978-1285428710 Section 8 SECTION 8B

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SECTION 8B – PRODUCT SAFETY

READING 8.5 – FROM SHUNNING TO ANONYMITY

Use PowerPoint Slides 299 – 303 to review the law on product liability.

Answers and Key Discussion Items

1. The standards have evolved from caveat emptor to caveat vendor. The liability rests with those who

2. The Nader years and activities were a response to ongoing issues and injuries with regard to

products that left buyers with no remedy. The result was a national movement that changed the eye

of the storm on product liability from consumers and caveat emptor to manufacturers and sellers. The

CASE 8.6 – PEANUT CORPORATION OF AMERICA: SALMONELLA AND

INDICTED LEADERS

Use PowerPoint Slide 304.

Answers and Key Discussion Items

1. This could be a negligence case because the e-mails show the company was aware of the problem

but kept producing and selling products. It is strict tort liability to have salmonella in food; it does

happen, but there is still liability. However, negligence kicks in (and punitive damages) when there is

2. Yes, the e-mails would be admissible because they are company records and the corporation cannot

3. The defense his father is raising is that the decision to go ahead despite the findings of salmonella is

illogical. However, what his father does not understand is the very purpose of studying culture,

psychology, and pressure in conjunction with ethics. We know the correct answer – you shut down

the plant and neither make nor sell any product until you have an all-clear because the risk is high

CASE 8.7 – TYLENOL: THE SWING IN PRODUCT SAFETY

Use PowerPoint Slide 305.

Answers and Key Discussion Items

1. No, the shareholders’ interests were examined for the long-term. In the short-term, the shareholders

had to accept a write-off that was substantial. But, as history has shown, the write-off helped restore

2. Most did continue with their capsule sales, assuming that the public wanted those sales. Again, the

3. Burke’s decision was one for Tylenol’s future. It was a difficult decision in terms of present costs but it

ensured that Tylenol could return to the market position it once held. The interests of consumers and

The decision to abandon the capsule makes Tylenol the odd market entry. Unfamiliarity can cause a

drop in the market share. In this case the caplet was the answer to consumer fears and the down

In this case, as in many others, taking care of the moral responsibility of producing a safe product,

was the same as ensuring long-term survival and earnings for the company. The balancing is not

difficult once a manager establishes that ethical choices are often the same as good financial or

marketing choices. Yes, the manufacturers should have made the decision to do the tamper-proof

4. There was an evolving cycle that moved quickly once the poisonings occurred. There was no turning

back at that point. The manufacturers perhaps should have anticipated the risk and acted voluntarily.

5. Use PowerPoint Slide 305 to show the differences.

In poisonings, recall was immediate. Johnson & Johnson went public. They worked with the

government. And, they honored their credo. In the latest quality control issue, the company tried to

6. With the 1982 cyanide case, Johnson & Johnson did follow its credo. However, its more recent

7. The information should just be disclosed. Perhaps it was hubris. Perhaps the company felt its stellar

Have the students discuss the following issues as they address the question of warnings:

a. Consumer trust

b. Company reputation

c. Physical harm to customers

8. Research does show that when a company is doing well is precisely when it will slip because it is

9. The company simply lost site of the importance of that brand and how it had been able to use that for

decades. Now competitors have moved in to take advantage of the situation because parents are

nervous and concerned. The decision to handle the quality control issues as they did was

CASE 8.8 – MERCK AND VIOXX

Use PowerPoint Slide 306 as a backdrop (evolving regulatory cycle) for discussing the case.

In gaining perspective on this case, review the following memo offered from a consultant on the situation

at Merck:

TO Merck Board

FROM Jennings

RE What Went Wrong With Vioxx and Necessary Changes in Merck Culture

DATE September 4, 2006

Based on a review of company records, FDA interactions, and discovery documents in the ongoing Vioxx

litigation as well as interviews with management and Merck employees, we offer the following insights

and recommendations for Merck. Both cultural characteristics and process issues contributed to the loss

of this important drug as a Merck product.

Candor

Our review indicates that there were several critical points in the Vioxx approval and sales periods when

candor suffered. For example, during the Phase 3 FDA process, Dr. Reicin’s e-mail expresses concerns

about negative findings, but also reflects a fear of sharing that information with management. The failure

of this information to percolate to managers and others responsible for FDA interaction resulted in a

less-than-candid report to the FDA. The board is aware of the consequences of this omission in terms of

regulatory relationships as well as ongoing investigations by several federal agencies. This lack of

candor continued when the Cleveland studies were released. There was no public disclosure of warnings

regarding the studies. In fact, the studies were used to promote Vioxx as “heart friendly.” The disclosures

on both the product and to physicians were minimal and did not reflect the rising body of evidence

accumulating regarding Vioxx and CVE. The safety committee withheld its initial findings as well. Finally,

the withdrawal of Dr. Cannuscio’s name from the Circulation article was not just a misstep in terms of

candor. This withdrawal had implications in terms of public perception as well as for Merck employees

and the company’s desire to understand issues and the expectations regarding candid discussions.

Decision Analysis

Hindsight does carry the benefit of clear and global views. However, there are some flaws in the Merck

decision processes that require change. Scientists who were examining the studies and data for Merck

were not in error in their conclusions about past experience or statistical insignificance. However, the

lessons of Vioxx, as with the lessons of other companies such as Johns-Manville and asbestos,

Jack-in-the-Box and e-coli, and McNeil and Tylenol (cases that will be used as examples in our

presentation) are that there is an extremely low tolerance for risk where human life is at issue. Joan

Wainwright’s response to the press on the 2004 minutes of the scientists’ meeting was, “Those

percentages are based on very small numbers of events.” She is correct, but perception is critical,

particularly in pharmaceutical cases. Merck scientists believe (and rightly so) that no drug can be made

risk-free. However, the issue is not one of making the drug risk-free, but is rather a more complex two-art

decision of what to disclose in terms of potential risks and when to disclose it. The marking points in

candor were also critical decision points at which time scientists, along with managers, should have

evaluated the costs and benefits of continuing with the status quo.

The flaw in the decision process appears to have rested with limited views of costs and risks and

overemphasis on benefits. Vioxx sales were $2.5 billion (representing 18% of net income and 11% of

revenue) and significant pressures perhaps created a dependence on achieving those numbers. Analysts

were increasingly negative about Merck because of a lack of a pipeline of drugs and perceived lack of

innovation. The immediate success, low margins, and high returns served to increase the pressure to

keep what was called Merck’s “big hit” going. However, those who decided to continue selling the drug

without additional warnings and disclosures failed to assess the risk when the information surfaced.

Suppressing studies, even internal ones, is simply not possible. This issue requires internal attention in

terms of training as well as policy manuals so that the Vioxx approval process is changed in both scientific

and management quarters of the company. Those involved did not seem to see the trend in information

and litigation – Vioxx positive information was not there; only negative results and a trend downward.

When the studies emerged, Merck faced not only the negative publicity but questions about the lack of

disclosure previously. The result has been increased litigation, two negative verdicts, and an estimated

cost for the suits of $10 billion. The gross revenue earned is less than what seems to be an accurate

assessment of the cost. Further, the costs of Vioxx development and approval cannot be recouped

because it is unlikely that the drug could be returned to the market, even for alternative uses.

Culture Issues

The issue of conflicts of interest emerged at least twice during the Vioxx developments. The outside

committee included independent experts who had served as consultants for Merck. While such

relationships are common in the industry, they do create perception and credibility problems for the safety

committee. The committee’s “wait and see” attitude is attributed, in hindsight, to those conflicts.

In addition, the situation with Dr. Cannuscio requires the development of a company policy on

involvement of Merck employees in outside studies. Whether they can participate and how the results will

be published should be resolved. The withdrawal of her name from the study with negative information

about Vioxx added to the public’s negative perceptions about the company’s actions with regard to Vioxx.

The decision process is surrounded by clear signals from the culture about short-term financial

performance with a resulting perception that management does not want to hear “bad news.” Employees,

such as Dr. Reicin, are left with conflicts between their personal values on candor and the demands of the

company regarding performance. The result is a perception of a lack of management openness to

concerns and discussion of issues. A type of tunnel vision invaded the decision process on Vioxx. Boxed

into “either I withhold and keep my job or tell the truth and lose my job,” employees opted for the former

without exploring alternatives, such as disclosure of CVE effects and warnings on limited use of the drug

to certain types of patients.

Answers and Key Discussion Items

1. The issue in the cases was probably causation. The health problems of those taking Vioxx varied

and so there were different levels of culpability. The cause of heart attacks and other cardiovascular

2. Use PowerPoint Slide 307.

FAVORABLE

Merck had an excellent reputation

One of Fortune’s most admired companies

Philanthropic in giving drugs to other countries

UNFAVORABLE

Conflicts on the studies

Training with sales people

Questions from the FDA

Handling of initial suits

One of the things the company could have done is realize its reputation and not dabble in high levels

of risk with regard to a new drug. The company could have settled for $2 billion in sales to patients

without heart issues instead of the $3 billion it had that included those at risk. That is $1 billion, but

3. The other ethical issues were the conflicts with the researchers and their disclosure, the authorship

Compare & Contrast

The Merck Vioxx experience appears to have been a turning point for pharmas. They have learned that

the quicker they get the drug off the market, the less liability there will be. Post-Vioxx situations have

found the pharmas voluntarily recalling the drug at the first sign of negative stats and research, regardless

CASE 8.9 – FORD AND ITS PINTO AND GM AND ITS MALIBU: THE REPEATING

EXPLODING GAS TANK PROBLEM

Use PowerPoint Slides 308 – 317 to show the cost analysis for the redesign of the Pinto and a summary

of the Ford internal memo on the value of human life as used in Ford’s evaluation as to whether to

redesign the Pinto.

Legal Issues

Under the new discovery rules, lawyers can no longer play a “cat and mouse” game of concealing

information from the other side. There is mandatory disclosure of all documents in the company related

to the subject matter of the litigation.

Answers and Key Discussion Items (Ford Pinto)

1. $18.66/unit.

2. Management’s position was that the “fixes” would take too long. Ford needed a small car out on the

market to compete with the foreign car manufacturers. Further, the fixes were not worth the additional

Mr. Copp, was one who carried out orders, but did not have the ultimate decision-making authority

with respect to the Pinto. However, Mr. Copp did possess certain strengths by virtue of his position in

3. The issues Ford missed were the value of human life – outsiders tend to view product liability issues

with the benefit of hindsight and that any risk above and beyond the normal risk of driving a car is not

There was no violation of any safety standards or other laws. It was simply an ethical decision to

There was also tremendous demand at the time for small, fuel efficient cars. Ford was trying to

deliver the car as quickly as possible. But, using one of the Laura Nash questions, it is difficult to

4. All autos are dangerous and we all assume some risks. But, as was decided many years ago in the

5. This is a situation similar to LiCari’s with greater danger involved for the customers. Copp did not try

to build consensus on why waiting to release the Pinto and focusing on a redesign was important.

Compare & Contrast

Ford’s recall in 1996 was forthright, full disclosure, full repair – it managed the issue this time. They

offered follow-ups, too. The ad that Ford ran represents a complete turn-around from the days of the

Pinto. Ford’s ad sets out all the questions, concerns and background. There is a number for more

Answers and Key Discussion Items (Chevrolet (GM) Malibu)

1. The drunk driver perhaps did not have insurance or carry sufficient insurance and hence the litigation

against GM. There is also the issue that the drunk driver was not ultimately the cause of the severe

2. In this era particularly, it is nearly impossible to keep such memos and information quiet. With the

forward function of e-mail, it is impossible to control who has the information and how far that

3. The best course of action is to raise the issues in the memo in the context of a business decision.

Raise the issue by having the company look at the costs of changing the design vs. the eventual

The longer these memos are concealed from the public, the greater the financial damage for the

4. The GM managers focused on short-term results – they did not consider the long-term damage.

5. You cannot design a product that has a flaw, release it and then hope for the best. The best does not

happen. Any risk beyond what is expected and disclosed is too much risk and does come back to the

6. When Chrysler refused to settle, there was a great deal of backlash from customers and dealers

because there were emotional articles that appeared everywhere on the accidents. The press

CASE 8.10 – E. COLI , JACK-IN-THE-BOX, AND COOKING TEMPERATURES

Answers and Key Discussion Items

1. Jack-in-the-Box did not follow the formula for handling corporate and national crises:

a. Be forthcoming with information;

b. Respond immediately;

c. Recall, recall, recall;

2. The change should have been made voluntarily and sooner as an ethical choice because of the

potential loss of human life and certainly illness and also because of the relatively low cost of

3. The misplacement of the memos tells us that compliance with the law was not systematic at

4. Jack-in-the-Box tried to make things right with those who were harmed. The praise from an

adversary indicates that the chain tried to do “the right thing.” Even those who were harmed felt

CASE 8.11 – BUCKYBALLS AND SAFETY

Answers and Key Discussion Items

1. There was just no way to keep the instructions and warnings with the product and seemed to be no

2. This was the company’s business and product – without it, it could not exist.

3. There is the ethical posture that we are accountable for understanding risk and taking appropriate

steps for protection – that businesses cannot anticipate every possible misuse of a product and if they

CASE 8.12 – ENERGY DRINKS: HEALTHY OR RISKY?

Answers and Key Discussion Items

1. Yes, it is possible. Like Buckyballs, the world can live without them. It would not be difficult to

eliminate them. There is evolving concern, medical and hospital issues from both products, and

“noise” from media about whether they are safe. It is possible to keep the labels and warnings with

Revamping the content labels would be a way to solve the problem and move away from a possible

recall, ban, or demands for labels designed by someone else. It is a chance to take voluntary action that