Legal Regulations Related to Competitive Intelligence - dummies

Legal Regulations Related to Competitive Intelligence

By James D. Underwood

Whether you’re conducting business domestically or abroad, you need to be aware of a few laws that directly or indirectly apply to your competitive intelligence efforts.

Although you need to be aware of laws that apply to CI, you should adopt ethical standards that are even more stringent than the law calls for. If everyone in your organization adheres to strict ethical standards, you don’t need to worry about breaking the law.

The Economic Espionage Act of 1996

The Economic Espionage Act (EEA) of 1996 makes the theft of trade secrets (proprietary information) a federal crime. The EEA defines trade secret as follows:

The term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.

In other words, you can’t take anything from a business that gives it a competitive advantage if the company has taken reasonable measures to protect it.

If an organization releases information, it’s fair game. For example, if a CEO talks about the organization’s marketing strategy in an interview published in a trade journal, that organization hasn’t taken reasonable measures to protect that information, so you can use it. However, if a disgruntled employee of that same organization offers to sell or give you that same information, you are legally bound not to accept it.

In fact, you really should inform the organization of the incident. More often than not, behaving in a way that’s above reproach protects your organization from unfounded charges of attempting to steal a competitor’s trade secret.

The Foreign Corrupt Practices Act

According to the Foreign Corrupt Practices Act (FCPA), paying a foreign official for the purpose of retaining or obtaining business is illegal. In the context of CI, that means you’re prohibited from paying a foreign official for any information that might give your business a competitive advantage. In short, bribery is illegal.

Most people are well aware that you’re not supposed to commit bribery in the United States, but when you’re doing business in a foreign culture in which bribery is an acceptable and even expected way of doing business, buying information from foreign officials may seem neither illegal nor unethical.

The old adage “When in Rome, do as the Romans do” doesn’t apply here. If you’re a U.S. firm doing business in a foreign country or a foreign firm doing business in the U.S., bribing government officials is a crime.

Don’t put profit before ethics. In certain countries, bribery, sexual slavery, discrimination, and other illegal and unethical practices are acceptable in business circles, but your organization and your employees need to answer to a higher set of values. Before doing business or conducting CI in a foreign land, answer the following three questions:

  • Does our organization need to violate its ethical standards in order to do business in this country?

  • Has our organization done everything possible to convince our local hosts that we can’t engage in certain practices?

  • Is our organization willing to put ethics above profit?

If you answer no to any one of those questions, don’t do business in that particular locale.

How to avoid SEC issues related to public companies

When you’re gathering intelligence about publicly traded companies, be careful not to engage in any activities that violate fair-trade laws. Situations you need to be concerned about usually involve cooperative CI between two competing businesses. When collaborating with a competitor, avoid any activities that could possibly be perceived as giving either business an unfair advantage over other competitors, such as exchanging information about pricing or marketing.

Another pitfall is the disclosure requirements related to material information — anything that could possibly affect a stock’s price after the public finds out about it, such as an acquisition or critical changes in management.

Disclosure of material information to an outside party may trigger SEC requirements that require public disclosure of such information. Those disclosures, under certain circumstances, may trigger legal disclosure requirements that can damage a company. Additionally, the disclosure can be expensive to file, depending on its nature.

Gathering intelligence about public companies without crossing the line can be tricky. If you obtain information from an internal source at a publicly traded company, you may open yourself and your organization to substantial penalties, as well as damages. Here are some basic guidelines for avoiding such conflicts:

  • All information you gather must meet the “plain view” rule. In other words, it must be publicly accessible.

  • When preparing internal documents, always cite the resource you used to obtain the information, such as an annual report; 8-K filing, or analyst opinion.

How to avoid tortious interference in competitive intelligence

Tortious interference occurs when a third party damages a contractual relationship between two other parties. In the context of competitive intelligence, you need to be careful about obtaining information from someone or a business entity that has a contractual relationship with another party when sharing information could harm that relationship if the other party were to find out about it.

Before accepting or using information from a source, take the following precautions:

  • Make sure that your source is not providing any information that would put her in breach of any contract with a third party.

  • Always get approval from your legal department prior to engaging with any third party source if the transaction has any possibility of negatively affecting the relationship between your source and another party.

  • When in doubt, don’t request or use information from the source.