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Inside Supply Management

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Sharing Sensitive Information

Author(s):

Jane K. Winn
Jane K. Winn is a professor and director at the Shidler Center for Law, Commerce & Technology, at the University of Washington School of Law in Seattle.

April 2008, Inside Supply Management® Vol. 19, No. 4, page 40

Legal Briefs: Supply Management's Legal Issues
The information that follows should help you construct an equitable contract governing the exchange of sensitive information among supply chain partners.

One of the most important differences between traditional supply management/supplier relations and managed supply chains is the emphasis on active collaboration among supply chain partners. Of course, the idea that suppliers and their customers may collaborate is not new — what is new is the elevation of collaboration from an informal, ad hoc process to a formal, actively managed process. As with any business relationship, a well-drafted contract can provide the blueprint for a successful strategic sourcing relationship. If suppliers and their customers believe that collaboration has become an essential part of their relationship, then contract managers should look for ways to incorporate those obligations to collaborate into the written agreement between the parties.

However, while there is no shortage of materials to help contract managers draft traditional sale-of-goods contracts, or even contracts governing the use of electronic data interchange (EDI) between trading partners, it may be hard to find assistance drafting contract terms to govern the collaborative aspects of managed supply chains. This column explores issues related to drafting contract terms governing one form of collaboration found in almost all supply chain relationships: the continuous exchange of sensitive or proprietary information among supply chain partners.

In traditional sale-of-goods contracts, the only information a supplier and its customer might exchange was the information contained in the purchase order itself. Because of the way purchasing worked in the 1950s, when UCC Article 2 was written, Article 2 is silent with regard to the exchange of sensitive information in connection with a sale of goods. Even as recently as 1990, when the American Bar Association produced a Model Trading Partner Agreement and Commentary for use by companies adopting EDI technologies, the model contract in its paragraph 3.2 provided that none of the information exchanged by the parties was to be treated as confidential unless the parties provided otherwise.

Within strategic sourcing relationships, there now is a continuous exchange of information ranging from real-time demand information captured at the point of sale by a retailer to sell-through data on inventory levels from wholesalers to rolling forecasts of demand a year or more in the future. The increased coordination made possible by such continuous exchanges of information can make the supply chain more efficient by eliminating overstocks and stockouts. When orders become increasingly inaccurate as they move up the supply chain, the result is known as the "bullwhip effect."

In addition to information about market conditions, supply chain partners may also exchange information about ways to improve product design, production processes or logistics. To make it possible for suppliers to participate in process improvement efforts, supply management professionals may rationalize their supplier base by building closer relationships with a smaller number of suppliers. But trading partners will be reluctant to turn over sensitive or proprietary information about innovations without some assurance that their contributions will actually be used for the benefit of the supply chain, and not turned over to competitors or otherwise used against them.

Trust Is Paramount

Although the potential benefits to sourcing partners of exchanging more and better information are great, so are the risks. When product descriptions, quantity and price are the only information exchanged by purchasers and suppliers, then sensitive information about market conditions or business strategies is only made available to employees. Employers can place restrictions on the use and circulation of sensitive information, such as through nondisclosure and noncompete agreements.

Even though the rewards of sending detailed information about supply and demand conditions up and down the supply chain are now obvious, such information will not flow freely unless supply chain partners trust each other. In the absence of trust, managers may simply be unwilling to release all relevant information to other supply chain partners. Well-drafted contracts may help provide some of the needed trust between trading partners to achieve success in strategic supply chain relationships.

Rights regarding the kind of information exchanged by supply chain partners, whether about market conditions or process innovations, are not addressed by either UCC Article 2 or the terms of traditional sale of goods contracts. However, contract managers looking for contract language to add to their standard terms and conditions may find useful models in other kinds of contracts.

For example, certain types of information may be protected by intellectual property laws. Companies that invent new processes or products may obtain patent rights on those inventions, which, in turn, gives the patent holder the right to receive royalties from anyone using the technology covered by the patent, or stop the infringing use. Trademark owners can also prevent unauthorized uses of their trademarks if they result in confusion among customers about who actually provides the goods or services.

The information exchanged by partners in a strategic sourcing relationship is unlikely to be limited to the kind of information that can be protected by patent, copyright or trademark laws. However, it may still be possible to protect that information by contract, using confidentiality or nondisclosure requirements. Such a term might provide:

"Supplier and purchaser agree that certain information provided to the other during the term of this agreement may be secret, proprietary or confidential. Each agrees to keep such information received secret and confidential, and to make use of it only for the purposes of this agreement. No such information may be disclosed to any third party except as expressly provided in this agreement, or with the other party's prior written consent."

While no sensitive information should be shared with a trading partner in the absence of such a written confidentiality agreement, it is important to recognize the practical limitations on the effectiveness of such a provision. Unlike intellectual property rights, which give the owner the right to pursue third-party infringers, such a confidentiality agreement does not normally give the owner of information rights against third parties to which the information may have been leaked — it only creates rights against the other party to the contract.

Beyond The Written Contract

Formal, written contract terms are just one tool contract managers have at their disposal to try to protect sensitive or proprietary information exchanged with supply chain partners. Suppliers and their customers can often leverage sources other than the terms of a formal, written contract to motivate trading partners to focus on the success of the supply chain as a whole, rather than their individual advantage.

For example, supplier certification procedures provide an opportunity to evaluate the trustworthiness of a potential supplier, and to review its management practices with regard to protecting the confidential information provided to it by other parties. Furthermore, the threat of revocation of certification, and termination of its participation in the supply chain if a supplier is suspected of misusing sensitive information provided under a confidentiality agreement, might provide a better guarantee of compliance with the contract term than a threat of litigation ever could.

Supply chain performance may also suffer if the information provided by one partner, and relied upon by other partners, is inaccurate. This may be the case if a downstream organization provides inaccurate forecast or inventory data, or if inaccurate costing information is used to allocate the benefits of continuous improvement efforts. Supply chain partners may be required to make significant investments in IT or in re-engineering existing business processes before they can provide accurate, timely and relevant information to others.

Contract terms requiring that sensitive or proprietary information provided by one party to another remain confidential should always be used whenever supply chain partners are under an obligation to exchange such information. But the law governing exchanges of sensitive information is not as well-developed as the law governing sale of goods contracts, so contract managers should realize that a confidentiality term provides only limited protection for sensitive information after the information has been placed in the hands of a supplier or a customer. Informal incentives to protect the confidentiality of that information should also be evaluated, and might well provide more powerful protections than formal written contract language.


For more information, send an e-mail to author@ism.ws.




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