ETHICS & VALUES IN BUSINESS

CHAPTER 5- Trade Secrets and Conflict of Interest

INTRODUCTION
Information is a valuable business asset that generally provides companies with a significant
advantage over competitors who lack it. We need to ask, however, what rights do companies
have in maintaining the secrecy of valuable information? And what corresponding obligations do
employees have not to disclose company trade secrets to outsiders or use them for their own
advantage? Because companies also seek to learn about each other through competitor
intelligence gathering, the ethics of such activities is also a critical issue.
There is considerable justification for holding that companies have some rights with respect
to trade secrets and other intellectual property, such as patents, copyrights, and trademarks. In
general, employees have an obligation of confidentiality not to disclose or use information
acquired during their employment. On the other hand, employees have the right to change jobs or
to start up a business of their own using some of the skill and knowledge they have acquired
while working for a former employer. Furthermore, companies have a right to use their own
employees’ skill and knowledge that have been legitimately acquired elsewhere and to gather
legitimate competitor intelligence. The challenge for individuals and companies, as well as the
law, is to balance all of these competing rights and obligations.

TRADE SECRET PROTECTION

A rough definition of a trade secret is that it is information used in the conduct of a business and
is not commonly known by others. Section 757 of the Restatement of Torts defines a trade secret
as follows:
A trade secret may consist of any formula, pattern, device or compilation of information
which is used in one’s business, and which gives him an opportunity to obtain an
advantage over competitors who do not know or use it.
Examples of trade secrets include the ingredients or chemical composition of a product, the
design of a machine, the details of a manufacturing process, methods of quality control, results of
marketing surveys, financial projections, and lists of customers and suppliers.
A distinction is made in the Restatement between trade secrets and confidential business
information. The latter is information concerning specific matters, such as the salary of an
employee, which is kept secret but not actually used to manufacture anything or provide a
service. The amount of a specific bid is also not a trade secret, but the procedure of a company
for calculating bids might be. A former employee who is knowledgeable about the bidding
procedure of a company, for example, might be able to use that information to enter lower bids.
There are six factors that can be used to determine what information is protectable as a trade
secret. These are:
(1) the extent to which the information is known outside his business; (2) the extent
to which it is known by employees and others involved in his business; (3) the extent
of measures taken by him to guard the secrecy of the information; (4) the value of
the information to him and his competitors; (5) the amount of effort or money
expended by him in developing the information; (6) the ease or difficulty with which
the information could be properly acquired or duplicated by others.

Prior to 1996, trade secrets were protected only by state laws, except where government
information was involved. But since then, protection has been granted through Economic
Espionage Act 1996 (EEA). There are three major arguments for trade secret protection.
One argument views trade secrets as a kind of property and attempts to apply common-law
principles of property rights to them.
Second argument, cases involving trade secrets are considered in terms of the right to compete
and the principles of fair competition.
The third argument holds that employees who disclose trade secrets to others or who use them
for their own gain violate an obligation of confidentiality that is part of the employer–employee
relationship.

Trade Secrets as Property

Trade secrets, along with patents, copyrights, and trademarks, are commonly regarded in
the law as intellectual property that can be said to belong to an owner. Ownership of a trade
secret, by contrast, does not confer a right of exclusive use but only a right not to have the secret
misappropriated or wrongfully acquired by others. Once the information is widely known, it
ceases to be a protectable trade secret.
The Basis for Property Rights.
One source for the argument that patentable ideas, trade secrets, and the like are a form of
property is the Lockean view that we own the results of our own labor. Patent and copyright laws
are based in part on the premise that inventors and writers who work with their minds and turn
out such products as blueprints and novels should have the same right of ownership that is
accorded to creators of more tangible objects. Insofar as intellectual property is created by
individuals who have been hired by a company for that purpose and paid for their labor, it
follows, in the Lockean view, that the company is the rightful owner. Just as the products made
on an assembly line belong to the company and not to the workers who make them, so too do
inventions made by people who are hired to invent. The company has paid them for their efforts
and provided them with the wherewithal to do their work.
Clarifying the Ownership of Ideas.
Many companies attempt to clarify the ownership of patentable ideas by requiring employees to
sign an agreement turning over all patent rights to the employer. Such agreements are morally
objectionable, however, when they give companies a claim on discoveries that are outside the
scope of an employee’s responsibilities and make no use of the employer’s facilities and
resources.
Fair Competition
The second argument for trade secret protection holds that companies are put at an unfair
competitive disadvantage when information they have expended resources in developing or
gathering can be used without cost by their competitors. Even when the information is not easily
classifiable as property and there is no contract barring disclosure or use of the information, it
may still be protected on grounds of fairness in trade. Eg. The Wesler v. Greenberg case.
Noncompetition Agreements
Because of the difficulty of imposing legal restraints on employees after they leave, many
companies require employees to sign a noncompetition agreement when they are hired. These
agreements typically restrict an employee from working for a competitor for a certain period of
time or within a given geographical territory after leaving a company. Agreements not to
compete are a common feature of the sale of a business, and the courts have generally not
hesitated to enforce them.
But there is little justification for restricting employees in this way. Noncompetition agreements
are almost entirely for the benefit of the employer and inflict a burden on employees that is out
of proportion to any gain.
The Confidentiality Argument
The third argument for trade secret protection is that employees who disclose trade secrets to
others or use them themselves are guilty of violating an obligation of confidentiality. This argu-
ment is based on the view that employees agree as a condition of employment to become agents
of an employer and be bound by the duty that agents have to preserve the confidentiality of
certain information. Section 395 of the Restatement of Agency states that an agent has an
obligation
not to use or to communicate information confidentially given him by the principal or
acquired by him during the course of or on account of his agency . . . to the injury of the
principal, on his own account or on behalf of another . . . unless the information is a
matter of general knowledge.
Confidentiality Agreements
Many employees sign a confidentiality agreement which creates an explicit contractual
obligation that is often more stringent than the obligation of confidentiality that employees
ordinarily have as agents. Although confidentiality agreements have some advantages for both
employers and employees, they are open to the same objections as agreements to assign patent
rights to employers and to refrain from postemployment competition. Because they are usually
required as a condition of employment, employees are effectively coerced into giving up rights
to which they might otherwise be entitled.

COMPETITOR INTELLIGENCE GATHERING

Not all use of a company’s trade secrets and other confidential business information is unethical
or illegal. The systematic collection and analysis of competitor intelligence has become an
accepted practice in the corporate world, and companies that do not avail themselves of this
valuable tool may find themselves at a disadvantage. This is especially true in a global
environment.
The ethical and legal limits on competitor intelligence gathering are generally concerned
with the methods used to acquire the information.15 The importance of the method of acquisition
is due to the point that trade secrets are protected, according to the Wexler decision, only if there
is a legal basis “upon which to predicate relief,” which means that some duty has been breached.
The unethical methods for gathering competitor intelligence can be grouped under four headings,
each of which involves a breach of a particular duty.
1. Theft and Receipt of Unsolicited Information. Theft of information, either by an employee
or an outsider, is obviously an improper method for acquiring information because it involves a
violation of property rights. Examples of employee theft include freely offering information to
competitors to take revenge, selling it for monetary reasons, and taking it to a new job in order to
advance one’s career.
2. Misrepresentation. To gain information under false pretenses is a form of deception
that violates the duty to be honest in all dealings. Posing as a customer to obtain information
from a competitor, for example, is an act of dishonesty.
employer.
3. Improper Influence. The employment relation is built on trust, and to induce an
employee to reveal information through bribery or some other means is to exert an improper
influence that undermines that trust. An employee who accepts a bribe and turns over a
company’s secrets has broken a bond with the employer, but the company that offers the bribe
has obtained those secrets by inducing that break. Improper influence can be exerted not only by
bribery but also by promising or holding out the possibility of a job or some other opportunity.
4. Covert Surveillance. Some methods for obtaining information intrude in ways that
companies have not anticipated and taken steps to prevent. These can be said to violate a
company’s right to privacy. Employees who talk about confidential matters in a public place, for
example, can have no expectation of privacy, but planting hidden microphones in a competitor’s
place of business is a form of espionage that intrudes into an area that is regarded as private.

CONFLICT OF INTEREST
Companies and their employees have an obligation to avoid conflicts of interest of the kinds.
Virtually all corporate codes of ethics address conflict of interest because it interferes with the
ability of employees to act in the best interests of a firm.
What Is Conflict of Interest?
The conflict in a conflict of interest is not merely a conflict between conflicting interests,
although conflicting interests are involved. The conflict occurs when a personal interest comes
into conflict with an obligation to serve the interests of another. More precisely, we can say that
a conflict of interest is a conflict that occurs when a personal interest interferes with a person’s
acting so as to promote the interests of another when the person has an obligation to act in that
other person’s interest.
Some Relevant Distinctions
All instances of conflict of interest are morally suspect, but some are more serious than others.
In their rules on conflict of interest, company codes of ethics and codes for professionals, such
as lawyers and accountants, contain a number of relevant distinctions that can aid us in
understanding the concept of conflict of interest.
ACTUAL AND POTENTIAL CONFLICT OF INTEREST.
There is a distinction between actual and
potential conflicts of interest. A conflict is actual when a personal interest leads a person to act
against the interests of an employer or another person whose interests the person is obligated to
serve. A situation constitutes a potential conflict of interest when there is the possibility that a
person will fail to fulfill an obligation to act in the interests of another, even though the person
has not yet done so.
PERSONAL AND IMPERSONAL CONFLICT OF INTEREST.
A second distinction can be made between personal and impersonal conflicts of interest. A
second distinction can be made between personal and impersonal conflicts of interest. A lawyer
who has a personal interest that conflicts with the interests of a client has a personal conflict of
interest, whereas a lawyer who represents two clients with conflicting interests faces an
impersonal conflict of interest.
INDIVIDUAL AND ORGANIZATIONAL CONFLICT OF INTEREST.
Third, conflicts of interest can be either individual or organizational. In the agency relation, the
agent is typically a person acting in the interests of a principal, which may be another person or
an organization. However, organizations can be agents as well and hence parties to conflicts of
interest.
The Kinds of Conflicts of Interest
The concept of conflict of interest is complex in that it covers several distinct moral failings that
often run together. It is important to separate them, though, in order to have a full understanding
both of the definition of conflict of interest and of the reasons that it is morally wrong for a
person to be in a conflict-of-interest situation. Briefly, there are four kinds of conflicts of
interest:
(1) exercising biased judgment, (2) engaging in direct competition, (3) misusing a position, and
(4) violating confidentiality. Each of these calls for some explanation.
BIASED JUDGMENT. The exercise of judgment is characteristic of professionals, such as
lawyers, accountants, and engineers, whose stock in trade is a body of specialized knowledge
that is used in the service of clients. Not only are professionals paid for using this knowledge to
make judgments for the benefit of others but also part of the value of their services lies in the
confidence that can be placed in a professional’s judgment.
DIRECT COMPETITION. For an employee to engage in direct competition with his or her
employer is a conflict of interest. One reason, of course, is that an employee’s judgment is apt to
be impaired by having another interest. In addition, the quality of the employee’s work might be
reduced by the time and effort devoted to other activities.
MISUSE OF POSITION. Misuse of position constitutes a third kind of conflict of interest. In
April 1984, a reporter for the Wall Street Journal was fired for violating the newspaper’s policy
on conflict of interest. The firing occurred after R. Foster Winans, a contributor to the influential
stock market column “Heard on the Street,” admitted to his employer and investigators from the
Securities and Exchange Commission that he conspired over a four-month period, beginning in
October 1983, with two stockbrokers at Kidder, Peabody & Company to trade on the basis of
advance information about the content of the column. One of the charges against R. Foster
Winans was that he misused his position as a Wall Street Journal reporter to enrich himself in
violation of a provision in the newspaper’s code of ethics.
VIOLATION OF CONFIDENTIALITY. Finally, violating confidentiality constitutes, under
certain circumstances, a conflict of interest. The duty of lawyers, accountants, and other
professionals, for example, precludes the use of information acquired in confidence from a client
to advance personal interests—even if the interests of the client are unaffected.
Managing Conflict of Interest
Conflict of interest is not merely a matter of personal ethics. A person in a conflict of interest,
either potential or actual, may be in the wrong, but conflicts usually occur in the course of
being a professional or a member of an organization. Often, these conflicts result from
structural features of a profession or an organization and must be managed through carefully
designed systems.
The management of conflict of interest requires a variety of
approaches. The following is a list of the major means by which professional groups and
business organizations can manage conflicts of interest.
1. Objectivity. A commitment to be objective serves to avoid being biased by an interest
that might interfere with a person’s ability to serve another.
2. Avoidance. The most direct means of managing conflicts of interest is to avoid acquiring
any interests that would bias one’s judgment or otherwise interfere with serving others. It may be
difficult to anticipate, identify or avoid a conflict of interest. Where adverse interests cannot be
avoided, they can be countered by introducing new interests in a process known as alignment.
3. Disclosure. Disclosure serves to manage conflict of interest primarily because whoever is
potentially harmed by the conflict has the opportunity to disengage or at least to be on guard. In
legal ethics, a conflict of interest is permissible if three conditions are satisfied: (1) the lawyer
discloses the conflict to the client, (2) the lawyer is confident that he or she can provide wholly
adequate representation so that the client will be unaffected by the conflict, and (3) the client
accepts the lawyer’s service under those conditions.
4. Competition. Strong competition provides a powerful incentive to avoid conflicts of interest,
both actual and potential.
5. Rules and Policies. As already noted, most companies have policies concerning conflicts
of interest. These typically require employees to avoid acquiring adverse interests by not
accepting gifts or investing in potential suppliers,
6. Independent Judgment. Insofar as a conflict of interest results in biased judgment, the
problem can be corrected by utilizing a third party who is more independent.
7. Structural Changes. Because conflicts of interest result from providing many different
services to different customers or clients, they can be reduced by compartmentalizing these
services.
CONCLUSION
Like whistle-blowing, trade secrets and conflict of interest involve a delicate balancing of the
rights and interests of employers and employees, as well as the public at large. Especially in the
case of trade secret protection, we see how different kinds of arguments—for property rights, fair
competition, and a duty of confidentiality—underlie the law in this area and support our views
about what is morally right.