Michael Budden is a Professor of Marketingat Auburn University at Montgomery. Heearned his Ph.D. degree at the University ofArkansas. Dr. Budden’s research interestsinclude applications of law to management and marketing, and retail control.

Michael Jones is an Associate Professor ofMarketing at Auburn University atMontgomery. He earned his Ph.D. degree atthe University of Missouri. Dr. Jones’sresearch focus includes non-profit marketing,services marketing, and purchasing.

Connie Budden is a doctoral degree candidatein management at Auburn University atMontgomery. Her research interests includebusiness ethics and performance appraisal.

Increasingly, purchasing managers are finding that they are gatekeepersof valuable information for which adequate security must be provided.As relationships between purchasers and suppliers become increas-ingly interdependent through partnering arrangements, the need todocument and provide adequate security increases. The authors believethat with recent trends in supplier relations, purchasing managers musttake a proactive approach to provide for the safety of their firms’ propri-etary information.

This article explores the trade-secrets problem facing managers, and suggests a program for reducing the risks of information misappropriation.

BACKGROUND

I n recent years, the trend for purchasing to establish partneringarrangements that encourage close ties between purchasers and sup-pliers has taken some industries by storm. The partnering concept,

while replete with benefits for purchaser and supplier alike, does raise anew issue which arises from the “open and sharing” arrangementsinherent in the concept. One of these issues concerns the security for“trade secrets.” Trade secrets are proprietary information about prod-ucts, processes, research, and customer information that is not generalknowledge, from which the owner derives an economic benefit.

The trade-secrets issue stems from the fact that in a partnering rela-tionship, suppliers receive more exposure to the internal operations ofthe purchasing firm, have improved access to the firm’s processes, andgenerally have an increased level of intimacy with personnel in the pur-chasing organization. In some cases, purchasing firms provide in-houseoffice space to representatives of selected suppliers.1 As a result, pur-chasing managers are finding that they are “gatekeepers” of valuableinformation which flows to and through the purchasing department. Itis the need to adequately protect this flow of information that presents asignificant risk to the security of proprietary information and, in somecases, the competitive advantage of the firm.

45

Supplier Relationships and the Trade Secrets Dilemma

BY

Michael C. Budden, Michael A. Jones, and Connie B. Budden

IN BRIEF

International Journal of Purchasing and MaterialsManagement © Copyright August 1996, by the National Association of Purchasing Management, Inc.

For example, General Motors’ continuing effortto prosecute its former director of purchasing forallegedly disclosing valuable trade secrets to hiscurrent employer emphasizes the increasinglystrategic role purchasing managers play in the suc-cess of many firms.2 Purchasing professionals outof necessity have both access and insight intoprocesses, products, and other vital informationthat may be construed as trade secrets. It is thisvaluable, secret information to which purchasingmanagers are privy that often means the differencebetween success and failure in a particular market.

Purchasing managers are exposed to secretinformation in a variety of ways. Knowledge of thepurchased materials going into a product orprocess gives purchasing managers insights intosecret processes and materials content that are not

available to the casualor even the determinedobserver who lacks theknowledge of the pur-chasing department.Perhaps as a sign ofthe times, there isanother, more onerouspath through whichtrade secrets may be

leaked, divulged, or otherwise misappropriated.That path is through malicious misappropriationof proprietary information divulged in purchasingcontracts and technology-exchange agreementswith suppliers.

The Japanese practice of k e i r e t s u, ingrained in theTQM philosophy, encourages close ties betweenmanufacturers and suppliers.3 From a practicalpoint of view, firms are thus encouraged to mini-mize the number of suppliers used for a given prod-uct or service. In practice, the reliance on only onesupplier for a particular item is gaining popularity,since the benefits of such a “partnering” arrange-ment often outweigh the disadvantages.

The ability to leverage financial resources andimprovements to just-in-time production systemsare seen as major benefits of effective partneringrelationships.4 Other benefits that may result frompartnering relate to cost savings that can arisethrough product design improvements, productiv-ity improvements, reduction of inventory levels,and the reduction of repetitious, time-consumingbidding procedures.5 For example, improvementsin Xerox’s cycle time and in its overall perfor-mance have been reported as a result of its concur-rent engineering/early supplier involvement pro-gram that is ingrained in its partneringp h i l o s o p h y .6 In general, partnering offers andoften delivers an improved, symbiotic relationshipbetween the purchaser and the supplier.

Still, inherent in such arrangements is the necessityfor exchanging information that may be considered

secret by one or both of the parties to the agree-ment. Partnering often results in the disclosure ofnew product plans or processes that are not forgeneral dissemination. The fact that “secretsshared are more likely to slip away” in the courseof business than those kept confidential will sur-prise few. As an example, it has been proposedthat the demise of the American television manu-facturing industry was brought on by technologysharing with Asian suppliers who later used theknowledge to their full benefit.7 It is this disclosureof trade secrets, through a partnering agreementand other long-term relationships, that calls forcareful consideration and planning to ensure con-tinued protection of the information to prevent itsdisclosure to third parties.

RISKS AND RESPONSIBILITY — AND THEPURCHASING MANAGER

Purchasing managers have a major responsibility toprovide for the protection of their firm’s valuableinformation, which may be compromised in thenegotiation process, during the life of a partneringagreement and after the agreement ends. Misappro-priations of trade secrets appear to be on the rise, asevidenced by the large number of lawsuits involvingthe alleged theft of secrets from both large and smallfirms. IBM, Mary Kay, Nationwide Mutual Insur-ance Company, Borland International, General Elec-tric, and Northwest Airlines are among the largerfirms in recent years that have sought legal remediesin situations concerning the theft or misappropria-tion of trade secrets.8 Scores of smaller firms havealso turned to the courts, seeking to protect theirsecrets from misappropriation.

The theft or misappropriation of such secrets canbe very costly to the firms that lose them. Forinstance, General Electric’s secret formula for makinghigh-grade industrial diamonds was reported stolenin 1990. The firm estimated the value of the stoleninformation to be at least $5 million.9 I n f o r m a t i o nsuch as research results, new product plans, marketentry plans, manufacturing process secrets, and othertypes of valuable information serve as the basis forsuccessful competitive efforts in many industries —and must be protected. Protecting secrets in interna-tional business transactions is not only a good man-agement practice, but may be legally necessary underthe Export Administration Act.1 0 Consequently, thequestion arises — do purchasing departments givesufficient consideration to this type of security insupplier evaluation and selection efforts?

One study concerning supplier developmentprograms found that 75 percent of the purchasingmanagers who responded indicated that they reg-ularly evaluated suppliers.1 1 Of those who indi-cated that they regularly evaluated suppliers, lessthan one half indicated that the evaluationinvolved a formal process. Regardless of whether a

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46 Supplier Relationships and the Trade Secrets Dilemma

Trade secrets may be at risk through malicious misappropriation of

information divulged in contractsand technology-exchange

agreements.

formal or informal evaluation process was inplace, the most commonly cited criteria used inthese supplier assessments were quality, price, andservice. Financial soundness and reliability of sup-pliers were mentioned by some respondents asadditional criteria, but were of lessor importancein the process.12 Another study found that “74 per-cent of the firms began sourcing internationallysimply to obtain lower-priced materials.”1 3 S i m i-larly, in a recent study of foreign sourcing behav-ior by U.S. purchasing managers, the items seen asmost critical in evaluating supplier performancewere, “product quality, price for value, adequateinformation exchange, reliability of delivery,adaptability to the buyer’s organization, andunderstanding of business in the United States.”1 4

Conspicuously absent in all of these cases was thecriterion of trade secrets security.

TRADE SECRETS PROTECTION AND THE LAW

Federal laws have offered their protection for cer-tain types of intellectual properties for years.Patents and copyrights are well known for thevarying levels of protection they offer businessesfor the protection of their intellectual properties.However, the relevant federal statutes that offer thisprotection have weaknesses or limitations thatmake them less than ideal for trade secrets protec-tion. For example, the mere process of patenting aninvention requires the disclosure of the informationand makes the information available to the public.At best, a firm’s secrets are protected for only 17years, a time span many firms find less than opti-mal. Additionally, descriptions of new productsand other types of information purchasing depart-ments encounter are often not eligible for patentp r o t e c t i o n .

The Uniform Trade Secrets Act (UTSA), prof-fered as an “ideal” law, is expected to provide con-sistent legal protection for trade secrets. It wasoriginally recommended to the states by the Com-missioners on Uniform Laws in 1979 and lateramended by the Commissioners in 1985. Presently,38 states and the District of Columbia have enactedthe UTSA. Other states presently are studying theAct for possible adoption.

The UTSA defines trade secrets, offers protectionfor such secrets, and offers legal remedy, shouldfirms find themselves victims of secrets theft ormisappropriation. Provisions of the Act coupledwith decisions in subsequent court cases carryimplications for purchasing managers. Purchasingprofessionals and others who have professionalaccess to such information should be aware of theimpact that the UTSA and related court decisionsnow have on firms’ efforts to protect trade secrets.This issue is addressed in the following section.

DEVELOPING A PROACTIVE PROTECTIONPROGRAM

Partnering agreements should detail protectionand confidentiality expectations for secrets sharedthrough the agreement. While the UTSA may notbe law in all jurisdictions — and as the Commis-sioners note, the Act will not preempt “duties vol-untarily assumed through an express or animplied-in-fact con-t r a c t ”1 5— itsspecifics and itsintent can guide thedevelopment of aplan of action thatwill acknowledgeand provide for theprotection of spe-cific trade secrets.The Act, the impli-cations of relatedcourt findings, andthe recommendations presented here should notbe construed as legal advice, but rather shouldserve to alert purchasing professionals to areasthat they and their legal counsels need to exploreconcerning the protection of their trade secrets.

A Protection Plan Needs to Be Specificabout which Information Possessed IsSecretNot all of the purchasing department’s informa-tion is secret. The availability of information in thetrade press, books, or other public forums, indi-cates that such information is not a secret and can-not be protected as a trade secret. The UTSA andother trade-secrets acts only offer protection forsecret information.

An Assessment of the Information’s ValueShould Be Made and AcknowledgedIn the two major cases in which the value of theinformation was a critical factor, the courts tookthe position that the information must have signifi-cant value.16 For instance, preparing a list of namesand addresses from telephone books was not seenas meeting a reasonable expectation as to value.The UTSA and other trade-secrets laws state thatthe secret must have real value. Proving the valueof secrets contested in a partnering agreementrequires careful record keeping and accurate cost-accounting efforts. Purchasing managers mustrealize that if the secret has value, the need to rea-sonably safeguard that secret is paramount.

A Firm Should Develop a Climate ofConfidentiality17

One purchasing director, involved in establishingseveral just-in-time partnering arrangements, is con-cerned that “before long, a buyer may inadvertently

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Supplier Relationships and the Trade Secrets Dilemma 47

Partnering agreements need to detail protection and confidentiality expectations for secrets shared throughthe agreement. While the UTSA may notbe law in all jurisdictions, its specificsand its intent can guide the develop-ment of a plan of action that willacknowledge and provide for the protection of specific trade secrets.

reveal next year’s technology to a supplier whoseparent company is a direct competitor in anothera r e a . ”1 8

Purchasing departments can take several steps todevelop a climate of confidentiality. Prominentlymarking confidential information as such, givesnotice to users that the information is secret and notto be disclosed to others. Destroying old copies of theinformation rather than discarding them in the trash

is expected.1 9 O n e -pass, strip shreddingmay not provide thelevel of privacydesired. For exam-ple, Mary Kay, theinternational cosmet-ics firm, discoveredthat its trash wasbeing pilfered withthe apparent intent

of recompiling shredded documents.2 0 Keeping theinformation in locked and restricted areas is a mini-mal expectation of the courts regarding efforts to pro-tect such information.2 1

Creating a climate of confidentiality will reinforcethe need for employees and suppliers to protect afirm’s secrets and will aid in any attempts to seeklegal redress should the secrets be misappropriated.An established, maintained, and documented cli-mate of confidentiality reduces the possibility ofmisappropriation, and will also prove useful in legalproceedings should it become necessary to pursuethat course of action.2 2

Include an Assessment of Supplier Trustand Honesty in the Supplier EvaluationProcessPurchasing managers widely acknowledge theneed to regularly evaluate suppliers. Trust must beamong the important evaluative factors used in thedecision process. Purchasing should seek informa-tion concerning the firm’s historical practices aswell as references from knowledgeable individualsor organizations, and should include this in theevaluation.

Purchasing should initiate discussions aboutsteps the supplier intends to take to provide for theprotection of the purchasing firm’s secrets. Doesthe supplier require nondisclosure, noncompeti-tion agreements of its employees? In light of thevalue of the information, does the supplier intendto take reasonable steps to protect the informationwith which it will be entrusted? Assess the climateof confidentiality at the supplier’s operation. It isessential to establish trustworthiness and honestyprior to entering a partnering agreement. With theincreased presence of outsiders, and the resultingaccess to potentially valuable secrets in the workenvironment due to just-in-time and partnering

philosophies, the need for a candid and thoroughassessment of trust is absolutely vital.

A Detailed Nondisclosure, NoncompetitionAgreement Must Be in PlaceA nondisclosure, noncompetition agreement shouldbe specific as to which information is considered tobe a trade secret belonging to the firm; under whatcircumstances the secret may be used; and theresponsibilities of the supplier and its employees toprotect the information. The specificity of the infor-mation considered secret by the purchaser is essen-t i a l .2 3 The agreement should be legal as to “time andp l a c e . ”2 4 If time and place terminology is not famil-iar, then take note; in any planning effort involving thelaw or legal issues, the advice of competent legal counsel isa must. In preparing to protect the firm’s tradesecrets, get the attorney’s advice from the start.

A Partnering Agreement Should IncludeProvisions for Handling Minor DisputesArbitration clauses or other arrangements that arespecific as to the types of problems covered can gofar to prevent costly and time-consuming legal bat-tles. The old adage “being forewarned is beingforearmed” conveys good advice.

If a Partnering Agreement Comes to anEnd, Remind the Former Supplier About theContinued Expectation of SecrecyThe necessity of continued secrecy must bedetailed in the original document and, again,should be legal as to time and place.

If a Firm Must Protect Its Rights in Court,Purchasing Managers Must Be Aware ofTwo ThingsFirst, legal counsel will undoubtedly seek andreceive an agreement from the court that materialsuncovered during the discovery process, alongwith the resulting records, be sealed and protectedfrom public disclosure. Second, care should betaken during the discovery process, and other pro-ceedings, to prevent the divulgence of additionalsecrets the firm owns which are not contested. Thenecessity of protecting secrets does not end at thecourtroom door. Experienced legal counsel will bein the best position to advise on this effort.

A SUMMING UP

Increasingly, purchasing managers are playingpivotal roles in the success of their firms’ efforts. Ina sense, they are gatekeepers, responsible for aflow of valuable information leaving and enteringa firm. The necessity for these gatekeepers to takesteps to prevent the misappropriation of this infor-mation is paramount. “Cooperative arrangements,themselves, require explicit cooperative strategiesthat involve formal and detailed analysis of the

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48 Supplier Relationships and the Trade Secrets Dilemma

An established, maintained, and docu-mented climate of confidentiality reduces

the possibility of misappropriation, andwill also prove useful in legal proceed-

ings should it become necessary to pursue that course of action.

objectives sought; the process to achieve the objec-tives; and the content, scope, and linkage mecha-nisms that will be used.”25

Purchasing managers involved in situations inwhich their firms’ trade secrets are at risk need toprepare a plan of action that reasonably protectsthese secrets. Competent legal counsel should bebrought in early to assist in the planning and protec-tion effort. It is important to realize that managersneed to be concerned with two major areas of poten-tial information risk — theirs and their supplier’s.

A purchasing manager should take steps to ensurethat his or her firm’s internal efforts to protect and control secrets are reasonable. In otherwords, does the purchasing department require itsown employees to sign nondisclosure agreements?Are secrets on the premises adequately safeguarded?Is there a climate of confidentiality in the office? Hasthe firm’s legal counsel reviewed the plan andapproved its adequacy? It is the purchasing man-ager’s responsibility to ensure that such is the case.

Purchasing managers must also include anassessment of the trustworthiness and honesty ofsuppliers to whom valuable secrets will beentrusted. The purchasing firm will need a valid,specific partnering agreement that details specificresponsibilities of the parties involved, and alsodetails dispute resolution procedures, among otherthings. Going to court is not the purpose of prepar-ing an adequate safeguard plan. The purpose is tohave a profitable, ongoing partnering relationshipthat precludes misunderstandings and advancesthe business objectives of both parties.

REFERENCES1. Fred R. Bleakley, “Strange Bedfellows — Some Compa-

nies Let Suppliers Work On Site And Even PlaceOrders,” Wall Street Journal, January 13, 1995, pp. A1+.

2. Alex Taylor, III, “VW’s Rocky Road Ahead,” F o r t u n e,August 23, 1993, pp. 64-68.

3. Neal Templin and Jeff Cole, “Manufacturers Use Suppli-ers to Help Them Develop New Products,” Wall StreetJournal, December 19, 1994, p. A1.

4. F. Ian Stuart, “Supplier Partnerships: Influencing Factorsand Strategic Benefits,” International Journal of Purchasingand Materials Management, vol. 29, no. 4 (Fall 1993), pp. 22-28.

5. F. Ian Stuart and P. Mueller, Jr., “Total Quality Manage-ment and Supplier Partnerships: A Case Study,” Interna -tional Journal of Purchasing and Materials Management, vol. 30, no. 1 (Winter 1994), pp. 14-20.

6. Charles O’Neal, “Concurrent Engineering with EarlySupplier Involvement: A Cross Functional Challenge,”International Journal of Purchasing and Materials Manage -ment, vol. 29, no. 2 (Spring 1993), pp. 3-9.

7. Templin and Cole, op. cit., 1994.8. Michael W. Miller, “IBM Sues To Silence Former

Employee,” Wall Street Journal, July 15, 1992, p. B1;Christopher Byron, “The Bottom Line — Garbage

Time,” New York Magazine, April 1, 1991, p. 16; WilliamM. Carley, “Fare Game: Did Northwest Steal American’sSystems? The Courts Will Decide,” Wall Street Journal,July 7, 1994, p. A1; 695 F.Supp. 688; Cara A. Cunning-ham, “Borland-Symantec Case Heats Up,” PC Week, Sep-tember 14, 1992, p. 1.

9 . Lawrence Ingrassia, “How Secret G.E. Recipe for MakingDiamonds May Have Been Stolen,” Wall Street Journal,February 28, 1990, p. A1.

10. Frank Haluch, “Are You Giving Away Trade Secrets?”NAPM Insights, September 1992, p. 25.

11. Charles A. Watts and Chan K. Hahn, “Supplier Develop-ment Programs: An Empirical Analysis,” I n t e r n a t i o n a lJournal of Purchasing and Materials Management, vol. 29,no. 2 (Spring 1993), pp. 11-17.

12. Ibid.13. Laura Birou and Stanley E. Fawcett, “International Pur-

chasing: Benefits, Requirements, and Challenges,” Inter -national Journal of Purchasing and Materials Management,vol. 29, no. 2 (Spring 1993), pp. 28-37.

14. Hans B. Thorelli and Aleksandra E. Glowacka, “Willing-ness of American Industrial Buyers To Source Interna-tionally,” Journal of Business Research, January 1995, pp. 21-30.

15. Commissioners on Uniform State Laws (1980), “UniformTrade Secrets Act,” Civil, Procedural, and Remedial Laws(West Publishing Company, 14), pp. 537-551.

16. 552 So.2d 288; 753 F.2d 179.17. 262 Cal.Rptr. 773.18. Fred Bleakley, op. cit., 1995.19. 332 N.W.2d 890.20. Christopher Byron, op. cit., 1991.21. 356 N.W.2d 738.22. Robert C. Lake, Michael C. Budden and Samuel L. Lett,

“Trade Secret Protection,” Internal Auditor, August 1991,pp. 43-48.

23. 262 Cal.Rptr. 773.24. 782 P.2d 1272.25. David N. McArthur and Ronald L. Schill, “International

Cooperative Technology Arrangements: ImprovingTheir Role in Competitive Strategy,” Journal of BusinessResearch, January 1995, pp. 67-79.

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