RECIPROCITY LEGAL AND ETHICAL CONSIDERATIONS March 28-29, 2012

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
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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
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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
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