When A Rival's Trade Secret Crosses Your Desk...

Imagine that a greedy, disgruntled employee mails top-secret new-product samples to your competitors and offers to help them unravel your ground-breaking technology for a small fee. The competitors, desperate to understand the secrets that they fear will make the new products unbeatable, wonder what to do. Should they return the samples to the company? Or analyze their properties and break the code?

A B-school ethics case? Nope. It's at the heart of a dispute between rivals 3M Co. and Johnson & Johnson. Back in 1985, a 3M contract employee, Philip A. Stegora, got hold of some samples of a new casting tape to be used by doctors to set broken bones. He mailed them to four 3M rivals. Alone among the competitors, 3M contends, J&J studied the tape and incorporated 3M's proprietary technology into its competing product. By doing so, 3M maintains, J&J blunted 3M's drive to dominate the $200 million U. S. market for casting tapes.

SLIPPERY. But it may have been a costly move for J&J. On May 1, a special master for the U. S. District Court in Minneapolis ordered the health care giant to pay 3M $116.3 million for infringing its patents and misappropriating trade secrets. Moreover, J&J may have to take some ef its casting tapes off the market. The company denies any wrongdoing, says it has a firm policy against taking trade secrets, and, vows a spokesman, "will vigorously appeal the decision."

In the 1970s, J&J dominated the casting market with its plaster-of-paris bandage roll. But in 1980, 3M upstaged J&J with a stronger and lighter fiberglass cast. Just one problem: Doctors found the cast hard to mold because its resin, when dipped in water, became sticky and hard to work with. In 1985, two 3M scientists developed a slipperier resin. Says one rival: "The 3M product was poised to overwhelm Johnson & Johnson."

Then came Stegora. Seeking to cash in on his knowledge of the product, which he had helped develop, Stegora mailed samples he stole to four competitors. In an accompanying letter, he offered to explain the technology. His price: $20,000. The chemist, using an alias, instructed J&J, DePuy, Cutter Laboratories, and Zimmer to contact him through a Minneapolis post office box.

None of the companies reported the incident to 3M. That unpleasant task was left to Skip Klintworth Jr., then chief executive of Carapace Inc., a small castmaker in Tulsa, who heard about the stolen samples from colleagues at DePuy and Zimmer. "Nobody intended to do anything," he says. "I couldn't believe it." Klintworth tipped 3M, which called in the Federal Bureau of Investigation. The feds quickly traced the theft to Stegora. By February, 1987, he was convicted of mail fraud and transporting stolen property across state lines. Stegora was released in 1989 after serving 22 months in prison.

SUSPICIOUS SAMPLE. The story might have ended there. But during discovery proceedings in a patent-infringement case, 3M found that J&J had done chemical tests on the sample Stegora had sent them, even though former J&J product manager John Hull had denied doing so under oath at Stegora's trial. Hull, now a seminarian and no longer connected with J&J, declined to comment. By doing the tests, the special master says, J&J was able to unlock the mystery behind 3M's new casting tape and get a product to market three months before it might have otherwise.

According to court records, Stegora's sample was put on the desk of Alfred J. Prince, president of J&J's orthopedics company. Since he was on vacation, the samples next went to Hull. The court found that even though Hull thought the samples suspicious, he sent them to the lab for analysis. The lab report was forwarded to several senior orthopedics officials, who didn't bother to instruct the chemists not to use the findings in their research. That, the court says, led J&J chemists to take 3M's technology.

But the whole mess, suggests industrial security consultant Richard Heffernan, is a lesson in what a company shouldn't do if it ends up with stolen trade secrets. His recommendation: Call the victimized company and the FBI. "Most companies actually do that," he says. "What Johnson & Johnson did is very rare." That may reassure companies nervous about protecting trade secrets from snooping competitors. But as this case shows, even one misstep in a hundred can hurt worse than a busted arm.


A competitor's disgruntled employee has just mailed you plans for what looks like a promising new product. Do you:

-- Throw the plans away?

-- Send them to your research department for analysis?

-- Notify your competitor about what is going on?

-- Call the FBI?

For answer, see last paragraph of story

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