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Business Law Chapter 5 Homework Orthofix’s Upper Management Have Taken Before This

Page Count
9 pages
Word Count
4851 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
12 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
CASE SYNOPSIS
Case 5.2: AlDabagh v. Case Western Reserve University
The curriculum at Case Western Reserve University School of Medicine identifies nine “core
competencies.” At the top of the list is professionalism, which includes ethical, honest, responsible and
reliable behavior.” Amir Al–Dabagh enrolled at the medical school and did well academically. He even
published several articles and won a special award for “Honors with Distinction in Research.” But he sexually
harassed fellow students, often asked an instructor not to mark him late for class, received complaints from
hospital staff about his demeanor, and was convicted of driving while intoxicated. The university decided that
AlDabagh lacked professionalism and refused to give him a diploma. He filed a suit in a federal district court
against Case Western, alleging a breach of good faith and fair dealing. The court ordered the university to
issue a diploma. The university appealed.
The U.S. Court of Appeals for the Sixth Circuit reversed. “Nothing in the record suggests that the
university had impermissible motives or acted in bad faith.”
..................................................................................................................................................
Notes and Questions
In this case, Case Western Reserve University School of Medicine decided that AlDabagh lacked
professionalism and refused to give him a diploma. Is it appropriate to assess professionalism so
early in a person’s career? Yes. As the U.S. Court of Appeals for the Sixth Circuit observed in the Al-
Dabagh case, “Professionalism has been a part of the doctor's role since at least ancient Greece.” And the
court explained that “it is entirely reasonable to assess the presence of professionalism early. For once a
medical student graduates, we must wait for a violation before we may punish the absence of it.”
ADDITIONAL CASES ADDRESSING THIS ISSUE
Enforcing University Ethics Codes
Cases involving the enforcement of ethics codes in universities include the following.
Halpern v. Wake Forest University Health Sciences, 669 F.3d 454 (4th Cir. 2012) (dismissing a medical
student for lack of professionalism is “academic”).
Brown v. Li, 308 F.3d 939 (8th Cir. 2002) (refusing to approve a Ph.D. thesis because its
acknowledgement section was unprofessional is “academic”).
Richmond v. Fowlkes, 228 F.3d 854 (8th Cir. 2000) (dismissing a student for “non-cognitive” problems like
“sleeping in” is “academic”).
Harris v. Blake, 798 F.3d 419 (10th Cir. 1986) (dismissing a student for failing to attend practical class
sessions is “academic”).
Perez v. Texas A&M University at Corpus Christi, __ F.3d __, 2014 WL 5510955 (5th Cir. 2014)
(dismissing a student for tardiness is “academic”).
1. Attitude of Top Management
Employees take their cues from management. Ethical conduct can be furthered by not tolerating
unethical behavior, setting realistic employee goals, and periodic employee review.
2. Behavior of Owners and Managers
Those who actively foster unethical or illegal conduct encourage it in others.
CASE SYNOPSIS
Case 5.3: Moseley v. Pepco Energy Services, Inc.
Moseley had worked for Pepco Energy Services, Inc. (PES), a subsidiary of Pepco Holdings, Inc. (PHI), in
New Jersey for over twenty years when, in response to PHI’s annual “Ethics Survey,” he revealed what he
believed to be violations of company policy by Thomas Herzog, a supervisor. After an investigation, Herzog
was “escorted out of the building.” Subsequently, Moseley received his first negative performance review and
was denied a promotion in favor of another employee despite his superior job performance and the other
employee’s negative history. Moseley filed a suit in a federal district court against PES and PHI, alleging
“retaliatory action.” The defendants filed a motion for summary judgment.
..................................................................................................................................................
Notes and Questions
How does the behavior in this case betray a lack of ethics? Herzog’s violations of company policy are
clearly unethical. He improperly used company assets and improperly hired immediate family members and
friends who did not appear on the payroll. Moseley reported these actions to the company, which investigated
and discharged Herzog. But the employer may have been tolerating Herzog’s transgressions, or even
encouraging them, because Moseley appears to have been penalized for his report with a negative
performance review and the denial of a job promotion. This retribution is as unethical as Herzog’s conduct.
Regardless of who wins this case in trial, in performing Step 5 (Evaluation) of the Business
Process Pragmatism™ procedure, what changes should the company take with regard to the
complaint process? Because this case did make it to trial, there is evidence that something was not right in
the processes. One potential change for the company is to better document reasons for lack of hiring or
How can business leaders encourage their companies to act ethically? Ethical leadership is
important to create and maintain an ethical workplace. Managers can set standards, and apply those
standards to themselves and their firm’s employees. Legal and ethical conduct can be furthered by not
CHAPTER 5: BUSINESS ETHICS 15
tolerating illegal or unethical behavior.
Does an organization have an ethical obligation to secure a safe and harassment-free workplace
for its employees? Why or why not? Yes, employers have a both legal ethical obligations to maintain a
workplace free of harassment. Those who actively foster unethical or illegal conduct encourage it in others so
employers should neither direct nor tolerate misconduct.
3. The Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 requires firms to set up confidential systems for employees to
report suspected illegal or unethical financial practices.
V. Global Business Ethics
There are important ethical differences among, and within, nations.
ENHANCING YOUR LECTURE
  GOOGLE CHINA
 
Doing business on a global level can sometimes involve serious ethical challenges. Consider the ethical
firestorm that erupted when Google, Inc., decided to market “Google China.” This version of Google’s widely
used search engine was especially tailored to the Chinese government’s censorship requirements. To date,
the Chinese government has maintained strict control over the flow of information in that country. The
government’s goal is to stop the flow of "harmful information." Web sites that offer pornography, government
criticism, or information on other sensitive topics, such as the Tiananmen Square massacre in 1989, are
censoredthat is, they cannot be accessed by Web users. Government agencies enforce the censorship
and encourage citizens to inform on one another. Thousands of Web sites are shut down each year, and the
sites’ operators are subject to potential imprisonment.
16 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
GOOGLES RESPONSE
Google defends its actions by pointing out that its Chinese search engine at least lets users know which
sites are being censored. Google China includes the links to censored sites, but when a user tries to access
THE CHINESE GOVERNMENTS DEFENSE
The Chinese government emphasizes that its censorship of the Internet is no different from the controls
placed on information access by other national governments. As an example, it cites France, which bans
access to any Web sites selling or portraying Nazi paraphernalia. The United States itself prohibits the
dissemination of certain types of materials, such as child pornography, over the Internet. Furthermore, the
U.S. government monitors Web sites and e-mail communications to protect against terrorist threats. How,
ask Chinese officials, can other nations point their fingers at China for pursuing a common international
practice?
FOR CRITICAL ANALYSIS
Do you agree with the assumption made by Google that technological advances and the desire of
the Chinese people to embrace liberty will overcome, in time, the current limitations imposed by the
Chinese government?
A. THE MONITORING OF EMPLOYMENT PRACTICES OF FOREIGN SUPPLIERS
Concerns include the rights and the treatment of foreign workers who make goods imported and sold in
B. THE FOREIGN CORRUPT PRACTICES ACT
Side payments to government officials in exchange for favorable business contracts are not unusual in
some countries, nor are they considered to be unethical.
1. Prohibition against the Bribery of Foreign Officials
2. Bribery by Foreign Companies
3. Accounting Requirements
4. Penalties for Violations
Business firms may be fined up to $2 million. Individuals can be fined up to $100,000 (the firm
cannot pay the fine) and imprisoned up to five years.
ENHANCING YOUR LECTURE
  BRIBERY AND THE FOREIGN CORRUPT PRACTICES ACT
 
Many countries have followed in the footsteps of the United States by passing their own anti-corruption
laws, sometimes similar to our Foreign Corrupt Practices Act. But, other countries are often not as diligent in
weeding out corruption of government officials, for instance.
MEXICO FACES A CORRUPTION ISSUE
Recently, Mexico passed an anti-corruption law that prevents hospital administrators from approving
contracts. Medical device supplier Orthofix International NV, based in Texas, faced a problem after passage
of the new law. It wanted to continue providing bone-repair products to Mexico. It therefore bribed regional
government officials instead of hospital administrators. For years, Orthofix successfully paid over $300,000 in
bribes to Mexican officials to retain government health care contracts. Employees at Orthofix called these
bribes “chocolates.” They generated almost $8.7 million in revenues for the company
THE BRIBING PROCESS
Orthofix’s Mexican subsidiary, Promeca, regularly paid cash and gifts, such as vacation packages,
televisions, and laptops, to hospital employees in order to secure sales contracts. These employees then
submitted falsified receipts for imaginary expenses such as meals and new car tires. As the bribes became
too large to hide in this manner, Promeca’s employees falsely attributed the payments to promotional and
training expenses. After the passage of the anti-corruption law, Mexico formed a special national committee
to approve medical contracts. Promeca employees then simply bribed committee members to ensure that
they were awarded the contracts.
NO PREVENTION TRAINING OR COMPLIANCE POLICY
It turns out that Orthofix did not have Foreign Corrupt Practices Act prevention training or a compliance
policy in place in Mexico. Orthofix did create codes of ethics and anti-bribery training materials, but they were
only distributed in English. When Orthofix managers found out about Promeca’s over-budget expenses, they
inquired, but initially did not do anything further.
THE U.S. GOVERNMENT INVESTIGATES
Well after Orthofix learned of the payments, it self-reported them to the Securities and Exchange
Commission (SEC). After negotiations with the SEC, Orthofix agreed to terminate the Promeca executives
who were engaged in bribing and to end Promeca’s operations. Orthofix required mandatory training for all
18 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
employees and strengthened its auditing of company payments. In addition, the company paid over $7
million in penalties.
CRITICAL THINKING
Because managers are potentially responsible for all actions of their foreign subsidiaries whether
or not they knew of the illegal conduct, what actions should Orthofix’s upper management have taken
TEACHING SUGGESTIONS
1. To emphasize the relation between law and ethics, emphasize their distinction by discussing the theory of
civil disobedience. Ethics are created by moral values. Whether to obey the law is itself an ethical question.
Some individuals may choose to ignore the law if their ethical principles conflict with it. If there is a conflict
between a law and an ethic, should an individual disobey the law, or should an individual obey the law
even if he or she thinks it would be unethical to do so? Is there a higher law than what society
provides in a particular place at a particular time?
2. Ethical standards are subjective. They are derived from personal religious beliefs or philosophical as-
3. There are a number of hypotheticals that could be used to introduce this chapter’s subject matter. Have
students imagine that they own a company at which there is an opening at a beginning level. There are two
applicants—one, the students’ personal friend and the other, a member of the opposite sex (or of a minority).
The latter individual is more qualified for the job than the friend. Ask the students to suppose that in spite of
whatever profit the most qualified person might generate, they would rather have their friend on the job. State
that in this hypothetical, hiring the friend would violate the law against discrimination. Would the students
hire the friend in violation of the law?
Other hypotheticals involving employment might be used. For example, would students, as owners of
a business, offer a prospective employee a lower salary if (1) the employee indicated during the
interview that she expected a lower salary than they had been prepared to offer based on other
4. To introduce social responsibility, a hypothetical involving a violation of the law could be given, but a vio-
lation as to which there is no risk of being caught. For example, have students suppose that as businessper-
sons they will have an opportunity to make more money by meeting with competitors and fixing prices, con-
CHAPTER 5: BUSINESS ETHICS 19
duct which is illegal. For this hypothetical, tell them that the authorities will not discover that the prices have
been fixed. In fact, the price rise could be smallpennies per itembut the increases in net profit could be
considerable. Is price-fixing fair? Ethical? Socially responsible? Does it make any difference what
the extra profit is used for? If the students imagine that they need the money, would price-fixing be
wrong? Would their answers be different if there was an even chance that they would be caught?
Why?
5. It might be pointed out that in a capitalist system it is essential that accurate information be disseminated
6. Suggest that students apply the same type of analytical reasoning to ethical problems that they apply to
considering and deciding legal issues.
Cyberlaw Link
Should ethical standards be adapted to deal with the new forms of social disruption made
possible by the Internet (for example, data theft, hacking, virus implanting, and invasion of privacy)?
What new ethical standards, if any, are needed to resolve problems online?
DISCUSSION QUESTIONS
1. How does a law come to be an expression of an ethical principle? A law is what society deems proper be-
havior. An ethical value is also an expression of what is considered appropriate conduct. When people wish to
enforce or change an ethical value, they often politicize the issue, urging politicians to create or amend a law. When
the law changes, it more effectively represents the ethic that served as the impetus for its change.
2. What are reasons for unethical business behavior?
Employers or owners who condone it.
The belief that it won’t be discovered.
The corporate structure, which can insulate individuals from responsibility for their acts through its distance
from the acts’ consequences and the collectivity (impersonality?) of corporate decision making.
3. In negotiating a business deal, is “strategic misrepresentation” permissible? From a duty-based ethics
viewpoint, in an absolute sense, it would unethical not to disclose information on which the negotiator knows the other
side might hinge its decisions. In contrast, a negotiator owes an ethical duty to negotiate in the best interests of
whomever he or she is negotiating for. When one ethical duty conflicts with another, a decision has to be made as to
which duty is more fundamental. Frequently, questions faced by businesspersons do not have clear-cut answers, but
involve choices between arguably equally good alternatives.
It has been suggested that business is a game and deception is an important element of negotiation, just as
poker is a game in which bluffing plays an important part. The better an individual is at deception, the more
successful he or she will be at negotiation. Those who do not anticipate deceit are fooling themselves. One of the
problems with this suggestion is that there is no stated point at which deception is no longer acceptable. By
20 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
comparison, in poker, it is acceptable to attempt to confuse other players as to the cards you have been dealt but it is
not acceptable to bribe the dealer to deal you better cards. Also, if deception were widely practiced, the expense of
protecting against it would increase for business and society.
4. Why would a corporation prefer to be seen as ethical? Consumers may be less willing to buy products of
5. Does a company have a duty to act in socially or politically beneficial ways? There is no agreement as to
6. How does a corporation’s investment in a political or social agenda affect its duty to its shareholders?
7. To whom might a corporation owe a duty? A corporation may owe a duty to its shareholders, its employees
and their families, its customers, and society as a whole. What must a corporation do if it finds itself subject to
conflicting duties? There is no law that says which of these duties comes first or how much weight should be given
8. Because business controls so much wealth and power, what duty does it arguably have to society? It
9. Do businesses have an ethical duty to use enhanced security measures to protect confidential customer
information? Why or why not? For example, if an employer allowed its employee to store customers’
unencrypted personal information on a laptop outside of the office, would this violate any ethical duty? Yes,
10. What is the difference between legal and ethical standards? How are legal standards affected by ethical
standards? Legal standards are greatly affected by ethical standards, and there are areas common to both. Killing
CHAPTER 5: BUSINESS ETHICS 21
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Suggest that students research the basis for their personal ethical standards. How well (or poorly) do these
bases coincide with the law as they know it? Is there a code of human conduct so basic that everyone would
agree to follow it?
2. Have students research the conflict that seems to exist between the Judeo-Christian and Islamic ethics, between
the Western and Arabic cultures. Is the apparent gap bridgeable? Do we in fact have a common ethics? Do
our ethics at least derive from a common source?
3. Ask students to discover exactly how a value can become a law. What does the lobbying process involve?
Do your students believe that good customs actually do become law? What factors distinguish good from
bad customs?
4. Have students choose an employer and discover as much as they can about the people who work for the
employer. What are the job categories and what percentages of each are held by women and minorities?
How does the employer determine wages? How flexible is the employer’s policy?
5. Some business firms publish annual reports concerning their socially responsible activities. Critics of these
reports call them advertising ploys. Suggest that students obtain and read one or more of the reports. What
activities do these firms consider socially responsible? What influence might the reporting of these activities
have on the firms’ management? Are firms that issue these reports likely to increase these activities?
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 3: Johnson Construction Co. took a leaky truck for repair to Shaffer’s Auto and Diesel Repair,
LLC. Shaffer gave a verbal estimate of $1,000 for the work, but after the repair invoiced Johnson for $5,863.49.
Johnson offered to pay the amount of the estimate plus the costs of parts and shipping, but no more. Shaffer refused
to return the truck without payment in full, and began to add storage charges of $50 a day plus 18 percent interest on
the amount of the invoice. Johnson filed a suit in a Louisiana state court against Shaffer, alleging unfair trade
practices. The court awarded Johnson $3,500 in damages and $750 in attorneys’ fees, and awarded Shaffer $1,000.
Shaffer appealed.
In Johnson Construction Co. v. Shaffer, a state intermediate appellate court affirmed. Johnson’s owner
had testified that he agreed to the $1,000 estimate but not more. A Shaffer mechanic corroborated this testimony. As
for the storage charges, if Shaffer had simply billed Johnson for the amount of the estimate, the firm would have paid
it and there would have been no need to store the truck. Shaffer’s keeping it was holding it “hostage” in an effort to
force an unauthorized payment. This was conversion.
Suppose that Shaffer had invoiced Johnson for only $1,500. Would the outcome have been different?
Even if the court had been convinced that Johnson had agreed to spend only $1,000 on the third repair of his truck,
the difference between the agreed-on price and the actual invoice price probably would not have seemed large
enough to justify Johnson not paying the invoice. Consequently, had all of the other facts remained the same, the
court probably would have arrived at a different conclusion.
22 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
Would it have been ethical for Shaffer’s mechanic to lie to support his employer’s case? Discuss. No,
it would not have been ethical for the Shaffer mechanic to lie on his employer’s behalf. Of course it would have been
fraud. This would have been unethical and illegal. And there might have been a question from the legal perspective
as to whether his employer directed the misconduct.

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