Protecting Corporate Secrets

By Alexander L. Taylor III

Companies restrict documents, hire gumshoes, plant evergreens

Coca-Cola accuses Procter & Gamble of trying to uncover its confidential operational plans. Hertz charges Avis with unfair trade practices for hiring away 18 managers with knowledge of secret operational and financial information. Squibb goes to court to block Diagnostic Medical Instruments from pilfering data about its cardiac monitoring systems. S.B. Thomas sues Entenmann's for filching crucial details about the equipment and ingredients used to make the famous nooks and crannies in its English muffins.

Whether the product is medicine or muffins, companies are more preoccupied than ever before with finding ways of protecting their trade secrets. American businesses this year will spend $12.5 billion on security, up from $10.7 billion in 1982. Much of it is aimed at preventing competitors from stealing proprietary information about product design, manufacturing techniques and marketing strategies. Companies install electronic locks that can be opened only with card-shaped "keys." Sensitive reports are circulated on a strict "need to know" basis. Workers are subjected to intensive background checks that include lie-detector tests and investigations by private detectives.

Such precautions and even more extreme ones do not mean that U.S. businessmen are succumbing to a kind of mass paranoia. So far, no one is known to have tapped a rival's computer over long-distance telephone lines, like Milwaukee's schoolboy 414 Gang. But the fact is that many companies, especially those in highly competitive industries, are frequently the targets of espionage activities.

Usually such intelligence gathering is done legally, if deviously, by searching trade journals or eavesdropping on conversations in airport waiting rooms. Other times it is more blatant. Tennant, a maker of floor-maintenance equipment, was awarded $500,000 in damages last April from a competitor, Advance Machine. Two managers of the rival firm admitted sifting through trash containers outside Tennant's Oakland, Calif., office for sales leads. General Motors transplanted a grove of 30-ft. evergreens to block a favored vantage point of photographers trying to shoot long-range pictures of new models at its Milford, Mich., test track.

Few companies have been as persistent in cracking a case of industrial espionage as Rohm & Haas, a Philadelphia chemical manufacturer. It hired a private-detective agency and spent nearly five years tracking down the theft of a secret formula used to make latex paints. The search led to Australia, where Rohm & Haas found a firm that was duplicating its product "molecule for molecule," and then back to the U.S., where a former employee was finally detained last May after a high-speed, wrong-way car chase on a Manhattan parkway. Explaining the investigation as "perfectly consistent" with the company's security measures, Rohm & Haas Spokesman Jack Pounds says simply: "We have a lot of secrets."

Workers, especially executives, who change jobs are the biggest source of company leaks. The problem is especially acute in the electronics industry. In California's Silicon Valley, job turnover averaged 24% last year. Observes one local executive recruiter: "There's a lot of greed out there. If you can get into the right situation, you're an instant millionaire."

To reduce the amount of information that walks out the door, companies are enforcing nondisclosure agreements that prevent workers from taking secrets with them to a new job. It is not easy. Points out California Attorney James Pooley: "The most difficult area the courts have to grapple with is the distinction between your ideas and the company's property." Texas Instruments sued ten employees who left to start Compaq Computer, even though the Compaq machine, a portable that works like an IBM Personal Computer, does not use the same operating systems or software as the T.I. machines. Compaq retaliated with a $60 million suit charging Texas Instruments with restraint of trade.

IBM is perhaps the most fiercely protective company in the U.S. In a booklet distributed to employees, Chairman John Opel warns, "IBM increasingly is a target for people interested in illicitly acquiring significant business secrets. Over the years, there have been a number of actual thefts." The booklet describes an elaborate method of protecting company as sets, including a four-level system for classifying documents and computer data from "IBM Internal Use Only" to "Registered IBM Confidential." This spring IBM took three senior executives to court for revealing privileged information.

IBM is just as tough on outside suppliers. While developing software for the Personal Computer, workers at Peachtree Software in Atlanta began to refer to the company by another three initials, KGB, after IBM ordered the installation of pa per shredders and locked security areas. Microsoft, which also developed software programs for the PC, had to stiffen its procedures after IBM conducted an unannounced inspection and discovered that part of the then secret computer had been temporarily left unguarded.

Even IBM, though, could learn some thing from Kentucky Fried Chicken. Only two executives are entrusted with access to the recipe for Colonel Harland Sanders' original blend of eleven herbs and spices that gives the chicken its distinctive taste. To get at the formula, either man must first use a secret key to open a strongbox that contains a combination. Then they use the combination to open a vault at the Louisville headquarters that holds a fireproof safe. After opening the safe, they face a strongbox with another combination lock. The handwritten recipe is inside the box. In one final attempt to thwart thievery, the combination to the last lock is concealed in an executive's memory.

--By Alexander L. Taylor III.

Reported by Bruce van Voorst/New York, with other bureaus

With reporting by BRUCE VAN VOORST This file is automatically generated by a robot program, so viewer discretion is required.