have ideas about the wording of such agreements.

  5. DEVELOP PROCEDURES FOR DESTROYING/DISPOSING SECRET INFORMATION. Procedures need to be developed to securely destroying excess copies of secret information. These documents should not be simply "thrown away," if legal protection is sought. A number of interesting cases have arisen in which valuable intellectual property was obtained by going through trash in dumpsters (Palmeri 1994).

  6. SEEK THE ASSISTANCE OF AUDITORS. Enlist the aid and assistance of your internal auditor in providing recognition and monitoring of trade secrets protection procedures.

  7. USE THE EXIT INTERVIEW AS PART OF YOUR PROCEDURE. As part of the exit interview for purchasing personnel, or others who have had access to your secrets, emphasize the responsibility of nondisclosure to parting employees. This includes a signed statement from the employee indicating that he or she understands.

  8. INVOLVE YOUR LEGAL COUNCIL. Effective trade secret protection requires the involvement of your firm's legal counsel from the start. Differences in trade secrets laws between states mandate cooperation with competent legal counsel. The recommendations here are not to construed as legal advice, but rather as a starting point for discussion with your attorney.

Upon understanding the risk that a firm is exposed to from the misappropriation of trade secrets, it is hoped that purchasing managers will become proactive with regard to protection. Courts expect to find that your organization has taken the measures necessary for protection, if legal recourse is sought. With this as a starting point, hopefully, you can keep a trade secret!

REFERENCES

Ang, D.S. and Budden, M. C.(1998, Summer). "Trade Secrets Protection: The Missing Ingredient In A POM Education," The Journal of Business and Management, 5(2).

Budden, M. C. (1996). Protecting Trade Secrets Under the Uniform Trade Secrets Act: Practical Advice for Executives. Quorum Books, Westport CT.

Budden, M. C., Jones, M. A. and Budden, C. B. (1996, Summer). "Supplier Relationships and the Trade Secrets Dilemma," International Journal of Purchasing and Materials Management, 32(3), 45-49.

Budden, M. C., Lake, R. C. and Lett, S. (1990, December). "Protecting Trade Secrets," Management Accounting, LXXII(6), 45-47.

Budden, M. C., Lake, R. C. & Yeargain, J. W. (1995, Fall). "Strategic Planning for Protection of Business Secrets Under The Uniform Trade Secrets Act," Journal of Managerial Issues, VII(3), 343-357.

Carley, W. M. (1995, January 19). "A Chip Comes In From The Cold: Tales of High-Tech Spying," The Wall Street Journal, A1, 12.

Commissioners on Uniform State Laws (1980), "Uniform Trade Secrets Act," Civil, Procedural, and Remedial Laws, West Publishing Company, 14, 537-551.

Crock, Stan and Moore, Jonathan, "Corporate Spies Feel a Sting," Business Week, July 14, 1997, 76-77.

Datamation, (1993, February 1). "Mum's The Word," 39(3), 19.

Hendrick, T. and Ellram, Lima. "Strategic Supplier Partnering," Report from the Center For Advanced Purchasing Studies, NAPM, Tempe, AZ. 1993.

Ingrassia, L. (1990, February 28). "How Secret G.E. Recipe for Making Diamonds May Have Been Stolen," The Wall Street Journal, p. A1.

Jones, M.A. and Budden, M.C. (1998, October) "Purchasing Managers and Trade Secrets: An Exploratory Investigation Into The Current State Of Management Concerns, Awareness and Practices," In The Proceedings of The Atlantic Marketing Association Annual Conference, Savanah, 34-41.

Jones, A. (1992, April 28). "CI versus Spy," Financial World, 62-64.

Lake, R. C., Budden, M. C. & Lett, S. (1991, August). "Trade Secret Protection," Internal Auditor, 48(4), 43-48.

Maxwell, D.A. (January 1989). "Keeping the Secret in Trade Secrets," Security Management, 33(1), 38-42.

Palmeri, C. (1994, September 26) "Dumpster Diving," Forbes, 154(7) 94.

U.S. Government Printing Office (1994). Freedom of Information Act Guide and Privacy Act Overview. Office of Information and Privacy; U.S. Department of Justice, Washington, DC.

U.S. News & World Report (January 20, 1997). "Secrets and Settlements," 122(2), 18.

Zellner, W. (1991, April 1). "Dumpster Raids? That's Not Very Ladylike, Avon," Business Week, 3206, 32.


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