The Often-Thin Line Between Cheating and Competing

Balboa Capital, an aggressive, fast-growing, Los Angeles-based equipment-leasing firm, suddenly lost five key salesmen who opened a competing company only a few blocks away.

Balboa sued the new competitor for theft of trade secrets, accusing the former employees of taking company documents and using that information to lure away other employees and customers. What’s more, the employees-turned-rivals were said to have signed agreements when they were working for Balboa, vowing not to divulge company secrets.

But the case took an interesting turn several weeks later when Balboa’s then-president was caught rooting through a dumpster behind the competitor’s office. When confronted, the man leaped from the bin and proceeded to wipe his dirty hands across the front of his former top salesman’s white dress shirt.

This real-life civil lawsuit from a few years ago, which was settled without a trial, raises a host of ethical questions.

Bath Iron Works faced a quite different ethical dilemma in 1991 when confidential information on a competitor unexpectedly materialized in a conference room at the shipbuilder’s Bath, Maine, headquarters.

A Navy consultant had left a routine meeting with the defense contractor but had forgotten to take a document marked “Business sensitive” that detailed the profitability and performance of Bath Iron Works and the only other U.S. company qualified to compete for a contract for a high-tech warship.

Instead of immediately returning the file, Bath Iron Works Chief Executive William Haggett briefly examined the document and ordered it photocopied so he could rush off to deliver a luncheon speech. By the time Haggett came back from lunch, the company’s president had learned of the problem and ordered the copy shredded--but not before some top executives had studied and begun working with the information.

Recognizing the breach of procurement regulations, Haggett personally returned the document to the Navy. Still, the scandal cost him and two other executives their jobs and imperiled the future of Maine’s largest employer as the Navy considered, and later rejected, the option of barring Bath Iron Works from bidding on future government contracts.

In business, keeping track of what the competition is doing is a smart and accepted practice. But where does “smart” end and “unethical’ begin? Tripping over that sometimes blurry line can produce serious consequences for all involved.

Taking computer records of clients’ names from a competitor’s office is wrong, but what about going through a competitor’s garbage?

It clearly is bad to bribe employees of another company to learn their secret formula. But what about buying the product and then paying to have it analyzed?

Is it unethical to pretend to be a grad student doing research or a potential customer looking for a bargain while you secretly probe a competitor’s employees for information? Is it wrong to examine a rival’s top-secret new machine through high-powered binoculars as it travels down a public highway on the back of a truck, or to peer through an open window into a competitor’s factory?

These are the sorts of questions that confront companies every day. In fact, the practice of gathering information on rivals and markets has become so widespread that it is now considered an industry unto itself with a name--”competitive intelligence”; a professional association--the Society of Competitive Intelligence Professionals, with nearly 6,000 members; and a code of ethics.

SCIP defines competitive intelligence as the “legal collection and analysis of information regarding the capabilities, vulnerabilities and intentions of business competitors.”

The organization’s code of ethics includes requirements to comply with all applicable laws, to honor requests for confidentiality and to accurately disclose all relevant information, including who you are and who you work for.

For the most part, competitive intelligence means gathering and analyzing information that is in the public arena, such as newspaper stories, publicly disclosed financial records and documents filed with governmental agencies. Intelligence-gathering might mean interviews with current and former employees of the competition, market analysts and key customers.

“You can be very ethical and still be very clever” in gathering information to help make business decisions, said Seena Sharp, owner of Sharp Information Research in Hermosa Beach.

Lying, stealing and bribing to gather information or to gain a competitive edge fall far outside the boundaries of acceptable behavior, intelligence professionals and ethicists agree.

But in between right and wrong lies a troublesome gray area that has led many well-meaning companies into trouble.

“I have three tests: the newspaper test, the child test and the skunk test,” said W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Mass., and a consultant to companies seeking ethical guidance.

“The newspaper test is: Would you want to see it printed the next morning in the newspaper? Would it embarrass you?

“The child test: What would you tell your child to do if he or she came to you and asked you for advice?

“And the skunk test is: Does it smell?” Hoffman said. “If it doesn’t feel right, smell right, taste right, then you probably should find out what makes it seem like a skunk.”

In the dumpster-diving incident at Balboa Capital, “it seems as if everybody got their hands a little dirty,” Hoffman said.

At Bath Iron Works, a brief ethical bobble almost destroyed a 100-year corporate history of integrity, but also prompted the company to adopt even more stringent ethical standards and oversight, he said.

“It was a fateful 15-second ethical lapse,” Hoffman said.

Common to both cases is that the original holders of the information had an expectation that the data would remain private--in Balboa’s computers, in the competitor’s dumpster and in a confidential file belonging to the Navy.

Materials placed in trash containers on private property remain the property of the people who threw them away, said Richard Mignogna, a competitive-intelligence expert who owns a research firm in Golden, Colo., called Technology/Engineering Management Inc.

However, privacy can’t be expected once the trash gets mingled with other trash in a truck on the way to a landfill, Mignogna said.

Likewise, the folder accidentally left in a corporate conference room is still the property of the original owner, no matter how tempting the contents, Hoffman said.

The practice of buying a product and then analyzing it is relatively common. It’s called “reverse engineering.”

Hoffman said some of his clients have been so concerned about maintaining high ethical standards that even this practice bothers them.

“I tell them that if it’s a publicly purchased product and you pay fair value for it, then you can do whatever you want with it within the bounds of law and appropriateness,” Hoffman said.

However, stealing the product clearly would be wrong, as would buying it and then copying it exactly and selling it as your own, Mignogna said. That’s why many computer chip makers include inactive circuits in their designs; if a suspiciously similar chip contains the same inactive circuits, then it’s an illegal knockoff, he said.

Buying a product, studying it, reassembling it and returning it to the store at which it was purchased falls into the less-than-acceptable category, he said.

Posing as something you are not in order to gather information, a violation of the SCIP code of ethics, is something that competitive intelligence experts agree is unacceptable in general, but the details of how you present yourself can be a little more fuzzy.

Mignogna said he always tells the interview subject who he is and whom he works for.

Sharp said she is upfront about the nature of her firm, but won’t reveal the names of clients.

“When we call someone up, we always identify ourselves as a research firm, but it’s amazing if you know how to talk to people how quickly they forget it,” Sharp said. “In our culture, we’re very willing to talk . . . and we’re very willing to show how much we know.”

Hoffman disagrees with any dissembling--even a government agency sending fake job candidates to a business to see if the company discriminates in hiring.

“A lot of people feel this is perfectly OK,” Hoffman said. “I don’t think I’m being an ethical prude in saying I think that’s crossing the line. . . . It’s one step away from being a sort of secret police.”

The competition’s new machine traveling openly on the public highway is fair game--there can’t be much expectation of privacy there--but looking through an uncovered window of a competitor’s factory using high-powered binoculars drew some disagreement.

“Close the curtains if there’s something that’s sensitive there,” Mignogna said. “If this is easily done, if you can stand across the street and look through the window . . . is there any expectation of privacy?”

“I would have to think about that one a little bit,” Hoffman said. “I think it’s a little devious, but maybe it does pass the bar.”

Sharp said the whole area of James Bond-like information-gathering strikes her as unnecessary because the most valuable market intelligence is forward-looking.

“So you go into your competitor’s trash and find some information on their strategy; what would you do with it?” Sharp asked. “I see companies that are so busy watching their competitors that they miss opportunities in the market.

“The most successful companies are the ones that don’t even follow the competition. They’re the ones that say, ‘What can I do better or smarter?’ ”