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Table Of Contents

1. Case 4.10 - Nestlé Infant Formula. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Case 5.7 - The Athlete/Star Role Model: From Verizon and Stefani to Cruise and Redstone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. Case 7.17 - The Death of the Great Disposable Diaper Debate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. Case 7.19 - Frozen Coke and Burger King and the Richmond Rigging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

5. Case 7.4 - Product Dumping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

6. Case 8.2 - Alcohol Advertising: The College Focus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

7. Case 8.3 - Subprime Lending and Marketing: From Payday to Title Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

8. Case 8.3 - The Obligation To Screen? The Obligation To Reject: Soldier Of Fortune Classifieds. . . . . . . . . . . . . . . . . . . . . . . . . . . 23

9. Case 8.5 - Ragu Thick And Zesty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

10. Case 8.7 - V-A-N-N-A: It Belongs To Me. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

11. Case 9.1 - Intel and Pentium: What to Do When the Chips Are Down. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

12. Case 9.6 - McDonald’s And The Disappearing Dodge Viper Game Pieces. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

13. Case 9.9 - ATVs: Danger On Wheels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

14. Case 10.15 - Taser and Stunning Behavior. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

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CASE 4.10Nestlé Infant FormulaAlthough the merits and problems of breast-feeding versus using infant formula aredebated in the United States and other developed countries, the issue is not so balancedin third world nations. Studies have demonstrated the difficulties and risks of bottle-feeding babies in such places.

First, refrigeration is not generally available, so the formula, once it is mixed oropened (in the case of premixed types), cannot be stored properly. Second, the lack ofpurified water for mixing with the formula powder results in diarrhea or other diseasesin formula-fed infants. Third, inadequate education and income, along with cultural dif-ferences, often lead to the dilution of formula and thus greatly reduced nutrition.

Medical studies also suggest that regardless of the mother’s nourishment, sanitation,and income level, an infant can be adequately nourished through breast-feeding.

In spite of medical concerns about using their products in these countries, someinfant formula manufacturers heavily promoted bottle-feeding.

These promotions, which went largely unchecked through 1970, included billboards,radio jingles, and posters of healthy, happy infants, as well as baby books and formulasamples distributed through the health care systems of various countries.

Also, some firms used “milk nurses” as part of their promotions. Dressed in nurseuniforms, “milk nurses” were assigned to maternity wards by their companies and paidcommissions to get new mothers to feed their babies formula. Mothers who did so soondiscovered that lactation could not be achieved and the commitment to bottle-feedingwas irreversible.

In the early 1970s, physicians working in nations where milk nurses were used beganvocalizing their concerns. For example, Dr. Derrick Jelliffe, then the director of theCaribbean Food and Nutrition Institute, had the Protein-Calorie Advisory Group of theUnited Nations place infant formula promotion methods on its agenda for several of itsmeetings.

Journalist Mike Muller first brought the issue to public awareness with a series ofarticles in the New Internationalist in the 1970s. He also wrote a pamphlet on the pro-motion of infant formulas called “The Baby Killer,” which was published by a Britishcharity, War on Want. The same pamphlet was published in Switzerland, the headquar-ters of Nestlé, a major formula maker, under the title “Nestlé Kills Babies.” Nestlé suedin 1975, which resulted in extensive media coverage.

In response to the bad publicity, manufacturers of infant formula representing about75 percent of the market formed the International Council of Infant Food Industries toestablish standards for infant formula marketing. The new code banned the milk nursecommissions and required the milk nurses to have identification that would eliminateconfusion about their “nurse” status.

The code failed to curb advertising of formulas. In fact, distribution of samplesincreased. By 1977, groups in the United States began a boycott against formula makersover what Jelliffe called “comerciogenic malnutrition.”

One U.S. group, Infant Formula Action Coalition (INFACT), worked with the staff ofU.S. Senator Edward Kennedy of Massachusetts to have hearings on the issue by theSenate Subcommittee on Health and Human Resources, which Kennedy chaired. Thehearings produced evidence that 40 percent of the worldwide market for infant formula,which totaled $1.5 billion at the time, was in third world countries. No regulations

Jennings Business Ethics, 6th Edition

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resulted, but Congress did tie certain forms of foreign aid to the development by recipi-ent countries of programs to encourage breast-feeding.

Boycotts against Nestlé products began in Switzerland in 1975 and in the UnitedStates in 1977. The boycotts and Senator Kennedy’s involvement heightened mediainterest in the issue and led to the World Health Organization (WHO) debating theissue of infant formula marketing in 1979 and agreeing to draft a code to govern it.

After four drafts and two U.S. presidential administrations (Jimmy Carter and RonaldReagan), the 118 member nations of WHO finally voted on a code for infant formulamarketing. The United States was the only nation to vote against it; the Reagan admini-stration opposed the code being mandatory. In the end, WHO made the code a recom-mendation only, but the United States still refused to support it.

The publicity on the vote fueled the boycott of Nestlé, which continued until theformula maker announced it would meet the WHO standards for infant formulamarketing. Nestlé treated the Nestlé Infant Formula Audit Commission (NIFAC) todemonstrate its commitment to and ensure its implementation of the WHO code.

In 1988, Nestlé introduced a new infant formula, Good Start, through its subsidiary,Carnation. The industry leader, Abbott Laboratories, which held 54 percent of the mar-ket with its Similac brand, revealed Carnation’s affiliation: “They are Nestlé,” said RobertA. Schoellhorn, Abbott’s chairman and CEO.76 Schoellhorn also disclosed that Nestléwas the owner of Beech-Nut Nutrition Corporation, officers of which had been indictedand convicted (later reversed) for selling adulterated apple juice for babies.77

Carnation advertised Good Start in magazines and on television. The American Acad-emy of Pediatrics (AAP) objected to this direct advertising, and grocers feared boycotts.

The letters “H.A.” came after the name “Good Start,” indicating the formula washypoallergenic. Touted as a medical breakthrough by Carnation, the formula was madefrom whey and advertised as ideal for babies who were colicky or could not toleratemilk-based formulas.

Within four months of Good Start’s introduction in November 1988, the FDA was inves-tigating the formula because of six reported cases of vomiting due to the formula. Carnationthen agreed not to label the formula hypoallergenic and to include a warning that milk-allergic babies should be given Good Start only with a doctor’s approval and supervision.

In 1990, with its infant formula market share at 2.8 percent, Carnation’s president,Timm F. Crull, called on the AAP to “examine all marketing practices that might hinderbreast-feeding.”78 Crull specifically cited manufacturers’ practices of giving hospitalseducation and research grants, as well as free bottles, in exchange for having exclusiverights to supply the hospital with formula and to give free samples to mothers. He alsocalled for scrutiny of the practice of paying pediatricians’ expenses to attend conferenceson infant formulas.

The AAP looked into prohibiting direct marketing of formula to mothers and physi-cians’ accepting cash awards for research from formula manufacturers.

The distribution of samples in third world countries continued during this time. Stud-ies by the United Nations Children’s Fund found that a million infants were dying everyyear because they were not breast-fed adequately. In many cases, the infant starvedbecause the mother used free formula samples and could not buy more, while her ownmilk had dried up. In 1991, the International Association of Infant Food Manufacturersagreed to stop distributing infant formula samples by the end of 1992.

76 Rick Reiff, “Baby Bottle Battle,” Forbes, November 28, 1988, pp. 222–24.77 For details of the Beech-Nut apple juice case, see Case 5.18.78 Julia F. Siler and D. Woodruff, “The Furor over Formula Is Coming to a Boil,” Business Week, April 9, 1990, pp. 52–53.


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In the United States in 1980, the surgeon general established a goal that the nation’sbreast-feeding rate be 75 percent by 1990. The rate remains below 60 percent, however,despite overwhelming evidence that breast milk reduces susceptibility to illness, especiallyear infections and gastrointestinal illnesses. The AAP took a strong position that infantformula makers should not advertise to the public, but, as a result, new entrants into themarket (such as Nestlé with its Carnation Good Start) were disadvantaged because long-time formula makers Abbott and Mead Johnson were well-established through physicians.In 1993, Nestlé filed an antitrust suit alleging a conspiracy among the AAP, Abbott, andMead Johnson.

Some 200 U.S. hospitals have voluntarily stopped distributing discharge packs fromformula makers to their maternity patients because they felt it “important not to appearto be endorsing any products or acting as commercial agents.”79 A study at Boston CityHospital showed that mothers who receive discharge packs are less likely to continuenursing, if they nurse at all. UNICEF and WHO offer “Baby Friendly” certification tomaternity wards that take steps to eliminate discharge packs and formula samples.

Discussion Questions

1. If you had been an executive with Nestlé,would you have changed your marketingapproach after the boycotts began?

2. Did Nestlé suffer long-term damage becauseof its third world marketing techniques?

3. How could a marketing plan address the con-cerns of the AAP and WHO?

4. Is anyone in the infant formula companiesmorally responsible for the deaths of infantsdescribed in the United Nations study? Is there

a line that companies could draw thatemerges in this case?

5. Is the moratorium on distributing free formulasamples voluntary? Would your companycomply?

6. If you were a hospital administrator, whatpolicy would you adopt on discharge packs?

7. Should formula makers advertise directly tothe public? What if their ads read, “Remem-ber, breast is best”?

Sources:“Breast Milk for the World’s Babies,” New York Times, March 12, 1992, p. A18.Burton, Thomas B., “Methods of Marketing Infant Formula Land Abbott in Hot Water,” Wall Street

Journal, May 25, 1993, pp. A1, A6.Freedman, Alix M., “Nestlé’s Bid to Crash Baby-Formula Market in the U.S. Stirs a Row,” Wall Street

Journal, February 6, 1989, pp. A1, A10.Garland, Susan B., “Are Formula Makers Putting the Squeeze on the States?” Business Week, June

18, 1990, p. 31.Meier, Barry, “Battle over the Market for Baby Formula,” New York Times, June 15, 1993, pp. C1, C15.“Nestlé unit Sues Baby Formula Firms, Alleging Conspiracy with Pediatricians,” Wall Street Journal,

June 1, 1993, p. B4.Post, James E., “Assessing the Nestlé Boycott: Corporate Accountability and Human Rights,” California

Management Review 27 (1985): 113–31.Star, Marlene G., “Breast Is Best,” Vegetarian Times, June 1991, 25–26.“What’s in a Name?” Time, March 29, 1989, 58.

79 Andrea Gerlin, “Hospitals Wean from Formula Makers’ Freebies,” Wall Street Journal, December 29, 1994.


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CASE 5.7The Athlete/Star Role Model: From Verizon andStefani to Cruise and RedstoneOn August 20, 1996, the North Texas Toyota Dealers Association filed suit againstMichael Irvin, the Dallas Cowboys player who entered a no contest plea to charges ofcocaine possession earlier in the month. The Toyota dealers’ suit alleges Mr. Irvin repre-sented himself as a moral person when he signed an endorsement contract with theAssociation and that, with the drug plea, he can no longer be used as a spokesperson.The suit also asked for the return of the Toyota Land Cruiser (valued at $50,000) thatMr. Irvin was given as part of the endorsement contract.86 The lawsuit also asked for thecosts of the aborted campaign and $1.2 million in lost sales. The total damages requestedwere $1.4 million.87

Mr. Irvin returned the car voluntarily and received a sentence of four years, withdeferred adjudication; a fine of $10,000; and 800 hours of community service. He wasalso suspended by the NFL for the first five games of the 1996–1997 season for hisinvolvement with drugs.88

The Irwin situation was an early case that signaled the beginning of a long line ofcelebrity endorsement cases that continue to present issues for companies, advertisers,and sponsors. In fact, the Irwin situation marked the beginning of the common use ofthe “morals clause.” A morals clause permits the organization to end the endorsementrelationship with the celebrity if the celebrity engages in illegal or immoral conduct, gen-erally defined to include drug use, arrest, violence, and, in the case of CEOs, affairs (SeeReading 5.8).

In 2005, international model Kate Moss appeared in a grainy videotape showing herusing cocaine. On the tape she is heard to say that she doesn’t do drugs more than any-one else.89

Following the release of the confession and the pictures from the video in London’sDaily Mirror, the “supermodel” apologized. However, Burberry and Chanel, two of thecompanies who use Ms. Moss as their representative, indicated that they would not berenewing her contract. H&M, Europe’s largest clothing company (with seventy-eightstores) that carries designers such as Stella McCartney, listened to Ms. Moss’s side ofthe story and initially agreed to give her a second chance. However, public reaction inLondon was so negative that the company withdrew the contract.90 Customers inun-dated the stores, complaining that allowing such a role model for teen-type clotheswas unacceptable. The public relations representative for the store said, “If someone isgoing to be the face of H&M, it is important they be healthy, wholesome andsound.”91 Ms. Moss has since had her contracts with H&M and several other compa-nies reinstated.

In 2006, Paramount Pictures ended its multibillion relationship with superstar TomCruise. Mr. Cruise had had a fourteen-year relationship with Paramount Studios, adivision of Viacom. However, Sumner Redstone, the chairman of Viacom, announced

86 Randall Lane, “Nice Guys Finish First,” Forbes, December 16, 1996, 236–42.87 Christine Biederman, “Irvin Given Probation in Plea Deal,” New York Times, July 18, 1996, p. B7.88

“Irvin Sued by Car Dealers He Endorsed,” New York Times, August 21, 1996, p. B12.89 César G. Soriano and Karen Thomas, “Moss Issues Apology,” USA Today, September 23, 2005, p. 3E.90 Guy Trebay and Eric Wilson, “Kate Moss Is Dismissed by H & M after a Furor over Cocaine,” New York Times, September 21,2005, pp. C1, C17.91 Id.


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(to the surprise of many) the termination. The Cruise–Paramount partnership hasearned $2.5 billion in box office sales since its inception. Citing Mr. Cruise’s personalbehavior, Mr. Redstone indicated, “As much as we like him personally, we thought itwas wrong to renew his deal. His recent conduct has not been acceptable to Para-mount.”92 He also added, “It’s nothing to do with his acting ability, he’s a terrificactor. But we don’t think that someone who effectuates creative suicide and costs thecompany revenue should be on the lot.”93 He also added, in reference to Mr. Cruisejumping on the chair during an interview on the Oprah Winfrey show, “He had neverbehaved this way before, he really went over the top.”94 The other conduct Mr. Red-stone was referring to was Mr. Cruise’s public disputes over depression, psychiatry,and treatment (grounded in his Scientology faith), and his public romance with muchyounger actress Katie Holmes (the couple were expecting their daughter, Suri, prior tobeing married).

However, an insider said the issue was the cost of the contract, the overhead, as wellas the cost of Mr. Cruise’s executive team. Mr. Redstone also estimated that Mr. Cruise’sbehavior prior to the release of Mission Impossible III resulted in lost sales of about $100to $150 million. Mr. Redstone added, “I feel badly. Essentially he’s a decent guy and agreat actor.”95

In 2007, Verizon withdrew its sponsorship of the Gwen Stefani tour when a raunchyvideo of her opening act, Akon, appeared online. The video shows Akon engaged inquestionable on-stage behavior with a young fan who was under the age of eighteen.The video resulted in considerable coverage and outrage from parents andcommentators.

Akon indicated that the club where the video was made was supposed to be checkingIDs and he assumed that the young woman (a pastor’s daughter) was eighteen. Heissued the following apology: “I want to sincerely apologize for the embarrassment andany pain I’ve caused to the young woman who joined me on stage, her family and theTrinidad community for the events at my concert.”96

Akon’s album, Konvicted, has sold 2.2 million copies and was number 11 on the Bill-board charts in May 2007. Ms. Stefani’s current album has sold 1.2 million copies.

Under the terms of its sponsorship contracts, Verizon has the right to end its relation-ships with singers for criminal charges or other misconduct. Ms. Stefani’s manager said,“This kid is not getting a fair shake [referring to Akon]. I strongly disagree with theirtake on it. How this has anything to do with Gwen Stefani I have no idea.”97

Verizon will still be required to pay Ms. Stefani the cash due under the contract (esti-mated at $2 million), but it will no longer have advertisements or other promotional ma-terials as part of the tour. Verizon issued the following statement: “We made a decision,based on what we saw, and, in this case, our own customers, who we listen to, werereacting.”98

92 David M. Halbfinger and Geraldine Fabrikant, “Fire or Quit, Tom Cruise Parts Ways with Studio,” New York Times, August 23,2006, pp. C1, at C2.93 Merissa Marr, “Sumner Redstone Gives Tom Cruise His Walking Papers,” Wall Street Journal, August 23, 2006, A1, A7.94 Id.95 Id.96 Jeff Leeds, “Verizon Drops Pop Singer from Ads,” New York Times, May 10, 2007, pp. B1, B6.97 Id.98 Id.


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1. Do you think Mr. Irvin breached his endorse-ment contract?

2. Is morality a condition for being a spokesper-son for a company? Where does the issue ofsocial responsibility enter into these issues?

3. Is the Verizon–Stefani incident different? Dis-cuss why or why not. Consider the followingcelebrity endorsement problems:

• Cybill Shepherd appeared in ads for the BeefIndustry Council in 1987 as the leadoff forthe “Real Food for Real People” campaignby the industry. Her contract was withdrawnwhen she admitted in public that she didnot eat meat.

• Eric Clapton and his song “After Midnight”were chosen by Anheuser-Busch for itsanchor commercial for its Michelob cam-paign. However, Mr. Clapton told RollingStone in an interview after the commercialfirst aired that he was an alcoholic at thetime he made the commercial and was inrehab by the time the commercial firstaired.

• Jose Canseco (now of steroid fame) wasfired, as it were, by the California Egg Com-mission as its spokesperson after he was ar-rested for possession of a handgun.

• O. J. Simpson lost his Hertz endorsementcontract when he was indicted for a doublehomicide. He was later acquitted of thecriminal charges but still later held civilly lia-ble for the deaths.

• Kobe Bryant lost his endorsement contractswith McDonald’s, Sprite, and Nutella afterhe was charged with sexual assault. Thecharges were later dropped, but the endor-sements did not return.

• Mary-Kate and Ashley Olsen appeared in“Got milk?” ads until Mary-Kate Olsen waschecked into a residential treatment facilityfor a “health-related issue.”99

• Atlanta Falcons player Michael Vick lost hisendorsement contracts after being indicted onfederal charges of operating a dog-fightingbusiness.

Compare & Contrast1. Linda Wells, the editor of Allure magazine, said of the companies canceling their contracts, “Does it

then mean we’re going to moralize and decide she’s not worthy of representing certain lines ofclothing?” Is she correct? Is this moralizing? Does it just make financial sense for the companies?Are the companies thinking of social responsibility or loss of customers? Are morals and businesssuccess opposite or complementary forces? Ms. Moss was reinstated in many of her endorsementagreements within a period of months. Why did the businesses permit her reinstatement?

2. Mr. Redstone said those who questioned his decision to end a relationship based on behavior fromover one year ago were in the minority. Stating that he had received congratulatory calls fromaround the country, he added, “Dominick Dunne called me to say that I behaved like Samuel Gold-wyn.”100 Some analysts said the decision was necessary because Mr. Cruise had diminished hisdrawing power. Do business and social-moral issues run in tandem? What rights issues could Mr.Cruise raise regarding the explanation for his termination? Are the terminations on the basis of alle-gations and perceptions unfair?

99“When Celebrity Endorsements Attack!” Fortune, October 17, 2005, p. 42.

100 David M. Halbfinger, Geraldine Fabrikant, and Sharon Waxman, “Allies Start to Escalate Dispute between Cruise and Viacom,” NewYork Times, August 24, 2006, pp. C1, C11.


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CASE 7.17The Death of the Great Disposable Diaper DebateIn the late 1980s, environmentalists raised concerns about the disposal of diapers inmunicipal landfills, space for which is scarce and becoming more so. The average infantuses 7,800 diapers in the first 130 weeks of life.

The debate over disposable diapers was complex. Disposable diapers account for just2 percent of municipal solid waste. The time required for plastic to break down is 200to 500 years. Eighteen billion disposable diapers go into landfills each year. An Arthur D.Little study comparing the environmental impact of cloth and disposable diapers over theproducts’ lifetimes found cloth diapers consume more energy and water than disposables.Cloth diapers also cost more (not counting diaper-service fees) and create more air andwater pollution through washing. Critics point out that the study was commissioned byProcter & Gamble, the largest maker of disposable diapers, with 50 percent of the market.However, the study was a sophisticated “life-cycle analysis” that used elaborate computermodels, and Arthur D. Little, although now defunct, was considered an eminent researchfirm.102

In surveys in the early 1990s, four of five American parents preferred disposables.Most hospital staffs and day care centers favor using disposables, even though manypersonally use cloth diapers. Switching from disposable to cloth diapers costs about 2.5percent more. The disposability of the diapers was also improving, with companiesdevoting significant R&D dollars to reducing the time for biodegradation. Procter& Gamble created advanced techniques for industrial composting of solid waste andspent $20 million to develop diapers that break down into humus.103

Environmentalists, however, were quite successful in obtaining regulation of disposables.Twenty states considered taxes or complete bans on disposables. Nebraska banned nonbio-degradable disposables, with a law that took effect in October 1993. Maine required daycare centers to accept children who wear cloth diapers. New York considered requiringthat new mothers be given information explaining the environmental threat of disposables.In 1990, the Wisconsin legislature barely defeated a measure to tax disposables.

Alternatives to disposables were being developed. R Med International distributesTender Care, a disposable diaper that degrades in two to five years because its outer lin-ing is made of cornstarch. However, the price of these diapers was substantially higherthan that of other disposables and made mass market appeal impossible.

The great disposable diaper debate peaked on Earth Day in 1990. After the Littlestudy appeared, parents’ guilt about rain forests and landfills was relieved, and by 1997,80 percent of all babies were wearing disposables. Many attribute the change in attitudeas well as the halt in legislative and regulatory action to Procter & Gamble’s effectivepublic relations using the Little study results. Also, Allen Hershkowitz, a senior scientistat the Natural Resources Defense Council, said, “The pediatric dermatology clearlyseemed to favor disposables, while the environmental issues were murky.” Environmen-talists referred to Mr. Hershkowitz as “the skipper of the Exxon Valdez.”104

102 Arthur Little declared bankruptcy in January 2002. Jonathan D. Glater, “Arthur D. Little Plans Bankruptcy Filing,” New York Times, Feb-ruary 6, 2002, p. C4.103 Zachary Schiller, “Turning Pampers into Plant Food?” Business Week, October 22, 1990, 38.104 Kathleen Deveny, “States Mull Rash of Diaper Regulations,” Wall Street Journal, June 15, 1990, p. B1.


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During the 1990s, all disposable diaper manufacturers were able to develop materialsthat were much thinner and lighter than their predecessors. Not only were the diapersdecomposing faster, but they also took up less room in the landfills.

By 1997, the National Association of Diaper Services (NADS) reported its membershipat an all-time low, with closings of cloth diaper services even in ecologically consciousBoston. There are no diaper services located in any of New York City’s five boroughs.Their current marketing campaign emphasizes a two-year guarantee for potty-trainingwith diapers free after that. Babies, the NADS says, can’t feel the wetness in disposables.

The Internet has created a new submarket for cloth diapers because the network ofparents who prefer cloth diapers is so easily connected. The two national companiesremain Mother-ease of New York and Kooshies Baby Products of Ontario, Canada, butthere are several small companies, including Darla’s Place, based in Imlay City,Michigan. Founded by Darla Sowders because of her frustration with the nationalbrands, the company uses at-home mothers to sew its product, which captures the“brown market,” or the market for used diapers. The diapers are sewn a certain waythat customers say prevents leaks. The brand is regarded as the “champagne” of diapersand sells at a premium above other diapers in the submarket. Despite this activity,Kimberly-Clark indicates there is no change in the demand for cloth diapers or anyreduction in the use of disposables.105 P&G reports sagging diaper sales, as it were, and iscompeting with a new premium brand marketed as an item of clothing.106


1. Did Arthur D. Little have a conflict of interestwith Procter & Gamble’s sponsorship of itswork?

2. Would it be a breach of duty to the hospital’spatients and shareholders to adopt a position(that is, using cloth diapers) that increasescosts?

3. Do people ignore environmental issues for thesake of convenience? Do your arguments

depend on whether you must changediapers?

4. What lessons are learned from this case forapplicability in other industries?

5. Did environmentalists exaggerate?

105 Lisa Moricoli Latham, “The Diaper Rush of 1999: Cloth Makes a Comeback on the Net,” New York Times, September 19, 1999, p. BU6.106 Emily Nelson, “Diaper Sales Sagging, P&G Thinks Young to Reposition Pampers,” Wall Street Journal, December 27, 2001, pp. A1, A2.


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CASE 7.19Frozen Coke and Burger King and the RichmondRigging110

Tom Moore, president of Coca-Cola’s Foodservice and Hospitality Division, was lookingat sales in the fountain division, a division responsible for one-third of all of Coke’s rev-enues. The fountain division sells fountain-dispensed soda to restaurants, conveniencemarts, and theaters. Sales were flat and he knew from feedback from the salespeople thatPepsi was moving aggressively in the area. In 1999, Pepsi had waged a bidding war to tryand seize Coke’s customers. Coke held about 66 percent of the fountain drink businessand 44.3 percent of the soda market overall. Pepsi held 22 percent of the fountainmarket and 31.4 percent of the overall soda market. The war between the two giants hadbeen reduced to a price war. One might say that Coke’s fountain sales were flat.

However, Moore noted that there was a potential new product line as he looked at theFrozen Coke products. At that time, Frozen Coke was a convenience store item only.Frozen Coke was still a little-known product, and Moore’s team at Coke pitched the ideaof having Frozen Coke at Burger King along with a national advertising push that wouldpush Coke’s fountain sales but also increase food sales at Burger King as customers camein to try the newly available product. Their pitch to Burger King was that Frozen Cokewould draw customers and that the sales of all menu items would increase as a result.Burger King was not ready for a marketing push because it had just lived through twomarketing disasters. The first was the failure of the introduction of its new fries andanother was a costly ad campaign to boost sales of the Whopper, with no impact buta great many angry franchise owners who had been required to help pay for the ads.Before Burger King would invest in another ad campaign, it wanted to see some testmarketing results. Burger King asked Coke to do a promotion of Frozen Coke in a testmarket. Burger King chose the Richmond, Virginia area as a good test market.

If the Richmond market did not show sales during the marketing test, Moore knewthat Coke risked not only no more growth in fountain sales, but also loss of BurgerKing’s confidence and perhaps an open door for Pepsi to win Burger King over.

Promotions and the marketing test in Richmond began in February 2000. Initial saleswere not good. Burger King executives made what Coke employees called “excoriating”calls to Coke team members about the poor performance. Coke pulled out all the stopsand hired mystery shoppers to make sure that Burger King employees were offering theFrozen Coke to customers as had been directed during the promotion. Coke gaveT-shirts and other promotional items to Burger King managers to encourage them topromote Coke sales. John Fisher, the Coke executive who had just been given the BurgerKing account to manage, was getting more nervous the closer Coke got to the end of theRichmond promotion time frame.

The Coke team told its own employees to buy more value meals at Burger King, themenu item that was being promoted with the Frozen Coke. Finally, Robert Bader, theCoke marketing manager who was in charge of the Richmond test, decided to hire a mar-keting consultant, Ronald Berryman, to get more purchases at Burger King. Mr. Berryman,who had worked with Coke in the past, developed a plan that included working with theBoys & Girls Clubs in the area. Using $9,000 wired to him by Mr. Bader from Mr. Bader’s

110 The author has done consulting work with the Burger King team of Coca-Cola. All information in this case is from public records and/orthird-party publications.


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personal Visa card, Berryman gave cash to directors of these clubs and developed a home-work reward program: if the kids came to the clubs and did their homework, they could goand buy a value meal at Burger King. The directors at the clubs assumed that the moneyfor the value meals was a donation from either Burger King or Coke.

The result of the Berryman plan was that the Richmond area Burger Kings had a6 percent increase in sales during the Frozen Coke promotion. Other Burger King storeshad only 0 to 2 percent growth during the same period. As a result, Burger King agreedto invest $10 million in an ad program to promote Frozen Coke. Burger King also invested$37 million in equipment, training, and distribution in order to carry the Frozen Coke inits franchises, but sales did not follow the Richmond pattern. Estimates are that BurgerKing’s total investment in the Frozen Coke promotion was $65 million.

Matthew Whitley, who had been with Coke since 1992, was its finance director in2000. During some routine audit work at Coke, he ran across an expenses claim fromMr. Berryman in the amount of $4,432.01, a claim that was labeled as expenses for the“mystery shop.” Mr. Whitley questioned Mr. Bader about this amount and others, whatthe funds were for, who Mr. Berryman was, and what the “mystery shop” submissionlabel represented. Mr. Bader responded that the methods might be “unconventional,”but they were “entrepreneurial.” Mr. Fisher wrote in a memo in response:

I would never have agreed to move forward if I believed I was being asked to commit an ethicscode or legal transgression.… We had to deseasonalize the data in order to have an accuratemeasure. I am not completely aware of the details of how the shops were executed but take fullresponsibility for the decision to execute the program.111

Mr. Whitley recommended that Mr. Fisher be fired because of the excessive expenseand his authorization for it. Coke did not fire Mr. Fisher, but Mr. Moore took away onehalf of his bonus for the year, saying in his memo of explanation to Mr. Fisher, “Theseactions exposed the Coca-Cola Co. to a risk of damage to its reputation as well as to therelationship with a major customer.”112

However, Coke did fire Mr. Whitley, who then filed suit for wrongful termination.Coke first told Burger King of the issues the day before Mr. Whitley filed his suit. Mr.Whitley’s lawyer had contacted Coke and offered to not file the suit if Coke would pay Mr.Whitley $44.4 million within one week. Coke declined the offer and disclosed the Whitleyand Frozen Coke issues to Burger King. The Coca-Cola board hired the law firm of Gib-son, Dunn & Crutcher and auditors Deloitte & Touche to investigate Whitley’s claim.

Mr. Whitley then filed his suit. The Wall Street Journal uncovered the lawsuit in courtdocuments when a reporter was doing some routine checking on Coke and ran a storyon August 20, 2003, describing Mr. Whitley’s experience and suit.

The reports of the law and audit firms concluded that the employees had actedimproperly on the Richmond marketing test. Also, as a result, Coca-Cola issued an earn-ings restatement of $9 million in its fountain sales.

Burger King’s CEO, Brad Blum, was informed of the report following the investiga-tion and calling the actions of the Coke employees “unacceptable,” and he issued thefollowing statement:

111 Chad Terhune, “How Coke Officials Beefed Up Results of Marketing Test,” Wall Street Journal, August 20, 2003, pp. A1, A6.112 Id.


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We are very disappointed in the actions … confirmed today by the Coca-Cola audit committee.We expect and demand the highest standards of conduct and integrity in all our vendor relation-ships, and will not tolerate any deviation from these standards.

Coke’s president and chief operating officer, Steve Heyer, sent an apology to Mr. Blum:

These actions were wrong and inconsistent with values of the Coca-Cola Co. Our relationshipswith Burger King and all our customers are of the utmost importance to us and should be firmlygrounded in only the highest-integrity actions.113

Coke had to scramble to retain Burger King’s business because Burger King threat-ened to withdraw Coca-Cola products from its restaurants. Burger King is Coke’s secondlargest fountain customer (McDonald’s is its largest). The settlement requires Coke topay $10 million to Burger King and up to $21.2 million to franchisees who will still havethe right to determine whether they will continue to carry the Frozen Coke products.

Coke continued with its litigation against Whitley, maintaining that he was “separated”from the company because of a restructuring and that his “separation” had nothing to dowith his raising the allegations. However, in October 2003, Coke settled the lawsuit for$540,000: $100,000 in cash, $140,000 in benefits including health insurance, and$300,000 in lawyer’s fees. Mr. Whitley said when the settlement was reached, “Over thepast several weeks I have reflected on my relationship with Coca-Cola, a company I stillrespect and love. It’s become increasingly clear to me that the company has taken seri-ously the issues I raised. That’s all I ever wanted.”114

Deval Patrick, executive vice president and Coke’s general counsel, also issued the fol-lowing statement when the settlement was reached:

Mr. Whitley was a diligent employee with a solid record. It is disappointing that he felt he need-ed to file a lawsuit in order to be heard. We want everyone in this company to bring their issuesto the attention of management through appropriate channels, and every manager to take themseriously, investigate them, and make necessary changes.115

Mr. Fisher was promoted to a top marketing position in the fountain division at Coke in2003. However, In April 2003, Coke’s internal auditors raised questions with Mr. Fisherabout why he exchanged two Disney theme park tickets that had been purchased by thecompany for Notre Dame football tickets. Mr. Fisher resigned shortly after, but no one atCoke has offered an explanation.

Mr. Bader is still a marketing manager in the fountain division, but he does not workon the Burger King account.

Tom Moore resigned following both the settlements. A spokesperson for Coca-Colasaid, “As he reflected on the events, he felt that change was necessary to avoid distrac-tions and move the business forward.”116 Sales of Frozen Coke at Burger King have fall-en to half of Coke’s original estimates. Burger King has proposed changing the name toIcee.117 Coke did sign the Subway chain for its fountain beverages, a contract that gaveCoke the three largest fountain drink contracts in the country: McDonald’s, Burger King,and Subway.118 Pepsi had previously held the Subway contract.

113 Chad Terhune, “Coke Employees Acted Improperly in Marketing Test,” Wall Street Journal, June 18, 2003, pp. A3, A6.114 Sherri Day, “Coca-Cola Settles Whistle-Blower Suit for $540,000,” New York Times, October 8, 2003, p. C1.115 Id.116 Sherri Day, “Coke Executive to Leave His Job after Rigged Test at Burger King,” New York Times, August 26, 2003, pp. C1, C2.117 Chad Terhune, “How Coke Officials Beefed Up Results of Marketing Test,” Wall Street Journal, August 20, 2003, pp. A1, A6.118 Sherri Day, “Subway Chain Chooses Coke, Displacing Pepsi,” New York Times, November 27, 2003, pp. C1, C2.


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As a result of the Whitley lawsuit, the SEC and the FBI began investigating Coke.Coke cooperated fully with the government investigations. In 2005, those investigationswere closed with no action taken against the company or any individuals with regard tothe marketing scenario or the response to Mr. Whitley’s report on the consultant’s con-duct in the Richmond test market.119 Coke also settled the channel-stuffing charges in2005. Although channel-stuffing issues at Coke had emerged in the 1997–1999 timeframe, regulatory interest was rekindled when the Burger King issue became public.120

As part of the settlement, in which Coke neither admitted nor denied the allegations,Coke agreed to put compliance and internal control processes in place and work toensure an ethical culture. Coke was also able to settle private suits on the channel-stuffing issues.121 Federal prosecutors investigated the Frozen Coke marketing tests forpossible fraud.122


1. Why did the executives at Coke decide to goforward with the marketing studies? Whatquestions from the models you have studiedcould they have asked themselves in order toavoid the problems that resulted?

2. Make a list of everyone who was affected bythe decision to fix the numbers in theRichmond test market.

3. Make a list of all of the consequences Cokeexperienced as a result of the Richmond rig-ging. “The initial decision was flawed, and therest of the problems resulted from that flaweddecision,” was an observation of an industry

expert on the Richmond marketing test. Whatdid the expert mean with this observation?

4. List the total costs to Coke of the Richmondrigging. Be sure to list any costs that you don’thave figures for but that Coke would have topay. Do you think those costs are done andover?

5. What lessons should companies learn from theWhitley firing and lawsuit? What changes doyou think Coke has made in its culture to com-ply with the SEC settlement requirements? Arethere some lessons and elements for a credoin the conduct of individuals in this case?

119“Coke Settles with SEC,” http://www.BevNet.com. April 19. 2005.

120 Betsy McKay and Chad Terhune, “Coca-Cola Settles Regulatory Probe,” Wall Street Journal, April 19, 2005, p. A3.121 Sherri Day, “Coke Employees Are Questioned in Fraud Inquiry,” New York Times, January 31, 2004, pp. B1, B14.122 Kenneth N. Gilpin, “Prosecutors Investigating Suit’s Claims against Coke,” New York Times, July 13, 2003, pp. B1, B4; and ChadTerhune, “Coca-Cola Says U.S. Is Probing Fraud Allegations,” Wall Street Journal, July 14, 2003, p. B3.


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CASE 7.4Product DumpingOnce the Consumer Product Safety Commission prohibits the sale of a particular productin the United States, a manufacturer can no longer sell the product to U.S. wholesalers orretailers. However, the product can be sold in other countries that have not prohibited itssale. The same is true of other countries’ sales to the United States. For example, GreatBritain outlawed the sale of the prescription sleeping pill Halcion, but sales of the drug con-tinue in the United States.11 The British medical community reached conclusions regardingthe pill’s safety that differed from the conclusions reached by the medical community andthe Food and Drug Administration here. Some researchers who conducted studies on thedrug in the United States simply concluded that stronger warning labels were needed.

The Consumer Product Safety Commission outlawed the sale of three-wheel all-terrain cycles in the United States in 1988.12 Although some manufacturers had alreadyturned to four-wheel models, other manufacturers still had inventories of three-wheelcycles. Testimony on the cycles ranged from contentions that although the vehiclesthemselves were safe, the drivers were too young, too inexperienced, and more inclinedto take risks (i.e., to “hot dog”). However, even after the three-wheel product was bannedhere, outlawed vehicles could still be sold outside the United States.

For many companies, chaos follows a product recall because inventory of the recalledproduct may be high. Often, firms must decide whether to “dump” the product in othercountries or to take a write-off that could damage earnings, stock prices, and employmentstability.


1. If you were a manufacturer holding a substan-tial inventory of a product that has been out-lawed in the United States, would you haveany ethical concerns about selling the productin countries that do not prohibit its sale?

2. Suppose the inventory write-down that you willbe forced to take because of the regulatoryobsolescence is material—nearly a 20 percentreduction in income will result. If you can sellthe inventory in a foreign market, legally, therewill be no write-down and no income reduction.A reduction of that magnitude would substan-tially lower share market price, which in turnwould lead your large, institutional shareholders

to demand explanations and possibly seekchanges in your company’s board of directors. Inshort, the write-down would set off a wave ofevents that would change the structure and sta-bility of your firm. Do you now feel justified inselling the product legally in another country?

3. Is selling the product in another country simplya matter of believing one aspect of theevidence—that the product is safe? Is thisdecision a matter of the credo as well?

4. Would you include any warnings with theproduct?

11“The Price of a Good Night’s Sleep,” New York Times, January 26, 1992, p. E9.

12“Outlawing a Three-Wheeler,” Time, January 11, 1988, 59.


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CASE 8.2Alcohol Advertising: The College FocusThe mix is unquestionably there. Alcohol ads mix youth, fun, and enticing activities likescuba diving, beach parties, and skiing. As early as 1991, then–U.S. Surgeon GeneralAntonia Novello asked the industry to voluntarily cut ads that attract minors. Novellostated, “I must call for industry’s voluntary elimination of the types of alcohol advertis-ing that appeal to youth on the bases of certain life-style appeals, sexual appeals, sportsappeal, or risky activities, as well as advertising with the more blatant youth appeals ofcartoon characters and youth slang.”38

However, by 2003, Bud Light, Miller Lite, Coors Light, and Skyy Blue Malt Liquorwere still heavy, as it were, advertisers on college sports broadcasts. All of the majorcompanies, with the exception of Anheuser-Busch, advertise on MTV.39 The issue of theads targeted at college students has become an increasingly sensitive one because fatalinjuries related to alcohol use climbed from about 1,500 in 1998 to more than 1,700 in2001 among U.S. college students aged 18–24. Over the same period, the number of col-lege students who drove under the influence of alcohol increased by 500,000, from 2.3million to 2.8 million. Fatal injuries attributable to alcohol consumption include alcoholpoisoning because of overindulgence as well as accidents related to drunken states(jumping from buildings, students who are drunk walking into traffic, etc.).40 There are500,000 unintentional injuries related to alcohol among college students and 600,000injuries caused by assaults committed by students who are under the influence of alco-hol. Industry officials maintain that they are very active in and financially supportive ofprograms for alcohol-use education, including Mothers against Drunk Driving.

Anheuser-Busch spends $20 million of its $260 million ad budget on a campaign thatfeatures the slogan “Know when to say when.” Miller Brewing Company runs a thirty-second television ad with the slogan “Think when you drink” as part of the $8 millionper year that it spends to promote responsible drinking.

Because of the Novello questions, Miller and Anheuser-Busch did not use their multi-story inflatable beer cans on popular beaches in Florida, Texas, and Mexico in 1991 and1992. And some companies began ad campaigns related to alcohol use and abuse, espe-cially at spring break locations. For example, in Daytona Beach, Florida, Miller putbillboards along the highways with the slogan “Good beer is properly aged. You shouldbe too.” Miller’s manager for alcohol and consumer issues, John Shafer, explained, “It’sjust good business sense to make sure we’re on the right side of these issues.”41 However,in 2000, many of the inflatable bottles for the companies had returned.

Patricia Taylor, a director at the Center for Science in the Public Interest, respondedto the efforts by saying, “The beer companies are spending hundreds of millions everyyear to present a very positive image of drinking. That overwhelms all attempts to talkabout the other side of the issue.”42

Because of concerns about liability as well as concerns about image, the notion ofcollege-student spring break marketing has been downplayed during the past five yearsby U.S. businesses. Many U.S. businesses, for reasons of costs springing from damages to

38 Hilary Sout, “Surgeon General Wants to Age Alcohol Ads,” Wall Street Journal, November 5, 1991, p. B1.39 Anheuser-Busch pulled its MTV ads in 1996.40 The National Institutes of Health keeps records of campus alcohol-related deaths. Data can be found at http://www.niaaa.nih.gov/NewsEvents/NewsReleases/College.htm.41 Id.42 Id.


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property and others from liability for alcohol-induced accidents, have declined to markettheir products or facilities to the spring-break crowd.

To fill the void, U.S. companies have begun to use Mexico, Amsterdam, and theCaribbean as liability-free spring-break areas and are intensely marketing these sitesto college students. StudentSpringBreak.com encourages students to take a trip toAmsterdam, a “pot-smoker’s paradise.” It also notes, “Your yearly intake of alcoholcould happen in one small week in Cancun, Mexico, on spring break.” Hotels and travelagencies sell $179 passes for seven bars with one all-you-can-drink-night in each one.43

Cancun, Jamaica, Mazatlán, Acapulco, the Bahamas, Cabo San Lucas, and Amsterdamnow top Miami, Fort Lauderdale, Daytona Beach, and South Padre Island for spring breakdestinations. The drinking age in the U.S. locations is twenty-one, but it is only eighteen inthe travel destinations abroad.

Because of the increasing numbers of college-age drinkers, accidents, and fatalities,researchers in the field have proposed the following remedies:

1. Greater enforcement of the drinking age

2. Higher taxes on beer to make it prohibitively expensive for college students

3. Greater availability of counseling programs for college students who are having difficultywith binge drinking or curbing their use of alcohol.


1. Suppose you were an officer of a brewerywhose advertising campaign targets youngadults (18–21). Would you change thecampaign?

2. Wouldn’t your ads appeal to various groupsregardless of their focus?

3. Would it be censorship for the government tocontrol the content of your ads?

4. Are campaigns on responsible drinkingsufficient?

5. What do you see evolving in a regulatory cyclesense? Why should beer companies imposemore self-restraint now?

6. Is the international strategy a means ofcircumventing the law? Is it a meansof avoiding social responsibility as wellas liability?

Sources:Balu, Rekha, “Anheuser-Busch Amphibian Ads Called Cold-Blooded by Doctors,” Wall Street Journal,

April 10, 1998, p. B6.Buck, Rinker, “Ode to Miller Beer,” Adweek’s Marketing Week, May 27, 1991, 16.Colford, Steven W., “FTC May Crash Beer Promos’ Campus Party,” Advertising Age, March 25, 1991,

3–4.Horovitz, Bruce, “Brewer to Stop Ads on MTV,” USA Today, December 23, 1996, p. 1A.Wells, Melanie, “Budweiser Frogs Will Be Put Out to Pasture,” USA Today, January 14, 1997, pp. 1B, 8B.Yang, Catherine, and Stan Crock, “The Spirited Brawl Ahead Over Liquor Ads on TV,” Business Week,

December 16, 1996, 47.

43 Donna Leinwand, “Alcohol-Soaked Spring Break Lures Students Abroad,” USA Today, January 6, 2003, pp. 1A, 2A.


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CASE 8.3Subprime Lending and Marketing: From Paydayto Title LoansTroubled credit history is a problem for debtors when they want to buy a home. None-theless, there is bad credit repentance and lender-induced redemption, and the latter canbe profitable. Over the last decade there has been significant growth in the subprimemortgage market. The subprime mortgage market is defined to include those borrowerswith a FICO (Fair Isaac Co.) score below 570. The median FICO score is 720, with a per-fect score being 850. The subprime home mortgage market, from 1994 to 2004, grewfrom $35 billion to $401 billion. The foreclosure rates range from 20 to 50 percent onsubprime loans, with the likelihood of default higher on many of the loans because ofloan structures that include high interest rates as well as balloon payments (see below formore discussion). The high default and foreclosure rates carried a secondary marketimpact at the beginning of 2007 as subprime lenders collapsed under the weight of theirforeclosure portfolios in a soft real estate market.

“We made so much money, you couldn’t believe it. And you didn’t have to do any-thing. You just had to show up,”44 commented Kal Elsayed, a former executive at NewCentury Financial, a mortgage brokerage firm based in Irvine, California. With his redFerrari, Mr. Elsayed enjoyed the benefits of the growth in the subprime mortgagemarket. However, those risky debtors, whose credit histories spelled trouble, are now de-faulting on their loans. Century Financial is under federal investigation for stock salesand accounting irregularities as it tries to deal with its portfolio of $39.4 billion insubprime loans. “Subprime mortgage lending was easy,” mortgage brokers and analystshad commented, “until the market changes.”

The subprime market is fraught with complexities that the average consumer may notfully understand as he or she realizes the dream of home ownership or a means for pay-ing off credit card debt through a home equity loan. Some subprime borrowers are ableto make payments initially because they have interest-only loans for a 3–5-year period.After that initial phase-in, their payments escalate to include principal, with the resultbeing an inability to pay or keep current. In many subprime loans, the lender builds invery high costs for closing, appraisal, and other fees, with a result known as equity strip-ping. The loan amount is so high that the borrower owes more than 100 percent of thevalue of the home. The lenders often return to customers and use a practice known asflipping. The borrowers refinance their homes on the promise of lower payments, a lowerrate, or some benefit that may actually be real. However, the costs of refinancing, knownas packing the loan amount to increase the lender’s interest in the home; the escalatinginterest rate; and other factors produce only a higher loan amount with a longer pay-ment period and greater likelihood of foreclosure.

These practices, coupled with marketing techniques for subprime lenders that targetthe poor and elderly, have resulted in significant state and local legislation designed tocurb subprime lender activities. Known as “Homeowner Security Protection Acts” or“High Cost Home Loan Acts” or “Home Loan Protection Acts,” these state laws takevarious approaches to protecting consumers from predatory lending practices.45 Some

44 Julie Creswell and Vikas Bajas, “A Mortgage Crisis Begins to Spiral, and the Casualties Mount,” New York Times, March 5, 2007,pp. C1, C4.45 For a summary of the state legislation on predatory lending practices, see Therese G. Franzén and Leslie M. Howell, “Predatory LendingLegislation in 2004,” 60 Business Lawyer 677 (2005).


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states limit charges or interest rates. Other states limit foreclosures or refinancings with-in certain time frames. Some, such as Cleveland’s ordinance, simply prohibit predatorypractices, making such activity a criminal misdemeanor. Cleveland’s ordinance wasdescribed by a court in a successful challenge by a lender as follows:

“Predatory loan” in Cleveland is defined as any residential loan bearing interest at an annualrate that exceeds the yield on comparable Treasury securities by either four and one-half to eightpercentage points for first mortgage loans or six and one-half to ten percentage points for juniormortgages. In addition, loans are considered predatory if they were made under circumstancesinvolving the following practices or include the following terms: loan flipping, balloon payments,negative amortization, points and fees in excess of four percent of the loan amount or in excessof $800 on loans below $16,000, an increased interest rate on default, advance payments, man-datory arbitration, prepayment penalties, financing of credit insurance, lending withouthome counseling, lending without due regard to repayment, or certain payments to home-improvement contractors under certain circumstances.46

Cleveland’s ordinance, like so many of the antipredatory statutes, ran into difficultieswith judicial challenges by lenders that have argued successfully that the regulation ofhome loans is preempted by the extensive federal regulation of both home mortgagesand consumer credit.47

Companies that are having difficulty because of their subprime portfolios includeNew Century and Fremont General, a company whose shares have dropped 32 percentsince it announced its bad loan levels in its portfolio. Also, financial companies thatbought subprime loan portfolios, including H&R Block and HSBC, are suffering fromthe downturn and risky loans. Some of the loans are being sold back at a 25–30 percentdiscount. HSBC said it will take two years for it to fix its sagging portfolio.

But the mortgage brokers and lenders were not the only ones affected with the sub-prime loan defaults. The major Wall Street investment firms were heavily invested infinancial instruments tied to these mortgage loans. When the defaults and foreclosureshit, those instruments have to be devalued. The number of foreclosures affected realestate markets and prices, with a resulting impact on the economy and interest rates.Debtors who were facing adjustment of their initial ARMs rates on their mortgages werealso unable to meet the new higher payments, something that produced even more de-faults. In short, there was a tailspin, in the mortgage market, the real estate market, andthe secured instruments, based on the values of both remaining steady. The result wassubstantial write-downs and losses as well as the removal of several CEOs for their fail-ures to understand the risk and exposure their companies had in their ties to subprimelending. The Fortune cover story featured those words in a 3.5-inch headline as well asphotos of Chuck Prince, Citigroup ($9.8 billion loss), Jimmy Cayne, Bear Stearns ($450million loss), John Mack, Morgan Stanley ($3.7 billion loss), and Stan O’Neal, MerrillLynch ($7.9 billion), with their firms’ losses as of November 2007 appearing in parenthe-sis following their names.48

46 Am. Financial Serv. Assn. v. Cleveland, 824 N.E.2d 553 at 557 (Oh. App. 2004).47 Am. Fin. Servs. Ass’n v. City of Cleveland, No. 83676, 2004 WL 2755808, (Ohio Ct. App. 2004); City of Dayton v. State, No.02-CV-3441 (Ohio Ct. Common Pleas Aug. 26, 2003); 813 N.E.2d 707 (Ohio Ct. App. 2004); Am. Fin. Servs. Ass’n v. City of Oakland, 23 Cal. Rptr.3d 453, 461–62 (Cal. 2005); and Mayor of New York v. Council of New York, 780 N.Y.S.2d 266 (N.Y. Sup. Ct. 2004). Cleveland’s ordinancewas held to be preempted by Ohio’s laws on predatory lending.48 Fortune, November 26, 2007, cover story.


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1. Evaluate the ethics of the subprime mortgagebrokers. With the subprime default rates sky-rocketing in 2007, there were ripple effects inthe stock market. What can we learn aboutthe isolation of individual ethical choices?

2. What are the ethical issues in subprime mort-gage loans? Do the lenders fill a marketniche? What could or should they have donedifferently?

Compare & ContrastConsider the regulatory cycle in this situation. The story of North Carolina provides a contrast andinsight into voluntary changes. North Carolina has escaped the wrath of the subprime foreclosures andresulting market downturn because of tougher lending laws it enacted in 1999. Its so-called predatorylending law, passed in a state with some of the country’s largest financial institutions headquarteredthere, is one that has become the model for other states as well as for proposed reforms wending theirway through Congress. The legislation, which helped consumers, ethical lenders, and the North Caro-lina economy, is perhaps a case study in how staying ahead of evolving issues and placing restraints onnefarious activities can benefit business.

North Carolina’s predatory lending law includes the following protections:

• Limitations on the amount of interest that can be charged on residential mortgage loans in theamount of $300,000 or less as well as any additional fees lenders add on to the loans

• Limits on fees that may be charged in connection with a modification, renewal, extension, oramendment of any of the terms of a home loan, other than a high-cost home loan. The permittedfees are essentially the same as those allowed for the making of a new loan, with the exceptionof a loan application, origination, or commitment fee.

• Limits on fees to third parties involved with the processing of the loan

• Eliminates penalties for consumers who pay off their debts early

• Requires lenders to verify income of debtors

• Puts limits on fees brokers can collect for arranging mortgages

Martin Eakes, one of the business people (and a trained lawyer), who worked to get North Carolina’slaw in place, said, “Subprime mortgages can be productive and fruitful. We just have to put boundaries inplace.” Part of the convincing evidence for the 1999 reforms in North Carolina was the studies by then-attorney general Mike Easely (now governor) that showed what foreclosures did in poorer neighborhoods.Interestingly, the sponsor of the bill was state senator Roy Cooper, who is now the attorney general.49

Do you think the federal government will make changes in consumer credit laws? What was differ-ent about the North Carolina approach, and why? What benefits did North Carolina enjoy because ofits different approach? In addition, Goldman Sachs, another Wall Street investment firm, liquidated itssubprime investments several months before the problems in the mortgage and lending markets. Gold-man’s losses were minimal. Why did Goldman make the decision to divest? Are social responsibilityand profits sometimes hand-in-hand?

Source:White, Ben, Saski Scholtes, and Peter Thai Larsen, “Subprime Mortgage Meltdown Intensifies,” Finan-

cial Times, March 6, 2007, p. 10.

49


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CASE 8.3The Obligation to Screen? The Obligation toReject: Soldier of Fortune Classifieds46

Soldier of Fortune (SOF) is a national magazine focused on guns and military clothingand aimed at “professional adventurers.” In its large classified advertising section, indivi-duals and companies offer guns, gun-related products, gun and equipment repairs,employment opportunities, and personal services.

Some of the classified ads printed between 1975, the magazine’s debut, and 1984offered services under such titles as “Mercenary for Hire,” “Bounty Hunter,” “High-RiskContracts,” “Dirty Work,” “Mechanic,” and “Do Anything, Anywhere at the RightPrice.” During this period, SOF ran 2,000 classified ads, about three dozen of which hadtitles like these.

Various media, including the Associated Press, United Press International, RockyMountain News, Denver Post, Time, and Newsweek, reported links between SOF classi-fied ads and crimes or criminal plots. These connections were made directly to fivespecific SOF ads and alleged with four others. Law enforcement officials contacted SOFstaffers in investigating two crimes linked to personal service ads in the magazine.

Nature of SOF Ads

Dr. Park Dietz, a forensic psychiatrist, concluded from his study of the ads that the aver-age SOF subscriber—a male who owns camouflage clothing and more than one gun—would understand some phrases in SOF’s classified ads as solicitations for illegal activitygiven the ads’ context. At that time, SOF contained display ads for semiautomatic riflesand books with titles such as How to Kill, along with articles on “Harassing the Bear,New Afghan Tactics Stall Soviet Victory,” “Pipestone Canyon, Summertime in ‘Nam andthe Dyin’ Was Easy,” and “Night Raiders on Russia’s Border.”

Dietz suggested that the SOF personal service ads carry the connotation of criminalactivity because of the nature of the magazine. He noted that the same ads would notcarry that connotation if they appeared in Esquire or Vanity Fair.

The Hearn Ad

In September, October, and November of 1984, SOF ran the following ad:

EX-MARINES-67–69 ‘Nam Vets, Ex-DI, weapons specialist—jungle warfare, pilot, M.E., high riskassignments, U.S. or overseas. [Phone number]

“Ex-DI” means ex-drill instructor; “M.E.” means multiengine planes; and “high riskassignments” means work as a bodyguard or security specialist.

The ad was placed by John Wayne Hearn, who said he wanted to recruit Vietnam vet-erans for work as bodyguards and security men for executives. Hearn’s partner said theyalso hoped to train troops for South American countries. Hearn said he did not place thead with an intent to solicit criminal employment but that 90 percent of the responsesto the ad sought his participation in illegal activities, such as beatings, kidnappings,jailbreaks, bombings, and murders. His only lawful inquiry was from a Lebanese oilconglomerate seeking bodyguards; Hearn received a commission to place seven menwith it.

46 Adapted from M. Jennings, Legal Environment of Business, 2d ed., Boston, 1991, pp. 229–231.


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Robert Black contacted Hearn through the SOF ad. Between 1982 and 1984, Blackhad asked at least four friends or coworkers in Bryan, Texas, to kill his wife, SandraBlack, or help him kill her. Initially, Black discussed bodyguard work with Hearn, andthen their conversations focused on Black’s gun collection. In October 1984, Hearn trav-eled to Texas from his Atlanta home to see Black’s collection. During the visit, Black toldHearn his plans for murdering his wife. After Hearn returned to Atlanta, Black repeated-ly called him. In a conversation with Debbie Bannister, Hearn’s girlfriend, Black offeredHearn $10,000 to kill Black’s wife. Bannister then communicated the offer to Hearn.

Hearn had no previous criminal record, but on January 6, 1985, he killed Bannister’ssister. On February 2, he murdered Bannister’s husband, and nineteen days later, hekilled Sandra Black. He was convicted of the murders and sentenced to concurrent lifeterms.

The Victims’ Suit against SOF

Sandra Black’s mother, Marjorie Eimann, and her son, Gary Wayne Black, sued SOF fornegligence in publishing Hearn’s ad. The trial court awarded Eimann and Black $9.4million in damages.

An appellate court reversed the decision, saying:

Given the pervasiveness of advertising in our society and the important role it plays, we declineto impose on publishers the obligation to reject all ambiguous advertisements for products orservices that might pose a threat of harm. The burden on a publisher to avoid liability from suitsof this type is too great.47

Other Cases of Ad Liability

SOF was sued again over a classified ad after Douglas Norwood was ambushed, as-saulted, shot, and finally killed by a car bomb late in 1985. Each of his assailants hadbeen hired through the following SOF ads:

GUN FOR HIRE: 37-year-old professional mercenary desires jobs. Vietnam Veteran. Discreet andvery private. Bodyguard, courier, and other special skills. All jobs considered. [Phone number]GUN FOR HIRE: Nam sniper instructor. SWAT. Pistol, rifle, security specialist, bodyguard, courierplus. All jobs considered. Privacy guaranteed. Mike [Phone number].48

The case was settled out of court in 1987.In another case, Richard Braun was shot and killed outside his Atlanta home by an

experienced mercenary, Richard Savage, who had been hired by Braun’s business associ-ate, Bruce Gastwirth, through an ad in Soldier of Fortune. Savage’s ad began with thewords “Gun for Hire.” Braun’s sons sued the magazine and were awarded $4.3 million.The amount was later reduced in a settlement of the case.49

The Association of Newspaper Classified Advertising Managers, Inc. (ANCAM) hasthe following policy:

Advertisements containing statements that injure the health of readers, directly or indirectly, arenot acceptable.

47 Eimann V. Soldier of Fortune Magazine, Inc., 880 F.2d 830 (5th Cir. 1989), cert. denied, 493 u.s. 1024 (1990).48 Norwood V. Soldler of Fortune Magazine. 651 F.supp 1397 (W.d. anc. 1987).49

“Military Magazine Gets Jury Judgment Reduced,” The Wall Street Journal, March 1, 1993, p. B3.


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Another ANCAM section provides:

Any advertisement fostering the evasion or violation of any law or making a direct or indirectoffer of any article or service that violates a city, state or federal statute is unacceptable.50


1. Assume that you are SOF’s new director of dis-play and classified advertising. You know SOFwas relieved of any liability for Sandra Black’sdeath, so it is not obligated to check or rejectads. Your conscience, however, remains trou-bled as you review ads with such language as“high-risk assignment” and “bounty hunter.”As you think about the Black case, you ratio-nalize that Hearn was on a murder spree andBlack was simply a victim of his sudden vio-lence. On the other hand, Hearn would neverhave known Black if his classified ad had notbrought a call from Robert Black. Further, onlyfive to ten ads of over a total of 2,000 classi-fieds have resulted in crimes or criminal plots.You discuss this dilemma over lunch with yoursenior staff member, who responds: “Yes, butwe could have prevented those crimes by notrunning the ads.”

Screening the ads will take time, privatedetectives, and an assumption of liability thelaw does not require you to make. Will youchange SOF’s ad policy? Will you conduct adbackground checks?

2. Does this dilemma present conflicting moralstandards?

3. To whom do you owe your loyalty in makingyour decision?

4. Should SOF feel morally responsible for SandraBlack’s death?

5. Is the appellate court’s decision not to imposeliability on SOF an application ofutilitarianism?

6. Should the decision on advertising policy bedifferent following Sandra Black’s murder?

7. William L. Prosser, a legal scholar, has stated,“Nearly all human acts … carry some recog-nizable possibility of harm to another.” Whydo we allow recovery for some of those harm-ful acts and not others?

8. Soldier of Fortune stopped accepting personalservice ads in 1986. Is that an appropriate andethical resolution?

50 Don Tomlinson, “Choosing Social Responsibility Over Law: The Soldier of Fortune Classified Advertising Cases,” Business & ProfessionalEthics Journal 9, 1990, pp. 79–96.


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CASE 8.5Ragu Thick and ZestyRagu Foods, Inc., has been the leading seller of prepared spaghetti sauce in the UnitedStates since 1972. By 1973, Ragu held more than 60 percent of the market. Late in thatyear, Hunt-Wesson Foods, Inc., decided to enter the market with “Prima Salsa” spaghettisauce. After extensive marketing and taste studies, Hunt-Wesson introduced its sauce in1976 using the slogan “Extra Thick and Zesty.”

Just before Hunt launched “Prima Salsa,” Ragu introduced a new sauce called “RaguExtra Thick and Zesty.” Ragu’s advertising campaign used a photo similar to Hunt’s of aladle of sauce being poured over noodles. Ragu’s sauce was thickened with starch, where-as Hunt’s used a longer cooking process. The label on the Ragu sauce did not make thisdistinction clear.

Hunt-Wesson executives claimed the introduction of the Ragu sauce appropriated alltheir work and research and created product confusion in consumers’ minds.52

Ragu maintained that its product was simply a response to competition and goodbusiness strategy. Hunt-Wesson claimed there can be no competition because of Ragu’sdomination of the market, which was 65 percent in 1975, and felt Ragu’s methods wereunfair.

In 1990, Ragu introduced a sauce called “Ragu Fresh Italian.” The Food and DrugAdministration (FDA) cited Ragu for six violations of federal labeling law that centeredon the word fresh. FDA regulations prohibit the use of “fresh” if chemical or heat pro-cessing is used. Ragu acknowledged using heat processing but maintained “fresh” is partof a trademark, not a description.53

In 1993, Campbell Soup introduced its Prego sauce with comparison ads that de-picted Ragu as runny. Ragu sued Campbell for these “misleading ads” since Campbelldid not use Ragu’s Thick & Chunky sauce to do the ad comparisons.54

At the end of 1993, Ragu sauces had 36.2 percent of this $1.1 billion market (downfrom 50 percent in 1992), while Prego had 26.3 percent (up from 20 percent).


1. Was Ragu just an aggressive competitor, ordid it appropriate ideas or mislead?

2. Are any moral standards violated by Ragu’sconduct in these campaigns?

3. Would you feel comfortable with the “PrimaSalsa” name if you were a marketing

executive with Ragu? Or with the use of theterm “fresh”?

4. Is product confusion a fair method ofcompetition?

5. Aren’t companies free to meet the market withtheir product lines?

52“Critics Take apart Label of Ragu a Word at a Time,” Arizona Republic, May 2, 1990, p. A7.

53 Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919 (9th Cir. 1980).54 Jack Rejtman, “Spaghetti Sauce Spat Between Prego, Ragu Is Set to Thicken,” The Wall Street Journal, August 4, 1993, p. B5.


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CASE 8.7V-A-N-N-A: It Belongs to MeSamsung Electronics ran an advertising campaign that had a letter-turning blonde robotdressed in a red evening dress, complete with diamond bracelet and necklace. The adwas a takeoff on Vanna White’s role of turning letters for contestants on the televisiongame show Wheel of Fortune. White filed suit alleging that Samsung’s use of the “RoboVanna” was an appropriation of her image and a taking of her creative output. Samsungmaintained there was no appropriation because the ads were a takeoff on Wheel ofFortune. The court found for Ms. White.59


1. Has something been taken without compensa-tion in this case?

2. Did Samsung take advantage of Wheel ofFortune and Vanna White?

3. One advertising law expert has stated, “I wishthese people would take a joke.” Is thetakeoff satire or appropriation?60

4. Should Samsung have sought permission torun its ads?

59 White V. Samsung Elect. Am., Inc., 971 F.2d 1395 (9th Cir. 1992).60

“Do You Vanna Dance With Lawyer?” Business Week, October 18, 1993, p. 8.


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CASE 9.1Intel and Pentium: What to DoWhen the Chips Are DownIntel, which makes components used in 80 percent of all personal computers, introducedthe powerful Pentium chip in 1993. Intel had spent $1 billion developing the chip,and the cost of producing it was estimated to be between $50 and $150 each. When thePentium chip was finally rolled out, Intel shipped 4 million of the chips to computermanufacturers, including IBM.

In July 1994, Intel discovered a flaw in the “floating-point unit” of the chip, which isthe section that completes complex calculations quickly.1

The flaw caused errors in division calculations involving numbers with more thaneight digits to the right of the decimal, such as in this type of equation:2

4,195,8353,145,727

� 3,145,727 ¼ 4,195,835

Pentium-equipped computers computed the answer, in error, as 4,195,579. Beforeintroducing the Pentium chip, Intel had run 1 trillion tests on it. Those tests showed thatthe Pentium chip would produce an error once every 27,000 years, making the chance ofan average user getting an error one in 9 billion.

In November, Thomas Nicely, a mathematician at Lynchburg College in Virginia, dis-covered the Pentium calculations flaw described above. On Thanksgiving Day 1994, Intelpublicly acknowledged the flaw in the Pentium chip, and the next day its stock fell from651/8 to 637/8. Intel stated that the problem had been corrected, but flawed chips werestill being shipped because a three-month production schedule was just ending. Intel ini-tially offered to replace the chips but only for users who ran complicated calculations aspart of their jobs. The replacement offer carried numerous conditions.3

On December 12, 1994, IBM announced that it would stop all shipments of itspersonal computers because its own tests indicated that the Pentium flaw was far morefrequent than Intel had indicated.4 IBM’s tests concluded that computer users workingon spreadsheets for as little as fifteen minutes per day could produce a mistake everytwenty-four days. Intel’s then-CEO Andrew Grove called IBM’s reaction “unwarranted.”No other computer manufacturer adopted IBM’s position. IBM’s chief of its personalcomputing division, G. Richard Thoman, emphasized that IBM had little choice: “It isabsolutely critical for this industry to grow, that people trust that our products workright.”5 Following the IBM announcement, Intel’s stock price dropped 6.5 percent, andtrading had to be halted temporarily.

On December 20, 1994, CEO Grove announced that Intel would replace all Pentiumchips:

We were dealing with a consumer community that was upset with us. That they were upset withus—it has finally dawned on us—is because we were telling them what’s good for them…. Ithink we insulted them.6

1 Evan Ramstad, “Pentium: A Cautionary Tale,” (Phoenix) Arizona Republic, December 21, 1994, p. C1.2 Janice Castro, “When the Chips Are Down,” Time, December 26, 1994, 126.3 James Overstreet, “Pentium Jokes Fly, but Sales Stay Strong,” USA Today, December 7, 1994, p. 1B.4 Ira Sager and Robert D. Hof, “Bare Knuckles at Big Blue,” Business Week, December 26, 1994, 60–62.5 Bart Ziegler and Don Clark, “Computer Giants’ War over Flaw in Pentium Jolts the PC Industry,” Wall Street Journal, December 13,1994, pp. A1–A11.6 Jim Carlton and Stephen Kreider Yoder, “Humble Pie: Intel to Replace Its Pentium Chips,” Wall Street Journal, December 21, 1994,pp. B1 B9.


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Replacing the chips could have cost up to $360 million. Intel offered to send ownersa new chip that they could install or to have service firms replace chips for customerswho were uncomfortable doing it themselves.

Robert Sombric, the data-processing manager for the city of Portsmouth, New Hamp-shire, found Intel’s decision to continue selling flawed chips for months inexcusable: “Itreat the city’s money just as if it were my own. And I’m telling you: I wouldn’t buy oneof these things right now until we really know the truth about it.”7,8

Following the replacement announcement, Intel’s stock rose $3.44 to $61.25. Onemarket strategist praised the replacement program: “It’s about time. It’s very clear theywere fighting a losing battle, both in public relations as well as user confidence.”9–111011

Grove responded that Intel’s delay in offering replacements was based on concernsabout precedent. “If we live by an uncompromising standard that demands perfection, itwill be bad for everybody,”12 he said. He also acknowledged that Intel had agreed to sellthe flawed Pentium chips to a jewelry manufacturer.13

By December 16, 1994, ten lawsuits in three states involving eighteen law firms hadbeen filed against Intel for the faulty chips. Chip replacement demands by customers,however, were minimal.

Intel’s internal employee newsletter had an April 1, 1995 edition that spoofed theinfamous chip.14 A spoof form provided in the newsletter required customers with Pen-tium chips to submit a 5,000-word essay on “Why My Pentium Should Be Replaced.”

In 1997, Intel launched two new products: Pentium Pro and Pentium II. A new poten-tial bug, again affecting only intensive engineering and scientific mathematical operations,was uncovered. Intel, however, published the list of bugs with technical information andremedies for both of the new processors. One analyst commented on the new approach,“They have learned a lot since then. You can’t approach the consumer market with anengineering mindset.”15


1. Should Intel have disclosed the flaw in thePentium chip when it first discovered it in July1994?

2. Should Intel have issued an immediate recall?Why do you think the company didn’t do that?Discuss what issues their executives missed byapplying the models you learned in Unit 1.

3. Was it ethical to offer limited replacement ofthe chip?

4. A joke about Intel’s Pentium chip (sourceunknown) circulated on the Internet:

Top Ten Reasons to Buy aPentium-Equipped Computer10. Your current computer is too accurate.9. You want to get into the Guinness Book

of World Records as “owner of mostexpensive paperweight.”

8. Math errors add zest to life.7. You need an alibi for the IRS.6. You want to see what all the fuss is

about.

7 Jim Carlton and Scott McCartney, “Corporations Await More Information: Will Consumers Balk?” Wall Street Journal, December 14,1994, pp. B1–B5.8 Stephen Kreider Yoder, “The Pentium Proposition: To Buy or Not to Buy,” Wall Street Journal, December 14, 1994, p. B1.9 Carlton and Kreider Yoder, “Humble Pie,” pp. B1–B9.10

“Intel Eats Crow, Replaces Pentiums,”Mesa (Arizona) Tribune, December 21, 1994, p. F1.11 Catalina Ortiz, “Intel to Replace Flawed Pentium Chips,” (Phoenix) Arizona Republic, December 21, 1994, pp. A1–A8.12 Ziegler and Clark, “Computer Giants’ War over Flaw in Pentium Jolts the PC Industry,” pp. A1–A11.13 Otis Port, “A Chip on Your Shoulder—or Your Cuffs,” Business Week, January 23, 1995, 8.14 Richard B. Schmitt, “Flurry of Lawsuits Filed against Intel over Pentium Flaw,” Wall Street Journal, December 16, 1994, p. B3.15 James Kim, “Intel Proactive with Potential Buy,” USA Today, May 6, 1997, p. 1B.


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5. You’ve always wondered what it wouldbe like to be a plaintiff.

4. The “Intel Inside” logo matches yourdecor perfectly.

3. You no longer have to worry about CPUoverheating.

2. You got a great deal from the Jet Propul-sion Laboratory.

And, the number one reason to buya Pentium-equipped computer: It’ll prob-ably work.16

Based on this circulating joke, discussthe long-term impact of this chip and In-tel’s decisions on how to handle it onIntel.

5. Assume that you are an Intel manager invitedto the 1994 post-Thanksgiving meeting onhow to respond to the public revelation of theflawed chips. You believe the failure to offerreplacements will damage the company overthe long term. Further, you feel strongly thatproviding a replacement is a balanced andethical thing to do. However, CEO Grove dis-agrees. How would you persuade him to offerreplacements to all purchasers?

6. If you could not persuade Grove to replace thechips, would you stay at the company?

Compare & ContrastConsider the following analysis (from “Intel Eats Crow, Replaces Pentium,” Mesa (Arizona) Tribune,December 21, 1994, p. F1):

Regarding your article “Bare Knuckles at Big Blue” (News: Analysis & Commentary, Dec. 26), futuregenerations of business school students will study Intel Corp.’s response to the problems with the Pen-tium chip as a classic case study in how to transform a technical problem into a public-relationsnightmare. Intel’s five-point plan consisted of:

1) Initially deny that the problem exists;

2) When irrefutable evidence is presented that the problem exists, downplay its significance;

3) Agree to only replace items for people who can demonstrate extreme hardship;

4) Continue running your current ad campaign extolling the virtues of the product as if nothinghas happened;

5) Count the short-term profits.17

List other companies discussed in this book or in other readings that followed this same five-pointpattern.

16 From memo furnished to author by Intel employee at the time of the Intel chip problems.17

“Intel Eats Crow, Replaces Pentiums,” p. F1.


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C 9.6McDonald’s and the Disappearing Dodge ViperGame PiecesJerome P. Jacobson was the marketing mastermind who managed McDonald’s customergames such as Monopoly and Who Wants to Be a Millionaire. Though not an employeeof McDonald’s, Mr. Jacobson was a principal at Simon Marketing, which made and han-dled the distribution of the game materials and pieces.

Being in a position of security and trust, Mr. Jacobson was able to skim off winninggame pieces before they were distributed to McDonald’s and then to the customers.Beginning in 1995, Mr. Jacobson, or “Uncle Jerry,” as he was known, operated a ring ofat least eight people who conspired to take the trips, cars, and large prizes McDonald’sgames offered. They are alleged to have netted $13 million from obtaining the winninggame pieces.

The FBI uncovered the prize network when it began working on an anonymous tipfrom someone who indicated that “Uncle Jerry” might be fixing the McDonald’s games.The FBI tracked closely those who were claiming the prizes and then set up a series ofwiretaps that eventually led to the disclosure of the ring. The agents were able to followmembers of the ring to their clandestine meetings, one of which was held in, ironically,Fair Play, South Carolina91. In some of the wiretaps the agents listened as the partici-pants argued over how to split the proceeds. In other meetings they simply discussedways to push McDonald’s to pay their prizes more quickly92. With McDonald’s coopera-tion in providing the names of winners for all their contests, the FBI was able to uncoverthe network of Uncle Jerry. McDonald’s cooperated with the FBI in what would eventu-ally become a sting operation.

What the FBI uncovered with this information and cooperation was a complex orga-nizational structure headed by Uncle Jerry, who was based out of Lawrenceville, Georgia.Jacobson would embezzle the game pieces and then sell them to individuals around thecountry. These individuals would become recruiters who would ask friends and relativesto buy pieces and claim the prizes. Some of these individuals actually mortgaged theirhomes in order to be able to buy the winning pieces from the recruiters. When theyclaimed their prizes, and they were mostly the big prizes such as a Dodge Viper and themillionaire tickets, they would pay a portion to the recruiters. The recruiters would thengive a portion of their proceeds to Uncle Jerry. No one is certain where the informant fitsin the organization, but he was able to supply the FBI with several names of those whowere eventually arrested.

In order to right the wrong to its customers, McDonald’s ran a $10 million prize give-away weekend over the Labor Day weekend from August 30 through September 2,2001.93 McDonald’s ended its contract with Simon Marketing at the same time. It was a25-year relationship and McDonald’s was responsible for 77 percent of Simon’srevenues.94

91 David Stout, “8 Charged with Rigging McDonald’s Promotional Games,” The New York Times, August 22, 2001, p. A14.92 Gary Fields and Shirley Leung, “Eight People Arrested, Charged with Bilking McDonald’s Contests,” The Wall Street Journal, August22, 2001, pp. A3, A8.93 Bruce Horovitz, “Games Scandal Tarnishes Golden Arches,” USA Today, August 22, 2001, p. 1B.94 Gary Strauss, “Informant Key to Unlocking Scam Behind the Golden Arches,” USA Today, August 24, 2001, pp. 1B, 2B.


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1. Although an accounting firm was hired tosupervise Jacobson and his distribution, appar-ently Jacobson operated without any checks.What does this factor and the case teachabout internal controls?

2. What is the significance of the informant’swork and tip?

3. When the FBI approached McDonald’s, itknew that its games and image would be

tarnished. Why do you think McDonald’scooperated?

4. Why did McDonald’s run the $10 million LaborDay weekend game?

5. Mr. Jacobson met some of his recruiters whenhe worked as a police officer. Do you thinktheir skills in law enforcement helped themevade authorities and detection for as long asthey did?


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CASE 9.9ATVs: Danger on WheelsHonda Motor Company, Ltd.; Yamaha Motor Company, Ltd.; Suzuki Motors Company,Ltd.; Kawasaki Heavy Industries, Ltd.; and Polaris Industries all made various types ofmotorcycles and all-terrain vehicles (ATVs) during the late 1970s and 1980s. Honda wasthe leading seller of ATVs, offering a full range of three-wheel models. It even made avery small three-wheel ATV for children ages four through ten that it advertised at theheight of the market in the mid-1980s. The fat-wheeled vehicles that look like large tri-cycles were advertised as able to conquer all land surfaces with great ease. Suzuki’s adssaid its ATV would “embarrass the wind.”120

The ATV was introduced in 1977 by Honda; several other manufacturers entered themarket in the following year. Yamaha and Kawasaki ATVs were larger in size and motorcapacity and carried higher price tags than Honda’s.

In 1978, based on a complaint from the National Association of Emergency RoomPhysicians (NAERP) and the American Neurological Society (ANS), the ConsumerProduct Safety Commission began investigating ATVs and their use and misuse. Thecommission’s reports, which incorporated information from NAERP and ANS, foundthat:

1. ATV accidents were increasing dramatically:121

Of all the fatalities over the five-year period, 165 involved children ages eleven and youn-ger, while 47 percent of the total involved children ages sixteen and younger.122

ATV-related emergencyroom admissions

Deaths from ATVaccidents

1982 8,600 261983 26,900 851984 63,900 1531985 85,900 2461986 86,400 268

2. Of all ATV-related injuries, 90 percent involved people under the age of thirty and 70 per-cent involved those under the age of eighteen.

3. In some areas, ATV-related injuries accounted for 45 percent of all emergency care onweekends.

4. Ninety percent of all injuries happened to experienced ATV riders (those who had loggedmore than twenty-five hours of riding time).

5. Leg injuries were common, with spiral fractures being the most frequent form.

6. Many injuries requiring emergency care were leg burns caused by riders holding their legstoo close to ATV engines.

120 Frederick M. Maynard, “Peril in the Path of All-Terrain Vehicles,” Business and Society Review, Winter 1987, pp. 48–52.121 Daniel B. Moskowitz, “Why ATVs Could Land in a Heap of Trouble,” Business Week, November 30, 1987, p. 38. The numbers do vary inpress releases and according to various groups.122 James Bolger, “The High Gravity Risk of ATV’s,” Safety & Health, November 1987, pp. 48–49.


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Dr. Ralph R. Fine, codirector of the National Spinal Cord Injury Statistical Center,testified before a House committee about his concerns: “We were seeing a disproportion-ate number of spinal cord injuries resulting from three wheeler or ATV crashes. Theseare dangerously deceptive, deceptively dangerous vehicles.”123

Honda was aware of the report and submitted a study to the Consumer Product Safe-ty Commission that showed the accidents with injuries happened when ATVs were mis-used.124 Referred to in the Honda report as “hotdogging,” misuse included driving toofast, climbing hills at ninety-degree angles, going through rapidly moving water, andusing ramps for jumping.125

Between 1982 and 1986, there were more than 50,000 ATV-related injuries. By1986, 2.1 million ATVs at an average price of $2,000 each were in use. Between 1982 and1988, 858 people were killed in ATV accidents, many of them young children. A Con-sumer Product Safety Commission report concluded, “Children under 12 years of ageare unable to operate any size ATV safely.”126 State attorneys general began efforts toregulate ATV use in 1986. Texas Assistant Attorney General Stephen Gardner stated,“These are killer machines. They should not be allowed.”127 The CPSC tried to have theindustry sales to sixteen-year-olds and younger banned, but was unsuccessful.128

After the report, Yamaha introduced a four-wheel ATV, including one model withtwo seats. Yamaha also undertook a dealer education program and issued an instructionmanual with the vehicles to encourage responsible operation.129

Roy Janson of the American All-Terrain Vehicle Association, a subsidiary of theAmerican Motorcyclist Association, stated at congressional hearings on ATVs:

Problems result primarily from how a vehicle is used rather than from its design. When ATVs areused as intended, they present no unreasonable risk to their operators. The major problemsrelated to three-wheel ATV injuries are the failure of users to wear proper safety equipmentwhile operating ATVs and using these vehicles in areas not recommended for ATV recreation.User education and information programs are clearly the most effective means for addressingthe problems relating to misuse.130

In 1980, major nationally franchised rental centers ceased renting ATVs because ofliability concerns.

In 1986, the Consumer Product Safety Commission published proposed ATV regula-tions that included these key provisions:

1. No ATVs below certain size limits would be manufactured. ATV riders would have toweigh at least 100 pounds and be at least sixteen years old.

2. All ATVs would have four wheels.

3. All manufacturers would undertake educational ad campaigns on the use and dangers ofATVs. No promotional advertising would be permitted in any media form.

While the proposed regulations were being debated, ATV accidents continued toclimb steadily. Of particular concern was the marked increase in severe injuries, such asspinal cord and head injuries, to children six to ten years of age. At the same time, some

123 “Public Safety: All-Terrain Vehicles,” National Safety and Health News, August 1985, pp. 79–80.124 Jeff Riggenbach, “Regulation Not Needed; Danger Is Exaggerated,” USA Today, November 6, 1986, p. 10A.125

“Safety Group Targets Use of ATVs by Young Riders,” Mesa Tribune, November 20, 1986, p. A4.126 Randolph Schmid, “Safety Panel Tackles All-Terrain Cycle Issue,” Phoenix Gazette, November 19, 1986, p. A14.127 Moskowitz, “Why ATVs Could Land in a Heap of Trouble,” p. 38.128

“ATV Makers Warned to Halt Sales to Children or Face Ban,” Mesa Tribune, October 2, 1986, p. A2.129 Alan R. Isley, “Industry Is Emphasizing Safety,” USA Today, November 6, 1986, p. 1B.130

“Public Safety,” p. 79.


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manufacturers continued to provide studies to the Consumer Product Safety Commis-sion indicating misuse, not design, was the primary cause of ATV accidents.

By 1987, the Association of Trial Lawyers of America had established a clearinghousefor the exchange of information on ATV claims, and over 400 lawsuits had been filed.Three fourths of the suits were being settled for a typical payment of $1 million.

Because of increased, widely publicized objections from consumer groups, as well asa call for action from the American Academy of Pediatrics, the commission recalledthree-wheel ATVs in May 1988 and halted their manufacture.131 Meanwhile, manufac-turers accelerated production of four-wheel vehicles. After judicial review of thecommission’s order and agreements were reached with the five manufacturers, the com-mission withdrew the recall but successfully implemented the ban on future sales.132

Some consumer groups, however, still felt a recall was necessary. James Florio, aCongressman from New Jersey, said, “How can anyone truly concerned with safety ineffect say ‘tough luck’ to people who currently own these unsafe vehicles?”133

However, the manufacturers did agree to take the following steps:

• Offer cash incentives to encourage owners of ATVs purchased after December 30, 1987, to enrollin training programs.

• Revise warning labels and owner’s manuals to outline the dangers of vehicle operation.

• Set up a consumer telephone hotline.

• Restrict sales of ATVs with engine displacements greater than ninety cubic centimeters displace-ment (CCD) to people sixteen years or older; children under twelve years would not be permittedto operate vehicles with engines greater than seventy CCD.

• Scrap a provision in the preliminary agreement that would have required ATV purchasers to signa form acknowledging the risks of operating the vehicle.134

Honda sent out the following “Safety Alert”135 to owners of its ATVs in January1988:

The Consumer Product Safety Commission has concluded that all-terrain vehicles (ATVs) maypresent a risk of death or severe injury in certain circumstances. While accidents may occur formany reasons:

• Over 900 people, including many children, have died in accidents associated with ATVs since 1982.

• Many people have become severely paralyzed or suffered severe internal injuries as a result ofaccidents associated with ATVs.

• Thousands of people have been treated in hospital emergency rooms every month for injuriesreceived while riding an ATV.

Because of this, the United States government has filed a lawsuit against all manufacturersand distributors of ATVs asking the court to declare that ATVs are hazardous and to order themanufacturers and distributors to take actions to protect ATV riders. The distributors, while con-testing the validity of the allegations made by the government, are presently engaged in discus-sions with the government to resolve these issues without litigation.

131 “We Need Regulation of Dangerous ATVs,” USA Today, November 14, 1986, p. 10A.132

“ATV Makers Agree to Warnings, Vehicle Ban,” Arizona Business Gazette, May 9, 1988, Law 3.133 “Outlawing a Three-Wheeler,” Time, January 11, 1988, p. 59.134 Matt DeLorenzo, “ATV Companies Agree to Warn, Train Owners,” Automotive News, March 21, 1988, p. 58.135 Reprinted with permission of Honda Motor Company, Ltd.


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You should be aware that an ATV is not a toy and may be dangerous to operate. An ATV han-dles different [sic] from other vehicles, including motorcycles and cars. According to the ConsumerProduct Safety Commission, an ATV can roll over on the rider or violently throw the rider withoutwarning, and even hitting a small rock, bump, or hole at low speed can upset the ATV.

To avoid death or severe personal injury:

Never drive an ATV without proper instruction. Take a training course. Beginning driversshould receive training from a certified instructor….

• Never lend your ATV to anyone who has not taken a training course or has not been driving anATV for at least a year.

• Always follow these age recommendations:

• A child under 12 years old should never drive an ATV with engine size 70 CCD or greater.

• A child under 16 years old should never drive an ATV with engine size greater than 90 CCD.

• Never allow a child under 16 years old to drive an ATV without adult supervision. Children need tobe observed carefully because not all children have the strength, size, skills, or judgment needed todrive an ATV safely.

• Never drive an ATV after consuming alcohol or drugs.

• Never carry a passenger on an ATV; carrying a passenger may upset the balance of the ATV andmay cause it to go out of control.

• Never drive an ATV on pavement. The vehicle is not designed to be used on paved surfaces andmay be difficult to control.

• Never drive an ATV on a public road, even a dirt or gravel one, because you may not be able toavoid colliding with other vehicles. Also, driving on a public road with an ATV may be against thelaw.

• Never attempt to do “wheelies,” jumps, or other stunts.

• Never drive an ATV without a good helmet and goggles. You should also wear boots, gloves,heavy trousers, and a long-sleeve shirt.

• Never drive an ATV at excessive speeds.

• Always be extremely careful when driving an ATV, especially when approaching hills, turns, andobstacles and when driving on unfamiliar or rough terrain.

• Always read the owner’s manual carefully and follow the operating procedures described.


1. Is the ATV too dangerous to be sold?

2. Are the warnings and the ban on future ATVsales sufficient?

3. If you were in marketing for one of the fivefirms, could you continue your sales efforts?

4. Should the three-wheel ATV have beenrecalled?

5. Is the cost of a recall just too high?


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CASE 10.15Taser and Stunning BehaviorTaser began operations in Arizona in 1993 for the purpose of developing andmanufacturing nonlethal self-defense devices. From 1993 through 1996, Taser focusedon the development and sale of the AIR TASER, a self-defense weapon marketed to con-sumers. In December 1999, Taser introduced the ADVANCED TASER device, a productdeveloped for sale to law enforcement agencies. The TASER X26 is sold to police andcorrections agencies for $799.

The Taser technology uses compressed nitrogen to shoot two small, electrified probesup to a maximum distance of twenty-five feet. The probes and compressed nitrogen arestored in a replaceable cartridge attached to the Taser base.

Taser’s focus from 1999 to 2001 was the development of a chain of distribution forthe introduction of the product to law enforcement agencies (primarily in North America)as well as a national training program for the use of the ADVANCED TASER.

Taser created a training board that consists of four active duty police officers and onerepresentative from the airline industry as well as Taser’s chief master instructor andking of the universe, Hans Marrero. Officers on active duty throughout the country serveas master and certified instructors for the company. They are paid $195 for each trainingsessions, and many of the officers, including those on the training board, have beenawarded stock options by the company. Officers in Arizona, California, Canada, Texas,and Washington received stock options after recommending that their municipalitiesand agencies adopt Taser products for use by officers. The officers who received the op-tions are now employed by Taser, Inc. The revelations about the officers and the optioncompensation came about because of suits filed by the Arizona Republic and SEC Insight,two publications seeking release of the company documents filed in lawsuits pendingbefore Maricopa County Superior Court in Arizona. The court ruled against Taser andunsealed the documents. When asked by the Arizona Republic about the options, CEORick Smith responded via a company press release,

The officers on our [training] board were involved in training operations at their respective depart-ments—not the purchasing departments. They followed all relevant conflict-of-interest regula-tions at their departments, and the grant of stock options did not violate Taser’s code of ethicsnor industry norms.

Taser established the TASER Foundation for the families of fallen law enforcementofficers in 2004. The TASER Foundation was funded with initial commitments for over$700,000 from TASER International, Inc., employees. The TASER Foundation’s missionis to give back to the community by supporting the law enforcement community thathelped with the development of distribution lines and training.


1. Evaluate Taser’s actions in hiring the officersand using options as payment.

2. Evaluate the conduct of the officers in accept-ing the positions and the compensation fromTaser.

3. What would you have done differently as anexecutive at Taser? As a police officer?

4. Are the connections among and between gov-ernment agencies and Taser a necessary andinevitable part of Taser's type of product?


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