Business Law Chapter 2 Homework Computers Modems Video Cameras Faxes Copiers

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CASE
Oliver Winery, Inc.
BACKGROUND
Paul Oliver, Sr., immigrated to the United States in 1930 from Greece. After
working for several wineries, he started Oliver Winery, Inc., which eventually
found a market niche in nonvarietal jug wines. Through mass-marketing
techniques, the company established a substantial presence in this segment of
the market. Ten years ago, Paul, Jr., joined the firm after receiving a degree in
enology (the study of wine making). He convinced his father of the desirability of
entering a different segment of the wine market: premium varietals. To do this,
the company needed a large infusion of capital to purchase appropriate
BOARD MEETING
The board of directors met, along with Janet Stabler, the director of marketing of
Oliver Winery, Inc. In attendance were:
Paul Oliver, Sr., Chairman of the board and founder of the company
Paul Oliver, Jr., CEO, has an advanced degree in enology
Cyrus Abbott, CFO, has an MBA
Arlene Dale, comptroller, has a CPA with a master’s degree in accounting
Raj Ray, COO, has a master’s degree in industrial engineering
LaTasha Lane, VP Legal, has a J.D. degree
Elisabeth Constable, union representative to the board, has a GED degree
Rev. John W. Calvin, outside director, has a Doctor of Divinity degree
Carlos Menendez, outside director, has an MFA degree
Oliver, Sr.: The next item on the agenda is a proposal to develop a new line of
wines. Janet Stabler will briey present the proposal.
Stabler: Thank you. The proposal is to enter the fortified wine market. It’s the
only type of wine in which unit sales are increasing. We’ll make the wines
cheaply and package them in pint bottles with screw-on caps. Our chief
competitors are Canandaigua with Richard’s Wild Irish Rose, Gallo with
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Stabler: For the convenience of consumers.
Menendez: Why would pensioners want a small bottle?
Calvin: Homeless people want it in pints so they can fit it in their hip pockets.
They obviously don’t have a wine cellar to lay away their favorite bottles of Mad
Dog.
Stabler: The pint size also keeps the price as low as possible.
Calvin: Translation: The homeless don’t have to panhandle as long before they
can make a purchase. Also, why would you increase the alcoholic content to 18
percent and make it so sweet if it weren’t for the wino market?
Stabler: Many people like sweet dessert wines and 18 percent is not that much
more than other types of wines that have 12 percent alcohol.
Menendez: Is it legal?
Lane: Sure. We sell to the retailers. It may be against the law to sell to
intoxicated persons, but that’s the retailers’ business. We cannot control what
they do.
Calvin: Isn’t this product intended for a perpetually intoxicated audience that
many people consider to be ill? Wouldn’t we be taking advantage of their illness
by selling highly sugared alcohol that suppresses their appetite? I’ve spoken to
Stabler: Why not? Canandaigua, Gallo, and Mogen David all do the same thing.
None of them put their corporate name on this low-end product.
Abbott: We’re getting away from the crux of the matter. Profit margins would
be at least 10 percent higher on this line than our others. Moreover, unit sales
might increase over time. Our other lines are stagnant or decreasing. The public
shareholders are grousing.
Dale: Not to mention that our stock options have become almost worthless. I’m
only a few years from retirement. We need to increase the profitability of the
company.
Ray: Operationally, this proposal is a great fit. We can use the grapes we reject
from the premium line. It will also insulate us from bad grape years because any
grape will do for this wine. We can fill a lot of our unused capacity.
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Dale: I think our concern is misplaced. These people are the dregs of society.
They contribute nothing.
Calvin: They’re human beings who need help. We’re profiting o; their
misfortune and misery.
Oliver, Sr.: We can take that up when we decide on what charities to support.
SOURCES
Carrie Dolan, “Gallo Conducts Test to Placate Critics of Its Cheap Wine,” The Wall
Street Journal, June 16, 1989, p. B3.
Alix M. Freedman, “Winos and Thunderbird Are a Subject Gallo Doesn’t Like to
Discuss,” The Wall Street Journal, February 25, 1988, p. 1.
Frank J. Prial, “Experiments by a Wine Maker Fails to Thwart Street Drunks,” The
New York Times, February 11, 1990, p. A29.
ISSUES
Should the company manufacture the new line of wine and, if so, under what
conditions?
OPTIONS
1) Do not manufacture
2) Do not manufacture and try to prevent others from manufacturing this
type of wine
3) Manufacture without company’s name on the wine
4) Manufacture with company’s name on the wine
ANALYSIS OF THE VARIOUS OPTIONS
How do these options affect the following stakeholders?
1) Oliver Winery
2) Habitual drinkers
3) Non-habitual drinkers
4) Retailers
5) Community
DECISION
Have the students justify their decision.
1) Does this decision differ from the decision of a company that is already
producing the wine as to whether it should continue to manufacture or
not?
2) Does this decision vary or differ between a privately held company and a
publicly traded company?
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ADDITIONAL DISCUSSION
1) What is the social responsibility of business?
2) What is the intent in this type of target marketing?
3) Is target marketing appropriate (a) in this case or (b) ever?
4) Should the Reverend resign?
5) If the company does not produce the wine, will the decision have any
e/ect?
CASE
JLM, Inc.
BACKGROUND
Sitting in her oHce, Ellen Fulbright, director of human resources for JLM, Inc.,
thought over the decisions confronting her. To help her decide, she mentally
reviewed how they had arisen.
After receiving her MBA and J.D. degrees from a highly regarded university, she
joined a prestigious New York law +rm where she specialized in employment law.
After seven years at the law +rm, she was hired by one of the +rm’s clients as
general counsel. When that company was acquired by JLM, she joined its legal
sta/ and within a few years had been promoted to her current position.
Fulbright’s rapid advancement resulted from her having made a positive
impression on Rasheed Raven, JLM’s CEO. Raven is a hard-driving,
bottom-line-oriented pragmatist in his early forties. Raven, a graduate of Howard
University, had begun his business career on Wall Street, which he astounded
with his aggressive but successful takeover strategies. After acquiring +fteen
unrelated manufacturing companies, he decided to try his hand at the
REFERENCE LETTER POLICY
About a year after Fulbright had become director of human resources (HR),
Raven called her into his oHce and showed her a newspaper article. It reported,
in somewhat sensational fashion, that several defamation suits had resulted in
multimillion dollar judgments against companies that had written negative
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reference. According to their data, they believed that these companies had
overreacted to the actual risk posed by defamation suits. Based on these articles
and her own inclination toward full disclosure, she proposed that the company
continue to permit letters of reference but that all letters with negative
comments must be reviewed by her.
Raven did not receive her proposal favorably and sought a second opinion from
her old law firm. His analysis of the firm’s advice was: “We get nothing but
brownie points for writing reference letters, but we face the possibility of
incurring the cost of a legal defense or, worse yet, a court judgment. This is a
TAKEOVER OF DIVERSIFIED MANUFACTURING, INC.
After a number of years of steady growth, diversified Manufacturing began
experiencing huge +nancial losses, and its immediate survival was in serious
doubt. After careful consideration, Raven decided that diversified was an ideal
takeover target in that its core businesses were extremely strong and presented
great long-term economic viability.
Upon acquiring diversified, JLM quickly decided that it had to rid diversified of
some of its poorly performing companies and that it had to reduce the size of
diversified’s home oHce sta/ by 25 percent. Raven relentlessly orchestrated the
reduction in force, but at Fulbright’s urging he provided the discharged
executives with above-average severance packages, including excellent
outplacement services.
THE PROBLEM
The reduction in force was disruptive and demoralizing in all the usual ways. But
for Fulbright there was a further complication: the no-reference-letter policy. She
was extremely troubled by its application to three discharged diversified
employees and to one discharged JLM employee.
The Salacious Sales Manager Soon after taking over diversified, Fulbright
became all too aware of the story of Ken Byrd, diversified’s then national sales
manager. Ken is an a/able man of +fty who had been an unusually effective
sales manager. Throughout his career, his sales +gures had always doubled
those of his peers. He achieved rapid advancement despite a fatal Kaw: he is an
inveterate and indiscreet womanizer. He could not control his hands, which
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Fulbright could not believe that such a manager had stayed employed at
diversified so long, let alone been continually promoted to positions of greater
responsibility and power. As Fulbright investigated the situation, she discovered
that numerous sexual harassment complaints had been +led with diversified
concerning Byrd’s behavior. To protect Byrd, diversified dealt with these
complaints by providing money and undeserved promotions to the complainants
to smooth over their anger. Thus, diversified successfully kept the complaints
in-house and away from the courts and the Equal Employment Opportunity
Commission.
After JLM’s takeover of diversified, Fulbright quickly discharged Byrd. Her
satisfaction in getting rid of him was short-lived, however. His golden tongue and
The Fruitless Juice Melissa Cuthbertson had been a vice president in
procurement for diversified’s Birch-Wood division with direct responsibility over
the ordering of supplies and raw materials. Birch-Wood manufactured a full line
of baby food products, including fruit juices that were labeled “100% fruit juice.”
To cut costs, Stanley Aker, the division’s president, had arranged for an
unscrupulous supplier to provide high-fructose corn syrup labeled as juice
concentrate. Because standard testing in the industry was unable to detect the
substitution, the company did not get caught. Emboldened, Aker gradually
increased the proportion of corn syrup until there were only trace amounts of
fruit juice left in the “juice.” A company employee discovered the practice and
after the takeover brought the matter to Fulbright’s attention through JLM’s
internal whistle-blowing channel, which Fulbright had established. She referred
That night Aker and Cuthbertson had the juice moved from Birch-Wood’s New
York warehouse and shipped to its Puerto Rico warehouse. Over the course of the
next few days, the “juice” was sold in Latin America as “apple juice.” Aker
reported to Raven that the juice had been properly disposed of and that
Birch-Wood had sustained only a small loss during that quarter. When Raven
discovered the truth, he immediately discharged Aker and Cuthbertson, telling
them “that if he had anything to do with it, neither of them would ever work
again.” Fulbright was to meet soon with Raven to discuss what should be done
about Aker and Cuthbertson.
The Compassionate CFO Jackson Cobb, JLM’s former chief financial oHcer, is
a brilliant analyst. Through hard work he had earned an excellent education that
honed his innate mathematical gifts. His natural curiosity led him to read widely,
and this enabled him to bring disparate facts and concepts to bear on his often
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cared little about ideas; he cared primarily about money. Cobb cared little about
money; he cared primarily about ideas. Raven took Cobb’s insights and
translated them into action with spectacular success. Their relationship brought
new meaning to the concept of synergy. When Raven formed JLM, he brought
Cobb on as chief financial oHcer and installed him in an adjoining oHce.
Their relationship continued to Kourish, as did JLM’s bottom line, until Cobb’s
wife became terminally ill. During the eighteen months she languished, Cobb
spent as much time as he could taking care of her. After forty years of marriage,
he was unwilling to leave her welfare to the “kindness of strangers.” At his own
expense, he installed a state-of-the-art communication center in his home. By
ISSUES
The general issue is what policy should JLM adopt regarding letters of
references.
The specific issue is what should JLM do about the particular individuals
involved.
OPTIONS
1) Adopt a no reference policy
2) Adopt a policy that permits references to be written by certain specified
employees
3) Allow references on a case by case basis
4) Permit references to be given
5) Provide (or not provide) references for each of the individuals involved
6) Allow employees to provide references as individuals but not as agents of
the company
ANALYSIS OF THE VARIOUS OPTIONS
1) What is the rationale behind a no reference policy?
2) What is the rationale in favor of providing references?
3) What are the ethics of each of these policies? Is not providing references
deception by silence?
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consideration of the employer’s providing a letter of reference?
7) Who is harmed by no reference policies?
8) Should JLM provide references for the particular individuals involved in this
case? Explain.
9) For whom are you most inclined to provide a reference? The least
inclined? Explain.
10) What is the cost to JLM of each option? What is the cost to society in
general?
DECISION
Have students justify their recommendations.
ADDITIONAL DISCUSSION
Employment at will—Is it fair? Explain.
Right to lie—Is it ever appropriate to lie in business? If so, when?
Society’s responsibility—Should there be laws regulating this area?
Explain.
CASE
Sword Technology, Inc.
BACKGROUND
Sitting in his oHce, Stephen Hag, CEO of Sword Technology, Inc., contemplated
the problems that had been perplexing him for some time. They had begun
when he took his company international, and they kept coming. But today he
was no more successful in devising a solution than he had been previously.
Slowly, his thoughts drifted to those early days years ago when he and his sister
Marian started the company.
The company’s first product was an investment newsletter stressing technical
analysis in securities investing. A few years later, he developed what became a
“killer app”: a computer program that de+nes an entirely new market and
through customer loyalty substantially dominates that market. His software
program enabled investors to track their investments in stocks, bonds, and
futures. By combining powerful analytical tools with an accessible graphical
interface, it appealed to both professional and amateur investors. Moreover, it
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labor costs it was unable to market its modem successfully. To reduce
manufacturing costs, especially labor costs, the company decided to move its
manufacturing facilities overseas. And that’s when the trouble began.
Stephen’s thoughts returned to the present. He reopened the folder labeled
Con+dential: International Issues” and began perusing its contents.
TRANSFER PRICING
The first item he saw was an opinion letter from the company’s tax attorney. It
dealt with Excalibur Technology, the first overseas company Sword established.
Excalibur, a wholly owned subsidiary of Sword, is incorporated in Tolemac, an
emerging country with a rapidly growing economy. To encourage foreign
investment, Tolemac taxes corporate pro+ts at a signiticantly lower rate than the
United States and other industrialized nations. Excalibur manufactures modems
for Sword pursuant to a licensing agreement under which Excalibur pays Sword a
royalty equal to a specified percentage of the modems’ gross sales. Excalibur
sells all of its output at a fair market price to Sword, which then markets the
modems in the United States. Stephen had been closely involved in structuring
this arrangement and had insisted on keeping the royalty rate low to minimize
taxable income for Sword. Stephen reread the opinion letter:
Section 482 of the Internal Revenue Code authorizes the Internal Revenue
Service to allocate gross income, deductions, credits, and other common
allowances among two or more organizations, trades, or businesses under
common ownership or control whenever it determines that this action is
necessary “in order to prevent evasion of taxes or clearly to reKect the
income of any such organizations, trades, or businesses.” IRS Regulation
1.482–2(e) governing the sale or trade of intangibles between related
persons mandates an appropriate allocation to reKect the price that an
unrelated party under the same circumstances would have paid, which
normally includes pro+t to the seller. The Regulations provide four methods
Stephen had spoken to the tax attorney at length and learned that the
probability of an audit was about 10 percent and that many multinational
companies play similar “games” with their transfer pricing. The attorney also
told him that he believed that if the company were audited, there was at least a
90 percent probability that the IRS would agree with his conclusion and at least a
70 percent probability that it would impose a penalty. Because the dollar amount
of the contingent tax liability was not an insigniticant amount, Stephen had been
concerned about it for the six weeks since he had received the letter.
CUSTOMS AND CUSTOMS
Soon after Excalibur had manufactured the first shipment of modems, a new
problem arose: getting them out of Tolemac. It took far too long to clear
customs, thus undermining their carefully planned just-in-time manufacturing
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THE THORN IN HIS SIDE
Tolemac was not Stephen’s only problem. Six months after commencing
operations in Tolemac, Sword began serious negotiations to enter the Liarg
market. Liarg is an undeveloped country with a large population and a larger
national debt. Previously, Sword had encountered great diHculties in exporting
products to Liarg. Stephen’s sister, Marian, COO of Sword, took on the challenge
of establishing a Liarg presence.
They decided that setting up a manufacturing facility in Liarg would achieve two
objectives: greater access to the Liarg marketplace and lower-cost modems. At
first, the Liarg government insisted that Sword enter into a joint venture, with
the government having a 51 percent interest. Sword was unwilling to invest in
such an arrangement, countering with a proposal for a wholly owned subsidiary.
Marian conducted extensive negotiations with the government, assisted by a
Liarg consulting +rm that specialized in lobbying governmental oHcials. As part
of these negotiations, Sword made contributions to the reelection campaigns of
key Liarg legislators who were opposed to wholly owned subsidiaries of foreign
Marian then hired an international engineering firm to help design the
manufacturing plant. Two weeks later, they submitted plans for the plant and its
operations that fully complied with Liarg regulations regarding worker health and
safety as well as environmental protection. But, as Marian had explained to
Stephen, the plant’s design fell far short of complying with U.S. requirements.
Marian noted that, under the proposed design, the workers would face exposure
to moderately high levels of toxic chemicals and hazardous materials. The
design also would degrade the water supply of nearby towns. However, the
design would generate very signiticant savings in capital and operational costs
Children and Chips
A twelve-year-old Liarg child recently spoke at an international conference
in New York denouncing the exploitation of children in the Liarg computer
chip industry. The child informed the outraged audience that he had
worked in such a plant from age four to age ten. He asserted that he was
just one of many children who were so employed. He described the
deplorable working conditions: poor ventilation, long hours, inadequate
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food, and substandard housing. The pay was low. But, because their
families could not afford to keep them at home, the children were hired
out to the factory owners, who especially wanted young children because
their small fingers made them adept at many assembly processes.
Stephen had read the article countless times, thinking about his own children. He
knew that if they set up a plant in Liarg, they would have to buy chip
components from Liarg suppliers. He also knew that there would be no way for
Sword to ensure that the chips had not been made with child labor.
TO OUTSOURCE OR NOT TO OUTSOURCE
Once again Stephen glanced over the cost data. Sword’s labor costs for
supporting its database services and hardware were eviscerating the company’s
pro+ts. After racking his brain endlessly, he had concluded that wherever it
made financial and strategic sense Sword should utilize business process
outsourcing (BPO); that is, long-term contracting out of non-core business
processes to an outside provider in order to lower costs and thereby increase
shareholder value.
Stephen had examined a number of potential countries on the basis of many
factors including time zone, communications infrastructure, technical training,
English language skills of the workforce, and—most critically—costs. Liarg had
emerged as the optimal choice. He anticipated reducing labor and associated
overhead costs by 45 to 50 percent.
He planned to start by o/-shoring half of the call center operations, soon to be
followed by a third of the low-end software development such as maintenance
and coding. Assuming all went as he envisioned, he expected to move o/shore
back-oHce operations and higher-level software development. As his
imagination soared, he saw the potential to amplify the company’s operations
with round-the-clock development.
Stephen realized that embarking on this course would result in reducing the
staHng at the company’s U.S. call centers. He expected he could achieve some
reductions through attrition and reassignment, but considerable layo/s would be
Memorandum of Law
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The Foreign Corrupt Practices Act makes it unlawful for any domestic
company or any of its oHcers, directors, employees, or agents or its
stockholders acting on its behalf to o/er or give anything of value directly
or indirectly to any foreign oHcial, political party, or political oHcial for the
purpose of
1. inKuencing any act or decision of that person or party in his or its
oHcial capacity,
2. inducing an act or omission in violation of his or its lawful duty, or
3. inducing such person or party to use its inKuence to affect a decision of
a foreign government in order to assist the domestic concern in
obtaining or retaining business.
An o/er or promise to make a prohibited payment is a violation even if the
o/er is not accepted or the promise is not performed. The 1988
amendments explicitly excluded facilitating or expediting payments made
to expedite or secure the performance of routine governmental actions by
a foreign oHcial, political party, or party oHcial. Routine governmental
action does not include any decision by a foreign oHcial regarding the
award of new business or the continuation of old business. The
The statute also imposes internal control requirements on all reporting
companies. Such companies must
1. make and keep books, records, and accounts, that in reasonable detail,
accurately and fairly reKect the transactions and dispositions of the
assets of the company; and
2. devise and maintain a system of internal controls that ensure that
transactions are executed as authorized and recorded in conformity
with generally accepted accounting principles, thereby establishing
accountability with regard to assets and ensuring that access to those
assets is permitted only with management’s authorization.
ISSUES
Should the company follow the legal and ethical practices of its home country or
the legal and ethical practices of the host country?
SITUATION DISCUSSION
Transfer Payments Is a cost/bene+t analysis appropriate?
Is it signiticant that other companies do it?
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Customs
Expediting
Is it legal and ethical in home country? In host
country? (Probably is not a violation of Foreign
Corrupt Practices Act.)
Campaign
Contributions
Is it legal and ethical in home country? In host
country? (Probably is a violation of Foreign Corrupt
Practices Act.)
Lake Tahoe Is it legal and ethical in home country? In host
country? (Probably is a violation of Foreign Corrupt
Practices Act.)
Design of Plant Is it legal and ethical in home country? In host
country?
Child Labor Is it legal and ethical in home country? In host
country?
DECISION
Have the students justify their decision.
ADDITIONAL DISCUSSION
Does the decision whether to follow the home or host country’s practice
depend on the level of economic development of each country?
Should a host country’s practice be permissible if the home country would do
the same if it were at the same economic stage as the host country?

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