Managers and the Legal Environment: Strategies for the 21st Century, 8th Edition Solution Manual

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Answers toA Manager’s DilemmaandQuestionsand Case Problemsto AccompanyMANAGERS AND THELEGALENVIRONMENTSTRATEGIES FOR THE21STCENTURYConstance E. BagleyYale UniversityPrepared byConstance E. BagleyEighthEdition

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ContentsUNITIFOUNDATIONS OF THELEGAL ANDREGULATORYENVIRONMENTChapter 1Law, Value Creation, and Risk Management1-1Chapter2Ethics and the Law2-1Chapter3Sources of Law, Courts, and Dispute Resolution3-1Chapter4Constitutional Bases for Business Regulation4-1Chapter5Agency5-1Chapter6Administrative Law6-1UNITIITHELEGALENVIRONMENTChapter7Contracts7-1Chapter8Sales, Licensing, and E-Commerce8-1Chapter9Tortsand Privacy Protection9-1Chapter10Product Liability10-1Chapter11Intellectual Property11-1UNITIIIHUMANRESOURCESChapter12The Employment Agreement12-1Chapter13Civil Rights and Employment Discrimination13-1UNITIVTHEREGULATORYENVIRONMENTChapter14Criminal Law14-1Chapter15Environmental Law15-1Chapter16Antitrust16-1Chapter17Consumer Protection17-1Chapter18Real Property and Land Use18-1UNITVCORPORATEGOVERNANCE,OWNERSHIP,ANDCONTROLChapter19Forms of Business Organizations19-1Chapter20Directors, Officers, and Controlling Shareholders20-1UNITVISECURITIES ANDFINANCIALTRANSACTIONSChapter21Public and Private Offerings of Securities21-1Chapter22Securities Fraud and Insider Trading22-1Chapter23Debtor-Creditor Relations and Bankruptcy23-1UNITVIIINTERNATIONALBUSINESSChapter24International Law and Transactions24-1

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CHAPTER11-1LAW,VALUECREATION,ANDRISKMANAGEMENTChapter1Law, Value Creation, and Risk ManagementAMANAGER’SDILEMMA:PUTTINGIT INTOPRACTICEJPMorgan and Its Hiring Practices in China: Networking or Bribery?Issue Presented:Assume that you are the new manager of JPMorgan’sChina operations. Would youcontinue the Sons and Daughters program? Why or why not?Whenever engaging in international business development, managers are expected to exercise theirresponsibilities according to the laws and practices of the countries where they conduct business. However,a manager should also consider the ethical standards in the home country, where the firm is headquarteredand where the board of directors will review his or her performance, as well as what the shareholders wouldconsider ethically acceptable.The managermust comply with the U.S. Foreign Corrupt Practices Act, which is discussed inChapter 24.The manager shouldconsult with qualified counsel to ensure thatthe firm’s hiring practicesfall within the scope of both U.S. and Chinese law. Hiring the children of government officials is commonin China, particularly in the banking industry,and that businesspracticemust becarefully weighedagainstAmerican expectations of ethical business conduct.Even thoughit might be difficult toestablishthat hiringa particular individual resulted in business with a government official who was related to that individual,U.S. regulators are increasing their investigations in this arena.For example, it would likely be easier toprove a violation of the FCPA where “hard” evidence, such as invoices or receipts, showed that lavishdinners or gifts had been given to government officials and that business contracts with those officialssubsequently arose. This situation involves the benefit of human relationships,something that is difficultto measure. As such, all aspects of the firm’s hiring practices could potentially be scrutinized by governmentregulatorsboth in the United States and China,includingits recruitment strategies, the performanceevaluations of the individuals hired, ande-mail correspondencewith the government officials. The managershould alsoreviewthefirm’s code of conduct and take full advantage of any ombudsperson available.Although some firms apply different ethical standards depending on the country in which they are doingbusiness, others (such as General Electric) have uniform global standards they apply to all their operations.Finally, while often difficult in practice, the manager should not sacrifice her personal integrity.QUESTIONS ANDCASEPROBLEMSQuestion 1.1Issues Presented:What public policies are furthered by this law? To what extent are there conflictsamong the policies served and how will they affect the way the law in this area is interpreted, applied,and changed?The laws and regulations applicable to U.S. business in the early twenty-first century further fourprimary public objectives: promoting economic growth, protecting workers, promoting consumer welfare,

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CHAPTER11-2LAW,VALUECREATION,ANDRISKMANAGEMENTand promoting public welfare. Other major economic powers tend to have laws that further these sameobjectives, albeit with varying degrees of emphasis on the different objectives and varying ways offurthering them. Indeed, much of the current debate on what constitutes good corporate governance turnson how much weight each country gives to the interests of shareholders, debtholders, employees, customers,and suppliers and to the protection of the environment.Sometimes those objectives may conflict. For example, intellectual property protection maypromote economic growth by giving incentives to innovate but may also create barriers to entry and increasethe likelihood of monopoly pricing, to the detriment of consumers.Question1.2Issue Presented:What effect does this body of law or legal tool have on the competitive environmentand the firm’s resources?Law helps shape the competitive environment and affects each of the five forces that determine theattractiveness of an industry (buyer power, supplier power, the competitive threat posed by current rivals,the availability of substitutes, and the threat of new entrants). Law also affects the allocation, marshaling,value, and distinctiveness of the firm’s resources. Under the resource-based view (RBV) of the firm, afirm’s resources can be a source of sustained competitive advantage if they are valuable, rare, andimperfectly imitable by competitors and have no strategically equivalent substitutes. Conversely, failure tointegrate law into the development of strategy and of action plans can place a firm at a competitivedisadvantage and imperil its economicviability.Question1.3Issue Presented:Where does this body of law or legal tool fit in the value chain?Each activity in the value chain has legal aspects. From a firm’s choice of business entity to thewarranties it offers and the contracts it negotiates, law pervades the activities of the firm, affecting both itsinternal organization and its external relationships with customers, suppliers, and competitors.Question1.4Issue Presented:How can managers responsibly help shapethis aspect ofthe legal environment?Managers can responsibly help shapethis aspect of thelegal environment bypromoting economicgrowth, protecting workers, promoting consumer welfare, and promoting public welfare. They can alsolobby for stricter laws that raise ethical standards rather than lower them. For example, rather than try towater down the U.S. ban on bribes, a group of firms created Transparency International and fought forinternational conventions to ban bribery. (This is discussed further in Chapter 2.)Question1.5Issue Presented:How could the managers in this case have avoided thelitigation that ensued?At its core, legal astuteness is the ability of the manager to communicate with counsel and to worktogether to solve complex problems. For example, legally astute managers can (1) negotiate contracts ascomplements to trust building and other relational governance techniques to define and strengthenrelationships and reduce transaction costs, (2) protect and enhance the realizable value of the firm’s

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CHAPTER11-3LAW,VALUECREATION,ANDRISKMANAGEMENTresources, (3) create options through contracts and other legal tools, and (4) convert regulatory constraintsinto opportunities. Court cases are akin to autopsy reports on transactions gone bad. When reading cases,students should be encouraged to ask howthe managers involved could have avoided the dispute or resolvedit without resort to litigation.Question1.6Issue Presented:What are the “moral aspects of choice” implicated by the conduct at issue?The systems approach to business and society recognizes that “business decisions consist ofcontinuous, interrelated economic and moral components” and that “moral aspects of choice” are the “finalcomponent of strategy.” It also builds on stakeholder theory’s insight that firms have relationships withmany constituent groups, which both affect and are affected by the actions of the firm.Question1.7IssuesPresented:Does this conduct meet societal expectations? If not, what new laws would be likelyto result if a substantial number of firms acted this way?Legally astute management teams appreciate the importance of meetingsociety’s expectations ofappropriate behavior and of treating stakeholders fairly. They accept responsibility for managing the legaldimensions of business and recognize that it is the job of the general manager, not the lawyer, to decidewhich allocationof resources and rewards makes the most business sense. Complying with the law is justthe baseline for determining what course of action to follow. As Ben Heineman, former general counsel ofGeneral Electric, put it: “If the first question is, ‘What is legal?’ than the last should be ‘What is right?’”The Foreign Corrupt Practices Act, the Sarbanes-Oxley Act, and the calls for further regulation in the wakeof the subprime mortgage crisis are just several examples of how society responds to ethical behavior.Question1.8IssuesPresented:Did the manager in this situation exemplify the four components of legal astuteness?If not, what could the manager have done differently?The four components of legal astuteness are: (1) a set of value-ladenattitudes about the importanceof law to the firm’s success, (2) a proactive approach to regulation, (3) the ability to exercise informedjudgment when managing the legal aspects of business, and (4) context-specific knowledge of the law andthe appropriate use of legal tools. Legally astute managers recognize that compliance failures are what MaxBazerman and Michael Watkins call “predictable surprises” and constantly evaluate their products,processes, and business relationships to manage the risk of legal liability.

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Chapter2Ethics and the LawAMANAGER’SDILEMMA:PUTTINGIT INTOPRACTICEIs Tax Avoidance Ethical?Issue Presented:Are there any factors a company should consider before structuring its businesstoavoidU.S. taxes by shifting revenue to overseas subsidiaries located in jurisdictions with lower taxrates?Structuring a business to avoid U.S. taxes, including by shifting revenue overseas, is viewed bysome as “smart business” in that it ultimately leads to higher profits for shareholders. Others see it asunpatriotic, even though tax avoidance is legal. In September 2014, the U.S. Department of the Treasuryand the Internal Revenue Service issued regulations to “rein in” corporate tax inversions, whereby a U.S.multinational corporation restructures itself so that the U.S. parent company is replaced by a foreign parentto avoid the higher U.S. tax rates. To benefit from the inversion, the companies must meet certainrequirements involving the amount of business activity in the home country of the new foreign parent andtheshareholderownership of the new foreign parent.The new rules, among other provisions, eliminatecertain methods inverted companies used to access overseas earnings without paying U.S. tax; as a result,inversionsmay not makeeconomic sense for future mergers. Press Release, U.S. Dep’t ofthe Treasury,Fact Sheet: Treasury Actions to Rein in Corporate Tax Inversions (Sept. 22, 2014).Ireland is a popular inversion site.More than fifty years ago,it adopted an “active tax policy” toattract foreign direct investment;it has modified the policy since to ensure it remains attractive. Nine of theten leading pharmaceutical companies operate in Ireland, as well as Google, Facebook,and Twitter.Vanessa Houlder, Vincent Boland & James Politi,Tax Avoidance: The Irish Inversion,FIN.TIMES(Apr.29, 2014). A partner in an Irish law firm said that inversions are an attractive process for shareholders thatgive a “real boost” to earnings per share, retained earnings and cash flow, with significant implications foracquisition premiums by “bridging valuation gaps for sellers” and in some cases exceeding sellers’expectations.Id.The economic benefitsof structuring a business to take advantage of foreign tax rates include theobvious cash flow savings resulting from the reduced foreign tax rate. One could argue that the benefits ofthat tax savings could be put to use by making new fixed asset purchases (machinery and equipment);spending more on research and development; paying employees better wages, particularly if manyemployees receiveonlythe minimum wage; reducing employee contributions for health insurance;reducing an underfunded pension plan’s liability; accelerating payments on debt (assuming there are noprepayment penalties); or paying shareholders a larger dividend. Although the economic benefits tostructuring a business to take advantage of foreign tax rates are numerous, there are non-economicconsiderations. Patriotism is one of them. Not paying taxes in the United States means less tax revenue forthe country, ultimately resulting in taxing others to make up for the shortfallor a reduction in governmentservices. This burden may fall on those least able to pay the additional taxes, such as small business owners,thereby stifling them in their new ventures. Large corporations are generally viewed as less thansympathetic to the financial realities of the working class, and that reputation is furthered when the salaries,bonus, and compensation packages of top executives are publicized. Saving on taxes therefore may merely

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CHAPTER22-2ETHICS AND THELAWmean, to many, that the executives are the only ones reaping the benefits. Whilean important objectiveofmost corporations is to earn a profit, and not to improve the living conditions of the truly needy, structuringa business overseas to avoid taxes,particularly when done in combination with outsourcing certainfunctions,may be seenby some individualsas supporting foreign governments when there is plenty to takecare of “at home.”Overtime, there can be a political backlash against big corporationsif they are widelyperceived as not being responsive to the needs of the populace.Questions and Case ProblemsQuestion2.1Issue Presented:Is it unethical for asmallcompanyto change its operating policies when a naturaldisaster strikesto take advantage of the increased business?Many companies do reap a financial benefit from the increased business a natural disaster causes,particularly small local construction and clean-up firms. The point at which ethical behavior becomesunethical is, however, sometimes hard to determine. Door-to-door solicitation and discounts for customerreferrals are common business practices and generally are not unscrupulous.Sales tactics that leavetraumatized disaster victimswith little time to make a rational decisioncanbe unethical, especially whencustomers are left with the impression that if they do not accept the offered services, there will not beanother opportunity to do so within a reasonable amount of time.On the other hand, local construction and clean-up companies often operate in a “feast or famine”environment and need to take advantage of businessopportunitiesto survive, regardless of their source.Accepting jobs on a cash-only basis may seem harsh, but the company may not have a line of creditonwhich to draw, and banking facilities may be off-line.Arriving with supplies leftover from a previous jobmight seem coercive to a homeowner, but itcouldbe the most practical way for the construction companyto use all available resources. On-the-spot hiring decisions sound harsh in theory, butsmall businessoperators realize that if they walk away from a potential customer, the customer is unlikely, or may beunable, to latercommit. Asking for the entire amount of payment before a job is completedcan appearoverly harsh, even in a disaster situation, but it may not be economically feasible for a contractor to waitfor insurance payments.Thus, it may be preferable to just require a substantial up-front payment.Raising prices during a disaster is not always unethical—sometimes higher prices provide anincentive for others tosend resourcesquicklyto disaster-stricken areas, and higher pricescanfunction asan incentive to overuse scarce resources. Regardless, charging twice the normal rate for a particular jobwhen a disaster strikes does seem unethical. Contractors realize that victims may not be thinking rationallyand will agree to any price just so the work gets done, and some contractors may capitalize on that.However, contractors may themselves be subject to higher prices by suppliers and must pass that cost on totheir customers.There is no formula to determine when behavior is ethical.The managers of allbusinesses, largeand small, should review theirfirms’practices, even during times of disaster, to ensure they are not beingunscrupulous. While it might result in the loss of some immediate revenue, customers whoaretreated fairlymay very welluse those contractors again.

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CHAPTER22-3ETHICS AND THELAW[SeeRichard Mize,Natural Disasters Attract Scammers,DAILYOKLAHOMAN, May 25, 2013, at 5E;seealsoChrisMacDonald,Post-Hurricane-IreneBusinessEthicsRoundup,Aug.29,2011,http://www.businessethicsblog.com/2011/08/29/post-hurricane-irene-business-ethics-roundup.]Question 2.2IssuesPresented:How should a female employee respond to her male boss’s insinuation that he isinviting her to a client meeting for her sex appeal rather than her intelligence and knowledge? Doesthis constitute illegal sex discrimination? How should the head of human resources respond?Allen Scot, Christine Bancroft’s boss, is clearly acting unethically by telling Christine that he wantsher to attend a client meeting for her sex appeal rather than her intelligence and knowledge of advertising.His behavior, while disrespectful, probablyis not sufficiently severe or pervasive to constitute actionablehostile environment sexual discrimination, however. SeeFaragher v. City of Boca Raton, 524 U.S. 775(1998), and the discussion of other hostile environment cases in Chapter 13. If, however,Scot persists intreating Christine as “eye candy,” then that may be illegal sexual stereotyping underPrice Waterhouse v.Hopkins, 490 U.S. 228 (1989),superseded in part by statute, Civil Rights Act of 1991, Pub. L. No. 102-166, 105 Stat. 1071 (1991). In that case, Ann Hopkins was denied partnership in Price Waterhouse and wastold that she needed to dress more femininely, have her hair styled, and wear more jewelry. The U.S.Supreme Court ruled that sexual stereotyping violated Title VII.This situation puts Christine Bancroft in the unfortunate position of having to decide how toreactto her boss’s behavior.If her boss knew how badly she wanted to work with clients, maybe he was givingher the opportunity she seemed to want at any cost. There is no doubt that this would be a good, firstopportunity for her to interact with a client. She might be inclined to go to the meeting and use theopportunity to advance her career and learn from her bosses. However, Christine cannot help but feeluncomfortable about being treated as “eye candy” for a client. Nonetheless, she risks jeopardizing herposition at the company or losing her boss’s favor if she complains.Christine must, however, consider the long-term ramifications of condoning such unethicalbehavior. If she knows her boss will behave like that to her, then he most certainly will act the same waytoward other female employees. If she can prevent other female employees from experiencing suchoffensive behavior, she should probably report his behavior to HR. Furthermore, there is a slippery slopeargument here: if Christine shows her boss that she is willing to accept this small, disrespectful situation isshe inadvertently giving him the okay to make further improper suggestions? He is not asking for sexualfavors in return for a promotion this time, but if he gets away with this behavior, will he be more likely touse female employees in even more degradingways in the future?Christine has worked too hard to get her Northwestern MBA degree and her position at Scot WayneMore to be degraded and used for her looks. If Christine does not stand up for herself this time, it is likelythat her boss will never respect her for her intelligence and knowledge about advertising.If Christine feels comfortable talking to her boss about this matter, she could go to him directly andtell him how she feels. She can tell him that she is not comfortable going to abusinessmeetingif her goodlooks are the only attribute she brings to the table. She can offer to do whatever preparation might berequired so she can be a valuable part of the meeting. She can ask her boss to treat her with more respect inthe future and let him know that she will report any similar suggestions to HR. Unfortunately, there is a riskthat she could lose her boss’s favor if she complains.To help protect against this, she might seek out the

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CHAPTER22-4ETHICS AND THELAWmanager who interviewed her for the position and ask him or her how to handleit. This may give her “aircover” in the event her boss starts complaining about the quality of her work.Alternatively, Christine could report the incident to HR, and perhaps ask to remain anonymous ifthat will ease her mind about reporting her boss. HR can advise her on the best course of action, encourageher to report future problems, and talk to her bossin her place. If Christine’s boss makes any morecomments like this one, she will have established a pattern of behavior on the record by reporting thisincident. HR should certainly speak with her boss and remind him that this behavior is inappropriate andthat it is illegal to retaliate against Christine for complaining. (This is discussed further in Chapter 13.) If ithas not already been done, HR should rewrite the company’s compliance manual to prohibit these types ofremarks about an employee’s clothing or looks. If this is already part of company policy, then Scot’sconduct is all the more reprehensible.As a beautiful woman, Christine should also recognize her obligation to act responsibly andprofessionally as well. If she does not want to be treated this way, and wants to be respected by her co-workers, she should be certain to dress and act professionally. It would be unethical on her part to flirt withmale employees or wear enticing clothing to benefit herself at work. She may want to reconsider wearingoverly sexy little black dresses to any company-sponsored functions, knowing that this type of situationcould result.This hypothetical is adapted from an example provided in Joseph L. Badaracco,Defining Moments:When Managers Must Choose Between Right and Right(1997), that involved race, rather than gender. Ayoung African American investment banker named Lewis was invited to a client meeting simply becauseof his skin color, and felt awkward about the situation. Lewis was so conflicted that he made a list of prosand cons about whether or not to attend the meeting. For example “opportunity” was a major pro, but“phony”was on the list of cons. An excerpt from his thinking on the matter: “Now his firm was singlinghim out solely for his skin color, not for his talent. Lewis believed companies and clients should basedecisions on performance, competence, and character, not on games of mix and match based on race,gender, and religion. Was including him as a token black really all that different from excluding himbecause he was black?”Id. at 12-13. Professor Badaracco further points out that this is not simply a case ofdeciding the right thing to do: “The challenge is decidingwhich right thing to do.Lewis has to choosebetween right and right, on a complex issue of personal integrity. His question was notwhetherto be ethical,it washowto be ethical.”Id. at 13-14. Lewis resolved his dilemma by asking to be part of the presentationto the clients, and therefore enabling himself to feel that he was at the meeting for a reason related to histalent and not just his skin color.Question2.3Issue Presented:Is it ever ethical for an employee of a company to accept gifts froman individual orfirmthat does business or wishes to do business with that company? If so, under what circumstances?Zandra Quartney should decline the tickets to the Super Bowl offered to her by the makers of BrandOne. Quartney is ethically obliged to decline any gift ifher business judgment might be affected by such agift, or if there would even be the appearance that her judgment might be affected. Even small gestures,such as dinner, should be accepted only if there are no strings attached. Given that Quartney is an ardentfootball fan, it is clear that she would greatly value tickets to the Super Bowl. In addition, there is a stronglikelihood that her favorite team, the Steelers, will be there. Given the fact that Quartney must decidewhether to cut Brand One’sbootsor one of Brand One’s competitors from her retail chain’s line of shoes,accepting such a valued gift might in fact cloud her judgment. It would most definitely create a suspicion

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CHAPTER22-5ETHICS AND THELAWof unfairness. This is particularly true given that the brands are equally profitable and there is no easy wayto decide which brand to cut. Even if Quartney were to accept the tickets and then decide to cut Brand Onesimply so that no one could accuse herof favoritism, this would be unethical. Quartney must make thedecisionbasedpurely on what is best for her company. As a responsible manager, Quartney’s first instinctshould be to decline the tickets as politely as possible.There is sometimes a fine line between business gifts and bribes. A bribe implies a clear-cutintention to win someone’s favor. To decide whether the tickets are an out-and-out bribe, we would haveto know more about the specific motivations of and information possessed by Brand One.IfBrand Oneoftenshowers significantgifts uponindividualswho can make decisions favorable to the company,then itmay be fair to say that Brand One in fact uses gifts to get favors. Such a policy would constitute a form ofbribery.It should not make any difference whether the person who offered the tickets to Quartney is a familymember or a close friend. Quartney is ethically obligated to declinethe tickets, given her positionof powerwith respect to Brand One. In fact, if the representative of Brand One is a relative or friend, Quartney mayhave an even greater obligation to decline the tickets. Friendship and family ties should be kept separatefrom business relations and business decisions. Quartney’s company has an ethical obligation to treat itssuppliers fairly, and requirethem to compete on genuine competitive issues, not onhaving personalconnections with thecompany’s buyer, or showering the buyer with gifts.Question2.4Issue Presented:Is it ethical for an employee of a company to acceptagift froma firm whose brandshe plans to cut from hercompany’s line of products?Under no circumstances should Quartney accept the tickets to the Super Bowl. Even if Brand Oneis clearly the line that she should cut, it is simply bad business and bad ethics to accept highly valued giftsfrom a businesspartner. The more Quartney values the tickets, the stronger the obligation to decline them.Quartney should not pay face value for the tickets. Why risk any perception of favoritism or even just thegeneral perception that the company’s buyer is offered valued gifts by her suppliers? Notethat Quartneyhas an easy solution in this particular case—there is always an active, legal Super Bowl tickets market forthose willing to pay the going price. Quartneywill most likely have to pay far more than face value,however.Quartney’s actions should be the same even if she were sure no one would find out about the gift.Just because an action isnot publicly knowndoes not mean it is ethical.Question2.5Issue Presented:Is it ethical for a consultant to gather information from a company without revealingher association withitsdirect competitor?Viloudakiclearly cannot lie about her employer when gathering data; to do so would be fraud. Shealso should not solicit trade secrets or encourage others to violate any nondisclosure agreements; otherwise,she might violate the Uniform Trade Secrets Act or be liable for intentional interference with a contract.Talking with low-level employees would be legal if done in accordance with these strictures. Itsethical character is a closer call. On the one hand, competitors should train their employees not to disclosesensitive data. On the other, taking advantage oflow-level employees’ ignorance seems questionable.

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CHAPTER22-6ETHICS AND THELAWIdeally, she would figure out a way to get permission from the higher level managers, perhaps by offeringto share some of the results of the study. In any event, if she personally views the calls as unethical, sheshould not make them. Instead, she shouldtalk with other consultants and managers in the firm and try topersuade them that she is right or let them persuade her that they are. She might also promote an industrycode of conductthat sets high ethical standards,as Chartered Financial Analysts have done.Question2.6Issue Presented:May an employee accept an expensive prize as a result of participation in a company-sponsored event?AlthoughWu was clearly meant to be the recipient of the prize under the terms of the contest, shehas an ethical obligation to inform her supervisor about the prize and offer it to her employer. The gift isextremely valuable, and she went to the event as a company representative, not as an individual. Thecompany may or may not allow her to keep the television. Wu should also consider how her supervisor andothers would react to hearing about the television gift if she does not tell them herself. Wu should avoidtheappearance of impropriety. In grey matters like this one, it is always best to err on the side of caution andact as ethically as possible. The television really belongs to the company, since the company sent Wu andcould have chosen to send someone else just as easily. If Wu were a manager receiving the television (or asimilar benefit) as a result of her affiliation with the company, she would have a fiduciary duty, and not justan ethical obligation, to inform the company.The company should provide in the code of conduct or in the employment contract that gifts orprizes over a certain value received as a result of company affiliation must be reported to the appropriateauthorities and offered to the company. This type of policy would have the additional value of discouragingemployees from accepting gifts or bribes in general.If Wu’s manager finds out about the prize from a source other than Wu, she should confront Wu.She should explain to Wuthat becauseshe received the gift as a result of a company-sponsored event,sheshould have informed the companyand offered the television to it.Question2.7Issues Presented:(a) Would it be ethical (or legal) to send a “friend” or “follow” request to asubordinate employee for the sole purpose of getting access to that person’s “private” page? (b)Would it be ethical (or legal) to ask applicants to open their pages during a job interview? (c) If amanger finds information on a social networking site that may warrant disciplinary action, such asabusive comments about fellow employees or threats against the safety of the workplace, should themanager act on itinhis or her managerial capacity?Mayan employee use a smart phone to secretlyrecord a performance evaluation?(a)An employeror managercertainly has the right to “friend” employees. Accepting anemployer’s “friend” request, may have some unintended consequences, however.The Genetic Information Nondiscrimination Act of 2008 (GINA) protects job applicants andemployees against discrimination based on their genetic information. However, GINAincludes aninadvertentacquisitionexceptiontothegeneralprohibitionwhena“manager,supervisor,unionrepresentative, or employment agency representative inadvertently learns genetic information from a socialmedia platform which he or she was given permissionto access by the creator of the profile at issue.”

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CHAPTER22-7ETHICS AND THELAWTherefore if the employer is a “friend” or a contact of the candidate or employee,the employermay legallyacquire genetic information on a social networking siteas long as the employer did not make the friendrequest for the purpose of obtaining genetic information.Becoming a friend just to “spy” on one’s employees may be legal, but it raisesethics issues.Consider, for example, that an attorney may not “friend” somebody just to learn more about that particularperson. Both the New York State Bar Association Committee on Professional Ethics and the PhiladelphiaBar Association’s ProfessionalGuidance Committee recently issued opinions stating that such conductwould constitute deception.SeeMarie-Andrée Weiss,The Use of Social Media Sites Data by BusinessOrganizations in Their Relationship with Employees,15(2) J.INTERNETL. 16 (2011).(b)Asking an applicant to open a personal social network page strikes many as a violation ofprivacy. Although certain states protect private employees from privacy violations, the U.S. Constitutiononly protects against violations by state actors, such as agovernment employer. Even if asking applicantsto open their social network pages does not violateconstitutional guarantees of privacy, it may cause illwill.At least six states, including California, Illinois and Utah, have enacted laws prohibiting employersfrom requiring job applicants to provide access to social media accounts that are password protected.(c)Under these circumstances,notfiring an abusive employee may place the employer at risk ofbeing found thathe orshe negligently retained an employee. InBlakey v. Continental Airlines,751 A.2d538 (N.J. 2000),the New Jersey Supreme Court found that an employer has the duty to remedy a patternof retaliatory harassment directed at an employee using a work-related forum, if the employer has notice ofit.TheBlakeyemployee had filed a charge of sexual discrimination and retaliation in violation ofTitle VIIof the Civil Rights Act, alleging that co-workers posted defamatory messages accessible to employees onan online bulletin board, which pilots and crew had to use to learn their flight schedules. Employees werecharged a monthly fee by the ISP for Internet access to the board, and part of this fee was paid back to theemployer. Plaintiff alleged she gave notice to the employer by forwarding copies of the messages, but thecourt found that the record was inadequate to determine if the bulletin board was indeed connected with theworkplace. It could therefore be difficult for an employee to prove that a social media site is a “work-related” forum, unless the employer creates a group, uses the site as a corporate tool, and activelyparticipates in ithimself.The legality of an employee using a smart phone to secretly record a performance evaluationgenerally depends on state law. The majority of states have “single-party” consent laws meaning that anindividual can make a recording of a conversationin which he or she participateswithoutobtainingtheother party’s consent. A minority of states require that all partiesbeaware the conversation is beingrecorded. Many corporations have implemented policies prohibiting employees from making unauthorizedaudio or video recordings;making such unauthorized recordings can result in termination.At the sametime, a number ofprivateemployers have adopted policies, which state law often requires them to post ina conspicuous place, in which they state thatemployees have no reasonable expectation of privacy and thatthe employer hasthe right to secretly record employees’ key strokes and conversationsand to use hiddencameraswithout cause. The U.S.Constitution limits the ability of public employers to invade publicemployees’ privacy right s in this way, and certain state constitutions protect even private employees.Question2.8IssuesPresented:What ethical and business issues should a corporation’sCEO andboard ofdirectorsconsider when setting the salaries for the different types of workers it employs?Should the

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CHAPTER22-8ETHICS AND THELAWgovernment play a role in establishing a minimum wage? Should the SEC require disclosure of theratio of CEO pay to that of the average worker?This questionasks whether a corporation has an ethical obligation to pay a living wage.Inan articlepublished inThe Standardin 2000,“Silicon Valley’s Dirty Side,”author Gary Rivlin notedthat in 1999Cisco Systems CEO John Chambers was compensated at a rate (including options he exercised) that was7,176 times what was paid to janitor Guadalupe Herrera (who earnedless than $17,000 a year).Thedisparity between CEO compensation and average worker compensation continues tobe wide(althoughnot in the proportion notedatCiscoSystems). A June 2014 press release issued by the Economic PolicyInstitute reported that the average compensation ofaCEO in 2013 was $15.2million(including exercisedstock options), or 296 times theamount an average worker was paid.Clearly,a corporation is not legally required to pay its employeesmore thanthelegally mandatedminimum wage.A number of companies,however,such asCostco and Gap, do pay their employees morethan the minimum wage.Whether the impetus to do so is from a public relations standpoint or in the hopethat a higher wage will attract more qualified employees, the workers benefit.Federal legislation to raise the minimum wage has been unsuccessful. The Federal Minimum WageAct of 2013 would have raised the minimum wage to $10.10 per hour by 2015 if it had passed. Anumberof states have enacted laws providing forincreasedminimum wages. For example, the minimum wage inthe state of Washington was $9.32 per hour as of January 1, 2014, well in excess of the national rate of$7.25.The Dodd-Frank Act authorized the SEC to implement various rules regarding the compensationof CEOs of publicly held corporations. Final rules were implemented requiring a shareholder vote onexecutive compensation (say-on-pay), but the vote is advisory only. The SEC proposeda rulerequiring thedisclosure of the ratio of the median annual total compensation of all employees other than the CEO to theannual total compensation of the CEO, but that rule had not been finalized as ofOctober2014.The board of directors (which sets executive and other compensation) should strive to create a paystructure that permits the firm to attract top talent while ensuring that those at the bottom can make endsmeet (per Rawles’s veil of ignorance). In addition, even if the board looks just at the bottom line, researchby Harvard Business School Professor Jay Lorsch demonstrates that large gaps in pay disrupt firmproductivity.SeeJay W. Lorsch,CEO Pay: How Much Is Enough?,HARV.BUS.REV., July-Aug. 1992, at136.

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Chapter3Sources of Law, Courts, and Dispute ResolutionAMANAGER’SDILEMMA:PUTTINGIT INTOPRACTICEThe Propriety of Confidential SettlementsIssue Presented:What factors should a managertake into accountwhen deciding whether or not torequire a confidentiality agreement as a condition to settling a case?Requiringconfidentialityagreementsasaconditionofsettlementisacommonpractice.Confidentiality agreements can enable a company to stave off frivolous me-too claims. A manager has abusiness obligation to settle claims as quickly and reasonably aspossible, and confidentiality agreementsoften seem like a promising way of doing so. Because future plaintiffs will not know the economicparticulars associated with a settlement, they may settle for less than the original claimant.Confidentiality agreements are troublesome, however, when they make it less likely that consumerswill learn about a product’s defects. A company could gravely jeopardize its public image by covering updamages paid for defective or harmful products. As Chief Judge Joseph F. Anderson Jr. of theU.S. DistrictCourt for the District ofSouth Carolina wrote: “Some of the early Firestone tire cases were settled withcourt-ordered secrecy agreements that kept the Firestone tire problem from coming to light untilmany yearslater. Arguably, some lives were lost because judges signed secrecy agreements regarding Firestone tireproblems.” Judge Anderson refused to approve Firestone’s request for a confidential settlement agreementin light of the wider ramificationsfor society: “Here is a rare opportunity for our court to do the right thingand take the lead nationally in a time when the Arthur Andersen/Enron/Catholic priest controversies areundermining public confidence in our institutions and causing a growing suspicion of things that arekeptsecret by public bodies.”Adam Liptak,Judges Seek to Ban Secret Settlementsin South Carolina,N.Y.TIMES, Sept. 2, 2002, at A1.Defective products were responsible for deaths and injuries to more than 65,000 babies and smallchildren in 1999, both before and after products had been recalled. In response to injuries, companies oftennegotiated press releases that made their productsound less dangerous than it really was and therebyavoided extensive press coverage. While the Consumer Product Safety Commission, the federal agency incharge of ensuring the safety of consumer products, strives to get the word out about such dangers, itoftendoes not have the funding or will to force companies to respond appropriately.Legal norms have changed to requiremore responsible corporate behavior. After their child waskilled by a crib that collapsed, two parents persuaded the Illinois government to enact the Children’s ProductSafety Act in 1999, which made it illegal to sell a children’s product after it has been recalled. MarlaFelcher,Children’s Products and Risk,ATLANTICMONTHLY,Nov. 2000, at 36-42. The amendments to theConsumer Product Safety Act enacted in 2008 also limit the sale of recalled products.If prohibiting secret agreements saves lives and preventsfurtherharmful effects, then lawmakersmay enact legislation barring secret settlements. On the other hand, confidentiality agreements tend to makecompanies feel more comfortable releasing sensitive information that otherwise would not come to light.For example, Harvard Law School Professor Arthur Miller responded to Chief Judge Anderson by stating

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CHAPTER33-2SOURCES OFLAW,COURTS,ANDDISPUTERESOLUTIONthat “the ban on secret settlements would discourage people from filing suits and settling them, and threatenpersonal privacy and trade secrets.” Liptak,Judges Seek to Ban. Responsible managerial restraint, ratherthan one-size-fits-all regulation, may be the best course of action.QUESTIONS ANDCASEPROBLEMSQuestion 3.1Issue Presented:How does one read a case citation?(a)The case was decided in the year 2000. The year appears at the end of the citation inparentheses.(b)“U.S.” denotes that the case appears in the United States Reporter. The United States Reportercontains cases decided by the Supreme Court of the United States.(c)The party listed first (Bush) is the appellant(or petitioner), or the party appealing the lowercourt’s decision(or petitioning a higher court to hear an appeal).The party listed second (Gore) is theappellee(or respondent), or the party that prevailed in the lower court(or responded to the petition seekingreview of the lower court’s decision).It is impossible to tell from an appellate cite, whether at the state orfederal level, which party initially brought the case, because the case is usually cited with the appellant’sname first and the appellee’s name second. The appellant may or may not have been the plaintiff in theoriginal suit.(d)Ifonewantsto cite to page 111, the full citation would be written as follows:Bush v. Gore,531 U.S. 98, 111 (2000).Question3.2Issues Presented:Is the arbitration clause enforceable? Is it ethical?The U.S. Supreme Court rejected the Concepcions’ argument that theDiscover Bankrule is aground that “exist[s] at law or in equity for the revocation of any contract” under section 2 of the FAA. Thefact that California law also prohibits waivers of class litigation did not save theDiscover Bankrule asapplied to arbitration agreements.At&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).Like the state-law rule requiring exhaustion of administrative remedies before arbitration, whichthe Supreme Court struck down inPrestonv.Ferrer,552 U.S 346, 357–58 (2008),California’sDiscoverBankrule impermissibly interferes with arbitration:Although the rule does notrequireclasswide arbitration, it allows any party to a consumer contractto demand itex post. The rule is limited to adhesion contracts, but the times in which consumercontracts were anything other than adhesive are long past. The rule also requires that damages bepredictably small, and that the consumer allege a scheme to cheat consumers. Theformerrequirement, however, is toothless and malleable (the Ninth Circuit has held that damages of $4,000are sufficiently small), andthe latter has no limiting effect, as all that is required is an allegation. .. . Consumers remain free to bring and resolve their disputes on a bilateral basis underDiscoverBank,and some may well do so; but there is little incentive for lawyers to arbitrate on behalf of

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