Competitive Intelligence

Boeing Mea Culpa, Lockheed Martin Victory & Billion-Dollar Consequences for Espionage

Boeing found out just how costly libertine ethics by employees can be – in the past few days, it was revealed that Boeing will lose about $1 billion worth of Air Force rocket launch contracts that have since been shifted to rival Lockheed Martin, in response to the admission that Boeing acquired tens of thousands of confidential and proprietary documents from Lockheed during a 1998 contract bid on the Air Force's Evolved Expendable Launch Vehicle rocket program competition.

Boeing Chairman and CEO Phil Condit responded to the Air Force announcement with a mea culpa:

"We are extremely disappointed by the circumstances that prompted our customer's action, but we understand the U.S. Air Force's position that unethical behavior will not be tolerated. We apologize for our actions. We will continue to work with the Air Force to address the issues that caused this suspension. Last week, I asked former Senator Rudman to review the company's policies and procedures regarding ethics and the handling of competitive information. His review will include looking at any management or cultural factors that could affect how these policies and procedures are respected and enforced. To reinforce the impact unethical behavior has on the customer and the company, a stand-down will take place on July 30 for all 78,000 employees in our Integrated Defense Systems business unit. These employees will be briefed on today's action taken by our Air Force customer and the events that caused it, and participate in specialized interactive ethics and procurement integrity training. As I've said before, I am proud of the 160,000 men and women of The Boeing Company. The unethical conduct that led to this action does not reflect the high standards that we exhibit day-in and day-out to our customers, suppliers and communities. We want to ensure that Boeing will never again have to face such criticism."

Three of Boeing's Integrated Defense Systems units were suspended from competing for new government contracts until the Air Force thinks the company is ready to fairly compete for new work. The ban includes Boeing launch systems, launch services and the Delta rocket program. Three workers were also suspended. The actual Air Force decision appears here.

Additionally, the Justice Department in June charged two former Boeing managers with conspiring to steal secrets from Lockheed. Boeing denied a broader role, but if Justice Department investigators decide that Boeing was involved in stealing secrets, it could be banned from space-related contracts for a limited time, although, as such an important aerospace and defense contractor, it would be nearly impossible to ban them for long. High-level talks between Chicago-based Boeing and the Air Force, which personally involve Air Force Secretary James Roche, are ongoing, The Wall Street Journal said.

The decision also makes it clearer for Lockheed to develop further launch facilities at Vandenberg Air Force Base in California for its rival design, the Atlas V.

The contract award goes back to 1999 but recently became an issue again after more documents were found to have been used in the bidding for the EELV contract, which was to share at least part of the work between the two companies. Lockheed launched a lawsuit against Boeing in early June, alleging that more than 37,000 proprietary documents were taken, according to Lockheed spokesman Tom Jurkowsky. Lockheed Martin spokesman Jeff Adams added: "The Air Force reached its decision using its own best judgment and we acknowledge that decision. We would, however, thank the Air Force for its thorough investigation, and for the fact that the investigation verifies that there was in fact a Procurement Integrity Act violation."

An LA grand jury charged two former Boeing managers with "conspiracy to conceal and possess trade secrets," the Pentagon said. Both face up to 10 years in prison and a fine of $250,000, according to the Defense Department. Boeing said last week that it has hired former Sen. Warren Rudman to investigate the matter and he is expected to deliver his public findings within the next few months.

Air Force undersecretary Peter Teets said the Air Force probe found that former Boeing executives Kenneth Branch, William Erskine and Larry Satchell broke the law and would be barred from participating in any future rocket contracts.

Branch, 64, and Erskine, 43, were charged with conspiracy, theft of trade secrets and violating federal procurement laws in federal court in Los Angeles. Branch, a former Lockheed Martin employee, gave Boeing the thousands of pages of documents that included financial and technical details of Lockheed Martin's planned bid for the satellite launch contract. Boeing fired both men in 1999 after an internal investigation. Satchell, the Boeing official in charge of making sure its bid came in lower than Lockheed Martin's, was suspended by the company and later retired. He has not been criminally charged.

"Boeing is responsible and must be held accountable for the actions of its employees," Teets said at a Pentagon news conference. "We cannot tolerate anything but complete honesty in our contracting process."

This comes as a special disappointment in light of Boeing’s recent announcement of sweeping changes in its space operations to focus almost exclusively on government work because of weak demand in the commercial satellite and space launch business. The Delta IV program used in the EELV contract, which was to help keep costs low by offsetting government work with commercial work, was to be used just for government space launches.

- Arik