RECIPROCITY LEGAL AND ETHICAL CONSIDERATIONS Leadership and Top Line Growth: The Future of Supply March 28-29, 2012 Phoenix, Arizona Definition of Reciprocity Avoid improper reciprocal agreements. • Reciprocity is both a legal and an ethical issue that may result in legal sanctions against the organization, its management and/or its supply management personnel. • When supply management professionals or their organizations give preference to suppliers because they are also customers, or when the organization influences a supplier to become a customer, the professional or the organization is engaging in a practice known as reciprocity. • Agreements involving a specific commitment to buy in exchange for a specific commitment to sell also constitute reciprocity. (Source: ISM Principles and Standards of Ethical Supply Management Conduct) The other side of reciprocity • Reciprocity – We recognize that a partnership thrives when both parties are equally invested in supporting the success and future growth of the other. In turn, partners are encouraged to reciprocate in providing consulting or research opportunities. Three ways to view reciprocity 1. Any time you buy from customers 2. Giving preference in buying decisions to customers 3. Restricting competition by requiring suppliers to buy from customers (As you move from one level to the next the danger becomes greater) Recommended guidelines for dealing with reciprocity: Understand suppliers that are also customers may: a. Not be a problem if the customer/supplier is the best source. b. Use care with supplier lists and ensure they are not provided to others for their use in pursuing improper reciprocal agreements. c. Apply and obtain accounting, legal and ethical guidance when potential issues of reciprocity arise. d. Recognize that forcing a supplier into a trading relationship is not appropriate. e. Recognize that reciprocal relationships may be an illegal restraint of trade in some countries. Negotiations and Reciprocity • Used as a sales tool • Quid pro quo • One side of the business may not know what the other is doing • It takes only one person do say something wrong to cross the line • No gifts • Deal with reciprocity from start of negotiations to end of contract performance • The appearance of impropriety • Negotiations become very difficult if in reciprocal agreement (they know you won’t leave them as supplier) Major Federal Legislation • • • • Sherman Act Clayton Act Federal Trade Commission Act Robinson-Patman Act Sherman Act • Section 1 – Agreements in restraint of trade are illegal – Two or more parties – "Per Se" violations • price fixing, division of territories, limitation of outputs, tying, collective refusal to deal, reciprocity – Conduct violations - what is effect on marketplace? Sherman Act • Section 2 – Monopolies are illegal – One or more parties • Some clear coupling of the sales and purchasing effort is required • The mere fact that you both buy and sell from the same company is not reciprocity Robinson-Patman Act • Prohibits price discrimination • Two More Sales – Goods of like grade and quality – Interstate commerce – Different prices – Two or more buyers • Automatic Violation! RPA - Sellers' Defenses to Violation • • • • • Cost justification Changing market conditions Meeting competition Functional discount Did one side significantly influence the other side? IBM’s policy • We will neither buy or sell on a reciprocity basis • Reasons: – To maintain high performance standards – Ensure reliability – Not jeopardize product quality and price • Very blunt policy To determine if violation of antitrust laws, take into account • The markets involved • The relative strengths of the companies in those markets • The amount of commerce actually affected Government Contract Provisions • Standard Clause – If you sell to the government, your company must comply with these regulations – The company must pass these regulations through to suppliers on all government procurements Does reciprocity alone violate antitrust laws? • No • It takes an additional step – Intent • Once this bell is rung you cannot go back • No antitrust law should ever prevent you from good business practices and ensuring competition and the lowest price Case Study • Microsoft How to avoid reciprocity • Negotiate purchase and sales contracts separately and use different people • Create Policies and Procedures to combat reciprocity • Insert clauses to specifically state you do not favor reciprocal agreements • Do not take credit on purchase for monies due on sales side • Create competition • Speak with one voice • Have a business reason about why you make a decision that may be considered reciprocal • Take into account cultural differences in other countries Policies and Procedures • It is XYZ’s policy to neither buy nor sell on a reciprocity basis. To maintain the highest ethical standards, XYZ bases all of its purchases on a supplier’s quality, price and reliability. To use reciprocity as a purchasing tool would limit the ability of XYZ to obtain supply and would eventually jeopardize our quality, price and ability to compete. XYZ would never use our extensive purchasing ability to aid our selling efforts. We must leave customers free to buy unhampered. Standards for Purchasing • How to avoid improper reciprocal agreements. • Agreements involving a specific commitment to buy in exchange for a specific commitment to sell also constitute reciprocity. These purchasing actions are illegal if they tend to restrict competition or trade or if they are coerced, since such acts may be construed as "restraint of trade" in violation of Sections 1 and 2 of the Sherman Act. • Purchasing agents and their organizations must be able to recognize reciprocity and its ethical and legal implications. • Reciprocity is both a legal and an ethical issue that may result in legal sanctions against the organization, its management, and/or its supply management personnel. Guideline A • Procurement is in full support of the policy regarding reciprocity and at no time should this policy be compromised; i.e., Procurement should never change a sourcing decision based on a supplier's purchases, or lack of purchases, from the company. However, all major customers deserve the utmost courtesy and attention from all employees, and this includes Procurement. This courtesy and attention, from a Procurement point of view, means: • Procurement will advise these suppliers of any Procurement strategies or plans that may impact that supplier's business. • Procurement will give these suppliers the opportunity to quote on any business that they believe they are qualified for. • Procurement will make sure that affected salespeople and account executives are advised of major events, good or bad, in the relationship; especially, if a major customer is about to lose a significant amount of business. Sales must be notified BEFORE the supplier is notified. • This company publishes a list of our major customers. • We should be very forthright, when the question arises, in explaining our no-reciprocity policy to suppliers. Guideline B • From time to time, our company may divest from certain areas of the business. In situations where there is a significant customer of the divested area, it may make sense for the company to buy products from the acquiring company for a period of time. • This approach has two major benefits: first, it maintains the supply to the company – finding an alternative supplier to completely replace the previously internally sourced supplier could potentially cause major disruptions while any new supplier gained a better understanding of our requirements; and, second, providing the potential for a revenue stream for a defined period can make the sale more attractive to possible acquirers. • Any "partnering" arrangements of this nature require the approval of the _______________ of our company. Have Supplier Provide Adequate Information to Evaluate Reciprocity • Supplier questionnaire • List of people who will perform services (if contract for services) • Pricing (method of calculation) • Exceptions to your contract (if any) • Information sheet from supplier • Non-disclosure Agreement signed Samples of Guidelines • Our corporation supports a healthy, competitive environment for fulfilling our operational needs. Customers are welcome to solicit business, but their customer relationship may become an issue in supplier selection only if all other factors are equal. • Potential suppliers who are customers should be reminded, if necessary, that we must make our supplier selections considering optimum price, terms, quality, etc., just as they have selected their banking relationships based on optimum terms and service. The two issues should remain separate. • Our corporation believes in courtesy and fair dealing in carrying out our purchasing functions. Every effort is made to perform in both an ethical and a legal manner to support our corporate needs, while supporting the communities we serve. • Source: Purchasing Today®: The Rules of Reciprocity Five Basic Questions in Supplier Questionnaire • Have you be involved in litigation in past three years? • Have you been assessed liquidated damages in past year? • Do you currently have other contracts with this company? • Have you ever defaulted on a contract with this company? • Do you also have a buying relationship with this company? (be careful because you may be opening the door) Proposal Provision • Evaluation Criteria. Proposals will be evaluated based on the following criteria (not in order of precedence): (a) Pricing; (b) Qualifications with respect to Company’s demonstrated needs; (c) Compliance with RFP instructions; (d) Ability to furnish what Company solicited; (e) Offeror’s quality control and quality assurance program; (f) Ability to meet Company’s schedule; (g) Number and nature of exceptions to Terms and Conditions; (h) References; (i) Offeror’s commitment to Company’s foundation values; and (j) Offeror’s financial capacity to perform, when requested. Contractual Provision Non disclosure provision Entire agreement clause Do not mention sale side in purchase agreement Use language that states you have no requirement to make any purchase whatsoever • Use technology to make your purchase • Document the file as to why you chose supplier • Compliance with laws • • • •