law w2 for Faith

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8 Ethics and Social Responsibility of Business

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Business Ethics

Businesses are compelled to obey the law. In some circumstances, they may be able to

obey the law but engage in conduct that would be deemed by many to be unethical. Do

businesses owe a duty to act ethically in the conduct of their business even though the

law would permit the conduct?

Learning Objectives

After studying this chapter, you should be able to:

1. Describe how law and ethics intertwine.

2. Describe the moral theories of business ethics.

3. Describe the theories of the social responsibility of business.

4. Examine the provisions of the Sarbanes-Oxley Act.

5. Describe corporate citizenship.

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Chapter Outline

Introduction to Ethics and Social Responsibility of Business

Ethics and the Law

Case 8.1 • U.S. Supreme Court Case • Wal-Mart Stores, Inc. v. Samara Brothers,

Inc.

Business Ethics

Critical Legal Thinking Case • United States ex. rel. Estate of George Couto v.

Bayer Corporation

Ethics • Bernie Madoff Steals Billions of Dollars in Fraudulent Investment

Scheme

Social Responsibility of Business

Ethics • Is the Outsourcing of U.S. Jobs to Foreign Countries Ethical?

Ethics • Sarbanes-Oxley Act Requires Public Companies to Adopt Codes of

Ethics

Case 8.2 • U.S. Supreme Court Case • Kiobel v. Royal Dutch Petroleum

Company

Global Law • Conducting Business in Russia

“Ethical considerations can no more be excluded from the administration of

justice, which is the end and purpose of all civil laws, than one can exclude

the vital air from his room and live.”

John F. Dillon

Law s and Jurisprudence of England and America Lecture I (1894)

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Introduction to Ethics and Social Responsibility of Business

Businesses organized in the United States are subject to its laws. They are also subject to

the laws of other countries in which they operate. In addition, businesspersons owe a

duty to act ethically in the conduct of their affairs, and businesses owe a social

responsibility not to harm society.

“Ethics precede laws as man precedes society.”

Jason Alexander

Philosophy for Investors (1979)

Although most laws are based on ethical standards, not all ethical standards have been

enacted as law. While the law establishes a minimum degree of conduct expected by

persons and businesses in society, ethics demands more. This chapter discusses

business ethics and the social responsibility of business.

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Ethics and The Law

Ethics and the law are intertwined. Sometimes the rule of law and the rule of

ethics demand the same response by a person confronted with a problem.

“In civilized life, law floats in a sea of ethics.”

Earl Warren

ethics

A set of moral principles or values that governs the conduct of an individual

or a group.

Example

Federal and state laws make bribery unlawful. A person violates the law if he or she

bribes a judge for a favorable decision in a case. Ethics would also prohibit this

conduct.

However, in some situations, the law may permit an act that is ethically wrong.

Example

Occupational safety laws set minimum standards for emissions of dust from toxic

chemicals in the workplace. Suppose a company can reduce the emission below the

legal standard by spending additional money. The only benefit from the expenditure

would be better employee health. Ethics would require the extra expenditure; the law

would not.

Another situation occurs where the law demands certain conduct but a person’s ethical

standards are contrary.

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Example

Federal law prohibits employers from hiring certain illegal alien workers. Suppose an

employer advertises the availability of a job and receives no response except from a

person who cannot prove he or she is a citizen of this country or does not possess a

required visa. The worker and his or her family are destitute. Should the employer

violate the law and hire him or her? The law says no, but ethics may say yes (see

Exhibit 8.1 ).

Exhibit 8.1 Law And Ethics

In the following U.S. Supreme Court case, the Court examined the lawfulness of Walmart

knocking off another company’s product design.

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Case 8.1 U.S. Supreme Court Case Business Ethics

Wal-Mart Stores, Inc. v. Samara Brothers, Inc.

529 U.S. 205, 120 S.Ct. 1339, 146 L.Ed.2d 182, Web 2000 U.S. Lexis 2197 (2000)

Supreme Court of the United States

“Their suspicions aroused, however, Samara officials launched an

investigation, which disclosed that Walmart [was] selling the knockoffs of

Samara’s outfits.”

—Justice Scalia

Facts

Samara Brothers, Inc. (Samara), is a designer and manufacturer of children’s clothing.

Samara sold its clothing to retailers, which in turn sold the clothes to consumers. Wal-

Mart Stores, Inc. (Walmart), operates a large chain of budget warehouse stores that sell

thousands of items at very low prices. Walmart contacted one of its suppliers, Judy-

Philippine, Inc. (JPI), about the possibility of making a line of children’s clothes just like

Samara’s successful line. Walmart sent photographs of Samara’s children’s clothes to

JPI (with the name “Samara” readily discernible on the labels of the garments) and

directed JPI to produce children’s clothes exactly like those in the photographs. JPI

produced a line of children’s clothes for Walmart that copied the designs, colors, and

patterns of Samara’s clothing. Walmart then sold this line of children’s clothing in its

stores.

Samara discovered that Walmart was selling the knockoff clothes at a price that was lower

than Samara’s retailers were paying Samara for its clothes. After sending unsuccessful

cease-and-desist letters to Walmart, Samara sued Walmart, alleging that Walmart stole

Samara’s trade dress in violation of Section 43(a) of the Lanham Act. The U.S. district

court held in favor of Samara and awarded damages. The U.S. court of appeals affirmed

the award to Samara. Walmart appealed to the U.S. Supreme Court.

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Issue

Must a product’s design have acquired a secondary meaning before it is protected as

trade dress?

Language of the U.S. Supreme Court

The Lanham Act, in Section 43(a), requires that a producer show that the allegedly

infringing feature is likely to cause confusion with the product for which protection is

sought. In an action for infringement of unregistered trade dress a product’s design is

protectable only upon a showing of secondary meaning.

Decision

The Supreme Court reversed the decision of the U.S. court of appeals and remanded the

case for further proceedings consistent with its opinion.

Ethics Questions

Did Walmart act illegally in this case? Was Walmart’s conduct unethical?

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Business Ethics

How can ethics be measured? The answer is very personal: What one person considers

ethical another may consider unethical. However, there do seem to be some universal

rules about what conduct is ethical and what conduct is not. The following material

discusses five major theories of ethics: (1) ethical fundamentalism, (2) utilitarianism, (3)

Kantian ethics, (4) Rawls’s social justice theory, and (5) ethical relativism.

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Ethical Fundamentalism

Under ethical fundamentalism , a person looks to an outside source for ethical rules

or commands. This may be a book (e.g., the Bible, the Koran) or a person (e.g., Karl

Marx). Critics argue that ethical fundamentalism does not permit people to determine right

and wrong for themselves. Taken to an extreme, the result could be considered unethical

under most other moral theories. For example, a literal interpretation of the maxim “an eye

for an eye” would permit retaliation.

ethical fundamentalism

A theory of ethics that says a person looks to an outside source for ethical

rules or commands.

The following critical legal thinking case discusses the incentives that employees have to

report illegal activities of their employers in certain circumstances.

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Critical Legal Thinking Case Whistleblower Statute

United States ex. rel. Estate of George Couto v. Bayer Corporation

“Bayer employees were to obey not only ‘the letter of the law but the spirit

of the law as well.’”

—Bayer Corporation’s Ethics Video

The Bayer Corporation (Bayer) is a large pharmaceutical company that produces

prescription drugs, including its patented antibiotic Cipro. Bayer sold Cipro to private

health providers and hospitals, including Kaiser Permanente Medical Care Program, the

largest health maintenance organization in the United States. Bayer also sold Cipro to the

federal government’s Medicaid program, which provides medical insurance to the poor.

Federal law contains a “best price” rule that prohibits a company that sells a drug to

Medicaid from charging Medicaid a price higher than the lowest price for which it sells the

drug to private purchasers.

Bayer’s executives came up with a plan whereby Bayer would put a private label on its

Cipro and not call it Cipro and sell the antibiotic to Kaiser at a 40 percent discount. Bayer

continued to charge Medicaid the full price. One of Bayer’s executives who negotiated

this deal with Kaiser was George Couto, a corporate account manager.

Everything went well for Bayer until Couto attended a mandatory ethics training class at

Bayer. Later that day, Couto attended a staff meeting at which it was disclosed that Bayer

kept $97 million from Medicaid by using the discounted private labeling program for

Kaiser and other health care companies.

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When he received no response to his memo, Couto contacted a lawyer. Couto filed a qui

tam lawsuit under the federal False Claims Act —also known as the Whistleblower

Statute—which permits private parties to sue companies for fraud on behalf of the

government. The whistleblower can be awarded up to 25 percent of the amount recovered

on behalf of the federal government, even if the informer has been a co-conspirator in

perpetrating the fraud.

After the case was filed, the U.S. Department of Justice took over the case, as allowed by

law, and filed criminal and civil charges against Bayer. Bayer pleaded guilty to one

criminal felony and agreed to pay federal and state governments $257 million to settle the

civil and criminal cases. Couto, age 39, died of pancreatic cancer three months prior to

the settlement. He was awarded $34 million, which went to his three children. United

States ex. rel. Estate of George Couto v. Bayer Corporation (United States District Court

for the District of Massachusetts)

Critical Legal Thinking Questions

Did the managers at Bayer obey the letter of the law? Did the managers at Bayer

obey the spirit of the law? Did Couto act ethically in this case? Should Couto have

benefited from his own alleged illegal conduct?

1

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Utilitarianism

Utilitarianism is a moral theory with origins in the works of Jeremy Bentham (1748–

1832) and John Stuart (1806–1873). This moral theory dictates that people must choose

the action or follow the rule that provides the greatest good to society. This does not

mean the greatest good for the greatest number of people.

utilitarianism

A moral theory which dictates that people must choose the action or follow

the rule that provides the greatest good to society.

Example

If an action would increase the good of twenty-five people by one unit each and an

alternative action would increase the good of one person by twenty-six units, then,

according to utilitarianism, the latter action should be taken.

Utilitarianism has been criticized because it is difficult to estimate the “good” that will result

from different actions, it is difficult to apply in an imperfect world, and it treats morality as

if it were an impersonal mathematical calculation.

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Example

A company is trying to determine whether it should close an unprofitable plant located

in a small community. Utilitarianism would require that the benefits to shareholders

from closing the plant be compared with the benefits to employees, their families, and

others in the community from keeping it open.

Web Exercise

Visit the website of Walmart Watch at www.walmartwatch.com. What is

one of the issues currently being discussed at this site?

Tibet

This is a photograph of the Potala Palace in Tibet. A person’s culture helps shape his

or her ethical values.

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Kantian Ethics

Immanuel Kant (1724–1804) is the best-known proponent of duty ethics , also called

Kantian ethics. Kant believed that people owe moral duties that are based on universal

rules. Kant’s philosophy is based on the premise that people can use reasoning to reach

ethical decisions. His ethical theory would have people behave according to the

categorical imperative “Do unto others as you would have them do unto you.”

Kantian ethics (duty ethics)

A moral theory which says that people owe moral duties that are based on

universal rules, such as the categorical imperative “Do unto others as you

would have them do unto you.”

Example

According to Kantian ethics, keeping a promise to abide by a contract is a moral duty

even though that contract turns out to be detrimental to the obligated party.

“The notion that a business is clothed with a public interest and has been

devoted to the public use is little more than a fiction intended to beautify

what is disagreeable to the sufferers.”

Justice Holmes

Tyson & Bro-United Theatre Ticket Officers v. Banton (1927)

The universal rules of Kantian ethics are based on two important principles: (1)

consistency—that is, all cases are treated alike, with no exceptions—and (2) reversibility

—that is, the actor must abide by the rule he or she uses to judge the morality of

someone else’s conduct. Thus, if you are going to make an exception for yourself, that

exception becomes a universal rule that applies to all others.

Example

If you rationalize that it is acceptable for you to engage in deceptive practices, it is

acceptable for competitors to do so also.

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A criticism of Kantian ethics is that it is difficult to reach consensus as to what the

universal rules should be.

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Rawls’s Social Justice Theory

John Locke (1632–1704) and Jean-Jacques Rousseau (1712–1778) proposed a social

contract theory of morality. Under this theory, each person is presumed to have entered

into a social contract with all others in society to obey moral rules that are necessary for

people to live in peace and harmony. This implied contract states, “I will keep the rules if

everyone else does.” These moral rules are then used to solve conflicting interests in

society.

The leading proponent of the modern justice theory was John Rawls (1921–2002), a

philosopher at Harvard University. Under Rawls’s social justice theory , fairness is

considered the essence of justice. The principles of justice should be chosen by persons

who do not yet know their station in society—thus, their “veil of ignorance” would permit

the fairest possible principles to be selected.

“It is difficult, but not impossible, to conduct strictly honest business.”

Mahatma Gandhi

Rawls’s social justice theory

A moral theory which asserts that fairness is the essence of justice. The

theory proffers that each person is presumed to have entered into a social

contract with all others in society to obey moral rules that are necessary for

people to live in peace and harmony.

Example

Pursuant to Rawls’s social justice theory, the principle of equal opportunity in

employment would be promulgated by people who would not yet know if they were in a

favored class.

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As a caveat, Rawls also proposed that the least advantaged in society must receive

special assistance in order to realize their potential. Rawls’s theory of social justice is

criticized for two reasons. First, establishing the blind “original position” for choosing

moral principles is impossible in the real world. Second, many persons in society would

choose not to maximize the benefit to the least advantaged persons in society.

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Ethical Relativism

Ethical relativism holds that individuals must decide what is ethical based on their

own feelings about what is right and wrong. Under this moral theory, if a person meets his

or her own moral standard in making a decision, no one can criticize him or her for it.

Thus, there are no universal ethical rules to guide a person’s conduct. This theory has

been criticized because action that is usually thought to be unethical (e.g., committing

fraud) would not be unethical if the perpetrator thought it was in fact ethical. Few

philosophers advocate ethical relativism as an acceptable moral theory.

ethical relativism

A moral theory which holds that individuals must decide what is ethical

based on their own feelings about what is right and wrong.

The following ethics feature discusses a classic case of greed and fraud.

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Ethics

Bernie Madoff Steals Billions of Dollars in Fraudulent Investment Scheme

“Here the message must be sent that Mr. Madoff’s crimes were

extraordinarily evil.”

—Chin, District Judge

One of the largest fraudulent investment schemes was run by Bernie Madoff over a

twenty-year period. Over the years, Madoff enticed investors to invest billions of

dollars with him, with the classic promise of extraordinary returns. Madoff joined

country clubs, served on boards of directors of charitable organizations and

universities, and traveled in high and wealthy circles.

Madoff did not invest his clients’ money as promised. When investors requested

their money back, he paid them out of new money that he had raised from other

investors. Madoff used much of the money to pay for his and his family’s lavish

lifestyle. Madoff and his wife, Ruth, had a Manhattan penthouse, a beachfront

mansion in the Hamptons on Long Island, and a villa on the French Riviera. He

owned three yachts, and Ruth had jewelry worth millions of dollars.

Madoff was able to run his pyramid scheme for two decades without getting

caught. However, in 2008, after a recession hit the United States and the stock

market plummeted, investors tried to recover billions of dollars of their investments

from Madoff. He could no longer keep his fraud afloat and was arrested by the

Federal Bureau of Investigation (FBI). In 2009, Madoff appeared in federal court

and pleaded guilty to securities fraud, wire fraud, mail fraud, money laundering,

and perjury and for filing false documents with the Securities and Exchange

Commission (SEC).

The U.S. district court judge called Madoff’s fraud “unprecedented” and

“staggering” and sentenced Madoff to 150 years in prison without the possibility of

parole. The judge stated, “Here the message must be sent that Mr. Madoff’s crimes

were extraordinarily evil.” Madoff, age 71, was committed to the federal prison. As

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part of his sentencing, Madoff was ordered to pay $170 billion in restitution, but

only a small amount will be recovered. Many investors lost their life savings. United

States v. Madoff (United States District Court for the Southern District of New

York)

Ethics Questions

Did Bernie Madoff act ethically in this case? Did he act illegally? Are the investors

to blame for their own misfortune? Explain. Why do fraudulent investment schemes

keep working?

Concept Summary

Theories of Ethics

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Social Responsibility of Business

Businesses do not operate in a vacuum. Decisions made by businesses have far-

reaching effects on society. In the past, many business decisions were based solely on a

cost–benefit analysis and how they affected the “bottom line.” Such decisions, however,

may cause negative externalities for others.

“He who seeks equality must do equity.”

Joseph Story

Equity Jurisprudence (1836)

Example

The dumping of hazardous wastes from a manufacturing plant into a river affects the

homeowners, farmers, and others who use the river’s waters.

Social responsibility requires corporations and businesses to act with awareness of

the consequences and impact that their decisions will have on others. Thus, corporations

and businesses are considered to owe some degree of responsibility for their actions.

Social responsibility

A theory that requires corporations and businesses to act with awareness

of the consequences and impact that their decisions will have on others.

Four theories of the social responsibility of business are discussed in the following

paragraphs: (1) maximize profits, (2) moral minimum, (3) stakeholder interest, and (4)

corporate citizenship.

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Maximize Profits

The traditional view of the social responsibility of business is that business should

maximize profits for shareholders. This view, which dominated business and the law

during the nineteenth century, holds that the interests of other constituencies (e.g.,

employees, suppliers, residents of the communities in which businesses are located) are

not important in and of themselves.

maximize profits

A theory of social responsibility which says that a corporation owes a duty

to take actions that maximize profits for shareholders.

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Example

In the famous case Dodge v. Ford Motor Company, a shareholder sued Ford Motor

Company when its founder, Henry Ford, introduced a plan to reduce the prices of

cars so that more people would be put to work and more people could own cars. The

shareholders alleged that such a plan would not increase dividends. Mr. Ford testified,

“My ambition is to employ still more men, to spread the benefits of this industrial

system to the greatest number, to help them build up their lives and their homes.” The

court sided with the shareholders and stated the following:

Web Exercise

Visit the website of McDonald’s Corporation, at www.mcdonalds.com.

Find and read the corporation’s code of ethics.

[Mr. Ford’s] testimony creates the impression that he thinks the Ford Motor

company has made too much money, has had too large profits and that, although

large profits might still be earned, a sharing of them with the public, by reducing

the price of the output of the company, ought to be undertaken.

There should be no confusion of the duties which Mr. Ford conceives that he and

the stockholders owe to the general public and the duties which in law he and his

codirectors owe to protesting, minority stockholders. A business corporation is

organized and carried on primarily for the profit of the stockholders. The powers

of the directors are to be employed for that end. The discretion of directors is to

be exercised in the choice of means to attain

that end and does not extend to a change in the end itself, to the reduction of

profits, or to the nondistribution of profits among stockholders in order to devote

them to other purposes.

Milton Friedman, who won the Nobel Prize in economics when he taught at the University

of Chicago, advocated the theory of maximizing profits for shareholders. Friedman

asserted that in a free society, “there is one and only one social responsibility of business

—to use its resources and engage in activities designed to increase its profits as long as

2

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it stays within the rules of the game, which is to say, engages in open and free

competition without deception and fraud.”

“Public policy: That principle of the law which holds that no subject can lawfully

do that which has a tendency to be injurious to the public or against the public

good.”

Lord Truro

Egerton v. Brownlow (1853)

The ethics of U.S. companies outsourcing jobs to workers in foreign countries is

discussed in the following feature.

3

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Ethics

Is the Outsourcing of U.S. Jobs to Foreign Countries Ethical?

“Outsourcing” is one of the most despised words to workers in the United States

who have lost their jobs to workers in foreign countries. U.S. companies often

outsource the production of many of the goods that are eventually sold in the

United States (e.g., clothing, athletic shoes, toys, furniture, televisions and

electronic products). The reason they do so is because they can get the goods

produced at a lower cost in foreign countries and then make higher profits when

they sell the goods in the United States. The reason for this is that the workers in

many foreign countries are paid substantially less than workers in the United

States.

But why are goods cheaper to be made in many foreign countries? By having their

goods made in foreign countries, companies avoid the expenses of complying with

U.S. worker protection laws that would apply if the products were made in the

United States. Some of these laws are occupational safety laws that require

workplaces to be safe to work in, workers’ compensation laws that pay workers if

they are injured on the job, fair labor standards laws that prevent child labor and

require the payment of minimum wages and overtime wages, laws that allow

workers to form and join unions, laws that require some employers to provide

health insurance to employees, laws that require employers to pay Social Security

taxes for employees to the U.S. government, laws that prohibit discrimination

based on race, sex, disability, age, and other protected classes, and so on. Thus,

by avoiding the compliance and costs of these laws, U.S. companies can

outsource the production of their goods to workers in other countries that do not

provide these worker protections and benefits.

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Great Wall, China

Ethics Questions

Is it ethical for U.S. companies to export the production of their goods to foreign

workers who have few of the required worker protections and benefits of workers

in the United States? Who benefits by having goods made in foreign countries?

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Moral Minimum

Some proponents of corporate social responsibility argue that a corporation’s duty is to

make a profit while avoiding causing harm to others. This theory of social responsibility

is called the moral minimum . Under this theory, as long as business avoids or

corrects the social injury it causes, it has met its duty of social responsibility.

moral minimum

A theory of social responsibility which says that a corporation’s duty is to

make a profit while avoiding causing harm to others.

Example

A corporation that pollutes a body of water and then compensates those whom the

pollution has injured has met its moral minimum duty of social responsibility.

The legislative and judicial branches of government have established laws that enforce the

moral minimum of social responsibility on corporations.

“The ultimate justification of the law is to be found, and can only be found, in

moral considerations.”

Lord MacMillan

Law and Other Things (1937)

Examples

Occupational safety laws establish minimum safety standards for protecting

employees from injuries in the workplace. Consumer protection laws establish safety

requirements for products and make manufacturers and sellers liable for injuries

caused by defective products.

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The following feature discusses how the landmark Sarbanes-Oxley Act promotes ethics in

business.

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Ethics

Sarbanes-Oxley Act Requires Public Companies to Adopt Codes of Ethics

In the late 1990s and early 2000s, many large corporations in the United States

were found to have engaged in massive financial frauds. Many of these frauds

were perpetrated by the chief executive officers and other senior officers of the

companies. Financial officers, such as chief financial officers and controllers,

were also found to have been instrumental in committing these frauds. In

response, Congress enacted the Sarbanes-Oxley Act of 2002, which makes

certain conduct illegal and establishes criminal penalties for violations. In addition,

the Sarbanes-Oxley Act prompts companies to encourage senior officers of public

companies to act ethically in their dealings with shareholders, employees, and

other constituents.

Section 406 of the Sarbanes-Oxley Act

A section that requires a public company to disclose whether it has adopted

a code of ethics for senior financial officers.

Section 406 of the Sarbanes-Oxley Act requires a public company to

disclose whether it has adopted a code of ethics for senior financial officers,

including its principal financial officer and principal accounting officer. In

response, public companies have adopted codes of ethics for their senior financial

officers. Many public companies have voluntarily included all officers and

employees in the coverage of their codes of ethics.

A typical code of ethics is illustrated in Exhibit 8.2 .

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Exhibit 8.2 Code of Ethics

Ethics Questions

How effective will a code of ethics be in preventing unethical conduct? Can you

recall any situation that you may have read about where officers of a public

company acted unethically?

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Stakeholder Interest

Businesses have relationships with all sorts of people besides their shareholders,

including employees, suppliers, customers, creditors, and the local community. Under the

stakeholder interest theory of social responsibility, a corporation must consider the

effects its actions have on these other stakeholders. For example, a corporation would

violate the stakeholder interest theory if it viewed employees solely as a means of

maximizing shareholder wealth.

stakeholder interest

A theory of social responsibility which says that a corporation must

consider the effects its actions have on persons other than its shareholders.

The stakeholder interest theory is criticized because it is difficult to harmonize the

conflicting interests of stakeholders.

Example

In deciding to close an unprofitable manufacturing plant, certain stakeholders would

benefit (e.g., shareholders and creditors), whereas other stakeholders would not

(e.g., current employees and the local community).

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Corporate Citizenship

The corporate citizenship theory of social responsibility argues that business has a

responsibility to do well. That is, business is responsible for helping to solve social

problems that it did little, if anything, to cause.

corporate citizenship

A theory of social responsibility which says that a business has a

responsibility to do good.

Example

Under the corporate citizenship theory of social responsibility, corporations owe a

duty to subsidize schools and help educate children.

This theory contends that corporations owe a duty to promote the same social goals as

individual members of society. Proponents of this “do good” theory argue that

corporations owe a debt to society to make it a better place and that this duty arises

because of the social power bestowed on them. That is, this social power is a gift from

society and should be used to good ends.

A major criticism of this theory is that the duty of a corporation to do good cannot be

expanded beyond certain limits. There is always some social problem that needs to be

addressed, and corporate funds are limited. Further, if this theory were taken to its

maximum limit, potential shareholders might be reluctant to invest in corporations.

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Critical Legal Thinking

Of the four theories of the social responsibility of business—(1) maximize

profits, (2) moral minimum, (3) stakeholder interest, and (4) corporate

citizenship—where do you think most corporations fall? Can you think of a

corporation that follows the corporate citizenship model?

In the following case, U.S. Supreme Court was called upon to decide the international

reach of its laws to prosecute claims of crimes against humanity allegedly committed by

multinational corporations outside of the United States.

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Case 8.2 U.S. Supreme Court Case Humanitarian Violations

Kiobel v. Royal Dutch Petroleum Company

133 S.Ct. 1459 (2013)

Supreme Court of the United States

“The canon of statutory interpretation known as the presumption against

extraterritorial application . . . reflects the presumption that United States law

governs domestically but does not rule the world.”

—Roberts, Chief Justice

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Facts

Petitioners were residents of Ogoniland, an area of the country of Nigeria. The

respondents are Royal Dutch Petroleum Company, incorporated in the Netherlands, Shell

Transport and Trading Company, p.l.c., incorporated in England, and their joint

subsidiary Shell Petroleum Development Company of Nigeria, Ltd. (SPDC), which is

incorporated in Nigeria and engages in oil exploration and production in Ogoniland. These

multinational corporations conduct business globally, including in the United States.

The petitioners were granted political asylum by the United States and are now residents.

They filed a complaint in U.S. district court against the respondents seeking damages and

other remedies. The petitioners’ complaint alleges that when they were in Ogoniland they

protested SPDC’s environmental practices. The petitioners allege that the respondents

enlisted the Nigerian government to violently suppress the environmental demonstrations

and that the Nigerian military and police attacked Ogoni villages, beating, raping, and

killing residents and looting and destroying property. Petitioners allege that the

respondents aided and abetted these atrocities by providing Nigerian forces with

compensation, transportation, and supplies, and allowing the Nigerian military to use

respondents’ property as a staging ground for the attacks.

In their complaint, the petitioners asserted that the United States has jurisdiction to hear

the case under the Alien Tort Statute (ATS), which permits aliens to bring lawsuits in

federal court. In the past, the ATS has been applied primarily to permit aliens in the

United States to sue in federal court for violations of laws committed within the United

States.

In this case, the petitioners alleged that the respondents committed crimes against

humanity, torture, and cruel treatment, and should be subject to jurisdiction in U.S. court

because of the ATS. The U.S. district court dismissed part of the case and the U.S. court

of appeals dismissed the entire case. The petitioners appealed to the U.S. Supreme

Court, which granted review.

Issue

Does the Alien Tort Statute permit U.S. federal courts to decide issues regarding conduct

that occurred in another country?

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Language of the U.S. Supreme Court

The canon of statutory interpretation known as the presumption against

extraterritorial application . . . reflects the presumption that United States law governs

domestically but does not rule the world. There is no indication that the ATS was

passed to make the United States a uniquely hospitable forum for the enforcement of

international norms. Indeed, the parties offer no evidence that any nation, meek or

mighty, presumed to do such a thing.

On these facts, all the relevant conduct took place outside the United States. And

even where the claims touch and concern the territory of the United States, they must

do so with sufficient force to displace the presumption against extraterritorial

application. Corporations are often present in many countries, and it would reach too

far to say that mere corporate presence suffices.

Decision

The U.S. Supreme Court held that the petitioner’s case seeking relief for humanitarian

violations that occurred outside the United States is barred.

Ethics Questions

Why did the petitioners sue in U.S. district court? Why do you think that they did not

pursue their case in Nigeria? Does the United States owe a duty to enforce humanitarian

laws worldwide? Should the United States bar corporations from doing business in the

United States if those corporations are violating humanitarian laws in other countries?

Concept Summary

Theories of Social Responsibility

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The following feature discusses doing business in Russia.

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Global Law

Conducting Business in Russia

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St. Petersburg, Russia

Russia was once the leading country of the Union of Soviet Socialist Republics

(USSR), also known as the Soviet Union. Russia was a socialist communist state

until the collapse of the Soviet Union in 1989. Since then, it has followed a course

of capitalism. However, Russia is ranked as one of the worst countries for

corruption and bribery in the world. Therefore, foreign companies sometimes find

it difficult to do business in Russia without violating ethical principles.

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Key Terms and Concepts

Code of ethics (

162

)

Corporate citizenship (

162

)

Ethical fundamentalism (156)

Ethical relativism (

159

)

Ethics (

155

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)

Ethics and the law (

155

)

False Claims Act (Whistleblower Statute) (

157

)

Kantian ethics (duty ethics) (

158

)

Law (

155

)

Maximize profits (

160

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)

Moral minimum (

162

)

Qui tam lawsuit (

157

)

Rawls’s social justice theory (

158

)

Sarbanes-Oxley Act (

162

)

Section 406 of the Sarbanes-Oxley Act (

162

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)

Social responsibility of business (

160

)

Stakeholder interest (

162

)

Utilitarianism (

157

)

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Critical Legal Thinking Cases

8.1 False Advertising Papa John’s International, Inc., is the third-largest pizza

chain in the United States, with more than 2,050 locations. Papa John’s adopted a

new slogan—“Better Ingredients. Better Pizza.”—and applied for and received a

federal trademark for this slogan. Papa John’s spent over $300 million building

customer recognition and goodwill for this slogan. This slogan has appeared on

millions of signs, shirts, menus, pizza boxes, napkins, and other items, and it has

regularly appeared as the tag line at the end of Papa John’s radio and television

advertisements.

Pizza Hut, Inc., is the largest pizza chain in the United States, with more than 7,000

restaurants. Pizza Hut launched a new advertising campaign in which it declared “war”

on poor-quality pizza. The advertisements touted the “better taste” of Pizza Hut’s pizza

and “dared” anyone to find a better pizza. Pizza Hut also filed a civil action in federal

court, charging Papa John’s with false advertising in violation of Section 43(a) of the

federal Lanham Act. What is false advertising? What is puffery? How do they differ

from one another? Are consumers smart enough to see through companies’ puffery?

Is the Papa John’s advertising slogan “Better Ingredients. Better Pizza” false

advertising? Pizza Hut, Inc. v. Papa John’s International, Inc., 227 F.3d 489, Web

2000 U.S. App. Lexis 23444 (United States Court of Appeals for the Fifth Circuit)

8.2 Bribery The Sun-Diamond Growers of California is a trade association that

engages in marketing and lobbying activities on behalf of its 5,000 member-growers of

raisins, figs, walnuts, prunes, and hazelnuts. Sun-Diamond gave Michael Epsy, U.S.

secretary of agriculture, tickets to sporting events (worth $2,295), luggage ($2,427),

meals ($665), and a crystal bowl ($524) while two matters in which Sun-Diamond

members had an interest in were pending before the secretary of agriculture. The two

matters were decided in Sun-Diamond’s favor. The United States sued Sun-Diamond

criminally for making illegal gifts to a public official, in violation of the federal

antibribery and gratuity statute [18 U.S.C. Sections 201(b) and 201(c)]. The United

States sought to recover a monetary fine against Sun-Diamond. Was Sun-Diamond’s

conduct ethical? Has Sun-Diamond violated the federal antibribery and gratuity statute

by giving these items to the U.S. secretary of agriculture? United States v. Sun-

Diamond Growers of California, 526 U.S. 398, 119 S.Ct. 1402, 143 L.Ed.2d 576,

Web 1999 U.S. Lexis 3001 (Supreme Court of the United States)

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8.3 Liability The Johns Manville Corporation is a profitable company that makes a

variety of building and other products. It was a major producer of asbestos, which was

used for insulation in buildings and for a variety of other uses. It has been medically

proven that excessive exposure to asbestos causes asbestosis, a fatal lung disease.

Thousands of employees of the company and consumers who were exposed to

asbestos and contracted this fatal disease sued the company for damages. Eventually,

the lawsuits were being filed at a rate of more than 400 per week.

In response to the claims, Johns Manville Corporation filed for reorganization

bankruptcy. It argued that if it did not, an otherwise viable company that provided

thousands of jobs and served a useful purpose in this country would be destroyed and

that without the declaration of bankruptcy, a few of the plaintiffs who first filed their

lawsuits would win awards of hundreds of millions of dollars, leaving nothing for the

remainder of the plaintiffs. Under the bankruptcy court’s protection, the company was

restructured to survive. As part of the release from bankruptcy, the company

contributed money to a fund to pay current and future claimants. The fund was not

large enough to pay all injured persons the full amounts of their claims. Is Johns-

Manville liable for negligence? Is it ethical for Johns-Manville to declare bankruptcy?

Has it met its duty of social responsibility in this case? In re Johns-Mansville

Corporation, 36 B.R. 727, Web 1984 Bankr. Lexis 6384 (United States Bankruptcy

Court for the Southern District of New York)

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Ethics Cases

8.4 Ethics Case McDonald’s Corporation operates the largest fast-food restaurant

chain in the United States and the world. It produces such famous foods as the “Big

Mac” hamburger, Chicken McNuggets, the Egg McMuffin, French fries, shakes, and

other foods. A McDonald’s survey showed that 22 percent of its customers are “Super

Heavy Users,”

meaning that they eat at McDonald’s ten times or more a month. Super Heavy Users

make up approximately 75 percent of McDonald’s sales. The survey also found that 72

percent of McDonald’s customers were “Heavy Users,” meaning they ate at

McDonald’s at least once a week.

Jazlyn Bradley consumed McDonald’s foods her entire life during school lunch breaks

and before and after school, approximately five times per week, ordering two meals

per day. When Bradley was 19 years old, she sued McDonald’s Corporation for

causing her obesity and health problems associated with obesity.

Plaintiff Bradley sued McDonald’s in U.S. District Court for violating the New York

Consumer Protection Act, which prohibits deceptive and unfair acts and practices.

She alleged that McDonald’s misled her, through its advertising campaigns and other

publicity, that its food products were nutritious, of a beneficial nutritional nature, and

easily part of a healthy lifestyle if consumed on a daily basis. The plaintiff sued on

behalf of herself and a class of minors residing in the state of New York who

purchased and consumed McDonald’s products. McDonald’s filed a motion with the

U.S. District Court to dismiss the plaintiff’s complaint. Has the plaintiff stated a valid

case against McDonald’s for deceptive and unfair acts and practices in violation of the

New York Consumer Protection Act? Does McDonald’s act ethically in selling products

that it knows cause obesity? Should McDonald’s have disclosed the information

regarding heavy users? Bradley v. McDonald’s Corporation, Web 2003 U.S. Dist.

Lexis 15202 (United States District Court for the Southern District of New York)

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8.5 Ethics Case Reverend Leon H. Sullivan, a Baptist minister from Philadelphia,

who was also a member of the board of directors of General Motors Corporation,

proposed a set of rules to guide American-owned companies doing business in the

Republic of South Africa. The Sullivan Principles, as they became known, call for the

nonsegregation of races in South Africa. They call for employers to (a) provide equal

and fair employment practices for all employees and (b) improve the quality of

employees’ lives outside the work environment in such areas as housing, education,

transportation, recreation, and health facilities. The principles also require signatory

companies to report regularly and to be graded on their conduct in South Africa.

Eventually, several hundred U.S. corporations with affiliates doing business in South

Africa subscribed to the Sullivan Principles. Which of the following theories of social

responsibility are the companies that subscribed to the Sullivan Principles following:

maximize profits, moral minimum, stakeholder interest, or corporate citizenship? To

put additional pressure on the government of the Republic of South Africa to end

apartheid, Reverend Sullivan called for the complete withdrawal of all U.S. companies

from doing business in or with South Africa. Very few companies agreed to do so. Do

companies owe a social duty to withdraw from South Africa? Should universities divest

themselves of investments in companies that do not withdraw from South Africa?

8.6 Ethics Case Kaiser Aluminum & Chemical Corporation entered into a collective

bargaining agreement with the United Steelworkers of America, a union that

represented employees at Kaiser’s plants. The agreement contained an affirmative-

action program to increase the representation of minorities in craft jobs. To enable

plants to meet these goals, on-the-job training programs were established to teach

unskilled production workers the skills necessary to become craft workers.

Assignment to the training program was based on seniority, except that the plan

reserved 50 percent of the openings for black employees.

Thirteen craft trainees were selected from Kaiser’s Gramercy plant for the training

program. Of these, seven were black and six white. The most senior black trainee

selected had less seniority than several white production workers who had applied for

the positions but were rejected. Brian Weber, one of the white rejected employees,

instituted a class action lawsuit, alleging that the affirmative-action plan violated Title

VII of the Civil Rights Act of 1964, which made it “unlawful to discriminate because of

race” in hiring and selecting apprentices for training programs. The U.S. Supreme

Court upheld the affirmative-action plan in this case. The decision stated:

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We therefore hold that Title VII’s prohibition against racial discrimination does not

condemn all private, voluntary, race-conscious affirmative action plans. At the

same time, the plant does not unnecessarily trammel the interests of the white

employees. Moreover, the plan is a temporary measure; it is not intended to

maintain racial balance, but simply to eliminate a manifest racial imbalance.

Do companies owe a duty of social responsibility to provide affirmative-action

programs? United Steelworkers of America v. Weber, 443 U.S. 193, 99 S.Ct. 2721,

61 L.Ed.2d 480, Web 1979 U.S. Lexis 40 (Supreme Court of the United States)

8.7 Ethics Case The Warner-Lambert Company has manufactured and distributed

Listerine antiseptic mouthwash since 1879. Its formula has never changed. Ever since

Listerine’s introduction, the company has represented the product as being beneficial

in preventing and curing colds and sore throats. Direct advertising of these claims to

consumers began in 1921. Warner-Lambert spent millions of dollars annually

advertising these claims in print media and television commercials.

After one hundred years of Warner-Lambert’s making such claims, the Federal Trade

Commission (FTC) filed a complaint against the company, alleging that it had engaged

in false advertising, in violation of federal law. Four months of hearings were held

before an administrative law judge that produced an evidentiary record of more than

four thousand pages of documents from forty-six witnesses. After examining the

evidence, the FTC issued an opinion which held that the

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