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Ethics and the Conduct of

Eighth Edition

John R. Boatright

Loyola University Chicago

Jeffery D. Smith

Seattle University

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Library of Congress Cataloging-in-Publication Data

Names: Boatright, John Raymond, 1941– author. | Smith, Jeffery David, 1971– author. Title: Ethics and the conduct of business / John R. Boatright, Loyola

University Chicago, Jeffery D. Smith, Seattle University. Description: Eighth edition. | Boston: Pearson, [2017] Identifiers: LCCN 2015050453| ISBN 9780134167657 | ISBN 0134167651 Subjects: LCSH: ethics. | Social responsibility of business. Classification: LCC HF5387 .B6 2017 | DDC 174/.4—dc23 LC record available at

http://lccn.loc.gov/2015050453

10 9 8 7 6 5 4 3 2 1

ISBN-10: 0-13-416765-1 ISBN-13: 978-0-13-416765-7

Brief Contents

1 Ethics in the World of 2 Ethical Decision Making 3 Ethical Theories 4 Whistle-Blowing 5 Information and Conflict

of Interest

6 Privacy 7 Discrimination and Affirmative

Action

8 Employment Rights

1 9 Health and Safety

21 10 Marketing and Advertising 46 11 Ethics in 65 12 Corporate Social Responsibility

13 Governance, Accountability,

and Compliance 106 14 International Ethics

References

82

133 Credits 156 Index Index

182

208

239

268

297

325

357 380 387

iii

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Contents

Preface About the Authors

1 Ethics in the World of

Case: Merck and the Marketing of Vioxx

1.1: Decision Making

1.1.1: Nature of 1.1.2: Levels of Decision Making

1.2: Ethics, Economics, and

1.2.1: Ethics and Economics 1.2.2: Ethics and

1.3: Ethics and Management

1.3.1: Ethical Management and Management

of Ethics

1.3.2: Ethics and the Manager’s Role 1.4: Ethics in Organizations

1.4.1: Individual Decision Making 1.4.2: Organizational Decision Making

Conclusion: Ethics in the World of

Case: A Sticky Situation Case: Beech-Nut’s Bogus Apple Juice Case: Ethical Uncertainty at Bath Iron Works Case: A Faked Résumé at Yahoo

2 Ethical Decision Making

Case: HP and the Smart Chip

2.1: Market Ethics

2.1.1: The Market System 2.1.2: Ethics in Markets 2.1.3: Breaches and Fraud 2.1.4: Wrongful Harm 2.1.5: Market Failure 2.1.6: Summary of Market Ethics

2.2: Roles, Relationships, and Firms

2.2.1: Agents and Principals 2.2.2: Fiduciaries and Professionals 2.2.3: Firms 2.2.4: Summary of Roles, Relationships,

and Firms 2.3: Ethical Reasoning

2.3.1: Philosophical Accounts 2.3.2: Psychological Accounts 2.3.3: Framework for Reasoning

Conclusion: Ethical Decision Making

Case: Lavish Pay at Harvard Case: Broken Trust at Bankers Trust Case: KPMG’s Tax Shelter

ix xi

3 Ethical Theories

Case: Big Brother at Procter & Gamble

1 3.1:

1

4 5 6 7 7 9 11

11 12 13 14 15

16

21

21

22 22 24 25 26 27 30 30 31 31 32

35 35 36 37 38

41

3.1: Utilitarianism

3.1.1: Principle of Utility 3.1.2: Cost–Benefit Analysis

3.2: Kantian Ethics

3.2.1: Universalizability 3.2.2: Respect for Persons

3.3: Virtue Ethics

3.3.1: What Is Virtue? 3.3.2: Defending the Virtues 3.3.3: Virtue in

3.4: Rights Rights

3.4.1: Meaning of Rights 3.4.2: Kinds of Rights

3.5: Justice

3.5.1: Nature and Value of Justice 3.5.2: Aristotle on Distributive Justice 3.5.3: Rawls’s Egalitarian Theory 3.5.4: Nozick’s Entitlement Theory

Conclusion: Ethical Theories

Case: Exporting Pollution Case: Clean Hands in a Dirty Case: Conflict of an Insurance Broker Case: An Auditor’s Dilemma

4 Whistle-Blowing

Case: Time’s Persons of the Year

4.1: What Is Whistle-Blowing? 4.2: Justification of Whistle-Blowing

4.2.1: Loyal Agent Argument 4.2.2: Meaning of Loyalty 4.2.3: Conditions for Justification

4.3: Right to Blow the Whistle

4.3.1: Existing Legal Protection 4.3.2: Arguments against Protection 4.3.3: Arguments for Protection

4.4: Developing a Policy

4.4.1: Benefits and Dangers 4.4.2: Components of a Policy

Conclusion: Whistle-Blowing

Case: A Whistle-Blower Accepts a “Deal” Case: A Whistle-Blower’s Quandary Case: Who’s a Whistle-Blower?

46

46

48 48 50 52 52 53 53 54 54 55 55 55 56 57 57 58 59 59

60

65

65

67 69 69 71 71 73 73 75 75 76 76 76

77

v

5 Information and Conflict

of Interest

Case: Barbie vs. the Bratz Girls

5.1: Confidential Information

5.1.1: Duty of Confidentiality 5.1.2: Competitive Employment 5.1.3: Impact of Restrictions

5.2: Proprietary Information

5.2.1: Intellectual Property 5.2.2: Defining Trade Secrets 5.2.3: Property Rights Argument 5.2.4: Fair Competition Argument 5.2.5: Competitor Intelligence

5.3: Conflict of Interest

5.3.1: Defining Conflict of Interest 5.3.2: Some Relevant Distinctions 5.3.3: Kinds of Conflict of Interest 5.3.4: Managing Conflict of Interest

Conclusion: Information and Conflict of Interest

Case: The Aggressive Ad Agency Case: Procter & Gamble Goes Dumpster Diving Case: A Conflict-Laden Deal

6 Privacy

Case: Psychological Testing at Dayton Hudson

6.1: Challenges to Privacy

6.1.1: Privacy in the Workplace 6.1.2: Privacy in the Marketplace

6.2: Meaning and Value of Privacy

6.2.1: History of the Concept 6.2.2: Defining Privacy 6.2.3: Utilitarian Arguments 6.2.4: Kantian Arguments

6.3: Privacy Away from Work

6.3.1: Justifying Monitoring 6.3.2: Limits to Monitoring 6.4: Privacy of Employee Records

6.4.1: Ethical Issues with Records 6.4.2: Justifying a Purpose 6.4.3: Disclosure to Outsiders 6.4.4: Gathering Information 6.4.5: Accuracy, Completeness, and Access

6.5: Big Data Analytics

6.5.1: Data Collection 6.5.2: Ethical Issues with Big Data

6.6: Using the Internet

6.6.1: Information Collection 6.6.2: Ethical Issues with Internet Use 6.6.3: Protecting Privacy

Conclusion: Privacy

82

82

84 85 86 87 88 88 89 90 91 92 93 95 95 96 98

102

106

106

108 108 109 110 111 111 112 113 114 114 115 116 117 117 118 119 120 120 121 122 123 123 124 125

128

Case: Privacy of Text Messages Case: Plugging Leaks at HP Case: Information Handling at ChoicePoint

7 Discrimination and

Affirmative Action

Case: Race Discrimination at Texaco

7.1: What Is Discrimination?

7.1.1: Civil Rights Act of 1964 7.1.2: Disparate Treatment/Impact 7.1.3: Forms of Discrimination

7.2: Sexual Harassment

7.2.1: Defining Sexual Harassment 7.2.2: Forms of Sexual Harassment 7.2.3: Further Issues 7.3: Objections to Discrimination 7.4: Preventing Discrimination

133

133

135 135 136 137 138 138 139 140 140 142

7.4.1: Analysis, Recruitment, and Assessment 142 7.4.2: Objective Tests 142 7.4.3: Subjective Evaluations 143 7.4.4: Sexual Harassment Programs 144

7.5: Affirmative Action

7.5.1: Affirmative Action Plans 7.5.2: Court Actions on Plans 7.5.3: Compensation Argument 7.5.4: Equality Arguments 7.5.5: Utilitarian Arguments 7.5.6: Problems with Affirmative Action

Conclusion: Discrimination and Affirmative Action

Case: Jacksonville Shipyards Case: Sex Discrimination at Walmart

8 Employment Rights

Case: The Firing of Robert Greeley

8.1: Employment at Will

8.1.1: Property Rights Argument 8.1.2: Freedom of Contract Argument 8.1.3: Efficiency Argument 8.1.4: Exceptions

8.2: Right to Due Process

8.2.1: Support for Due Process 8.2.2: of Due Process

8.3: Freedom of Expression

8.3.1: Defining Freedom of Expression 8.3.2: Legal Protection for Expression 8.3.3: Arguments over Expression

8.4: Workplace Democracy

8.4.1: Participation and Democracy 8.4.2: Arguments for Democracy

8.5: Worker Compensation

8.5.1: Setting Wages

145 146 146 147 149 150 151

152

156

156

157 158 159 160 161 162 163 163 164 165 165 166 167 167 168 169 170

8.5.2: Market Outcomes 8.5.3: Minimum Wage

8.6: Executive Compensation

8.6.1: Criticism of CEO Pay 8.6.2: Justifying CEO Pay 8.6.3: Problems with Justification

Conclusion: Employment Rights

Case: Fired for Blogging at Google Case: Worker Participation at Saturn Case: Health Benefits at Walmart

9 Health and Safety

Case: The Ford–Firestone Brawl

9.1: Rights in the Workplace

9.1.1: Meaning of Health and Safety 9.1.2: Protecting Health and Safety

9.2: Hazardous Work

9.2.1: Justifying a Right to Refuse 9.2.2: Justifying a Right to Know

9.3: Reproductive Hazards

9.3.1: Scientific Background 9.3.2: Fetal Protection Policies 9.3.3: Charge of Discrimination 9.3.4: Defending against the Charge 9.3.5: Remaining Issues

9.4: Product Safety

9.4.1: Due Care Theory 9.4.2: Contractual Theory 9.4.3: Strict Liability Theory

Conclusion: Health and Safety

Case: Genetic Testing at Burlington Northern Case: Johnson Controls, Inc. Case: The Collapsing Crib

10 Marketing and Advertising

Case: Selling Hope

10.1: Marketing Ethics Framework 10.2: Sales Practices and Labeling

10.2.1: Deception and Manipulation 10.2.2: Information Disclosure 10.2.3: Labeling

10.3: Pricing and Distribution

10.3.1: Anticompetitive Pricing 10.3.2: Unfair Pricing 10.3.3: Distribution

10.4: Development and Research

10.4.1: Product Development 10.4.2: Marketing Research

10.5: Deceptive Advertising

10.5.1: Defining Deceptive Advertising 10.5.2: Applying the Definition

10.6: Irrational Persuasion 170 10.6:

172 173

10.6.1: Threats to Free Choice 10.6.2: Dependence Effect

10.7: Impact of Advertising 174 10.7:

174 175

10.7.1: Impact on Persons 10.7.2: Impact on Society

10.8: Internet Advertising 176 10.8:

10.8.1: Online Placement 10.8.2: Ethics of Placement

10.9: Social Advertising

Conclusion: Marketing and Advertising

182

182

184

Case: McCormick’s Pricing Strategy Case: Capital One’s Online Profiles Case: Herbalife: A Pyramid Scheme?

184 11 Ethics in

185

Contents vii

224 225 225 226 226 228 229 229 230 232

233

239

Case: Goldman Sachs and the Abacus Deal 239

188 11.1: Financial Services 189 11.1.1: Deception 191

192 193 193 11.2: Financial Markets

11.1.2: Churning 11.1.3: Suitability

194 195 195 11.3: Insider Trading 196

196 198

11.2.1: Fairness in Markets 11.2.2: Derivatives and HFT

11.3.1: Theories of Insider Trading 11.3.2: Evaluation of the Two Theories 11.3.3: Recent Insider Trading Cases

200 11.4: Hostile Takeovers

203

208

208

210

11.4.1: Market for Corporate Control 11.4.2: Takeover Tactics 11.4.3: Role of Directors

Conclusion: Ethics in

Case: SCM Mutual Funds Case: Merrill Lynch and the Nigerian Barge Deal Case: Martha Stewart: Inside Trader? Case: Oracle’s Hostile Bid for PeopleSoft

212 212 12 Corporate Social Responsibility

213

Case: Competing Visions at Malden Mills

214 12.1: The CSR Debate 215

215 217 218 219 12.2: Normative Case for CSR

12.1.1: Meaning of CSR 12.1.2: Examples of CSR 12.1.3: Related Concepts

219 220 222 12.3: Case for CSR

222 224

12.2.1: Classical View 12.2.2: Friedman on CSR

12.3.1: The Market for Virtue 12.3.2: Competitive Advantage

241 242 243 244 245 246 248 251 252 253 254 255 256 257 260

261

268

268

270 271 272 273 274 274 276 278 278 280

12.4: Implementing CSR

12.4.1: Program Selection and Design 12.4.2: Reporting and Accountability

12.5: with a Mission

12.5.1: Social Enterprise 12.5.2: Competing Successfully 12.5.3: Mission and Trust

Conclusion: Corporate Social Responsibility

Case: Starbucks and Fair Trade Coffee Case: Timberland and Community Service Case: Coca-Cola’s Water Use in India

13 Governance, Accountability,

and Compliance

Case: Fraud at WorldCom

13.1: Corporate Governance

13.1.1: Shareholder Control 13.1.2: The Shareholders’ Contract 13.1.3: Shareholders and Stakeholders

13.2: Corporate Accountability

13.2.1: Financial Reporting 13.2.2: Executives and Directors 13.2.3: Criminal Prosecution

13.3: Corporate Compliance

13.3.1: Program Components 13.3.2: Program Benefits 13.3.3: Federal Sentencing Guidelines 13.3.4: Codes of Ethics

Conclusion: Governance, Accountability, and Compliance

Case: Sears Auto Centers Case: Shareholder Rights at Cracker Barrel Case: The Sale of Trans Union

281 14 International Ethics

281 283 285 14.1: Different Standards

286 287 289

290

Case: Mattel’s Toy Woes

14.1.1: Relevant Differences 14.1.2: Variety of Outlooks 14.1.3: Right to Decide 14.1.4: Necessity

14.2: Guidelines for Multinationals

14.2.1: Rights 14.2.2: Welfare 14.2.3: Justice 14.2.4: International Codes

14.3: Wages and Working Conditions 297 14.3:

297

299

14.3.1: Setting Wages 14.3.2: Working Conditions

14.4: Foreign Bribery 300 14.4:

303 305 307

14.4.1: What Is Bribery? 14.4.2: What’s Wrong with Bribery? 14.4.3: Combating Bribery

14.5: Human Rights Abuses 307 14.5:

310 312 313 314 314 315

14.5.1: Constructive Engagement 14.5.2: Liability for Abuses

Conclusion: International Ethics

Case: H. B. Fuller in Honduras Case: Walmart in Mexico Case: Google in China

317 References

319

Credits Index

325

325

328 329 329 330 331 331 332 333 333 335 336 337 339 340 341 342 343 346 347 348

349

357 380 387

Preface

Thfnieerss est iahgchahstih er veeeadmcihteieondnt, twowfh oEic tshhi igicssn oiafbnicvdai otnhute s m Ctooil neadnsutyocontn eoefs r.B eTuahsdie- ing these words, is the transition to digital media. Through Pearson’s online platform REVEL, this text offers not only a new mobile reading experience—on computers, tablets, and even smartphones—but also a new approach to learn ing, with many interactive features, videos, quizzes, and other educational tools. REVEL creates a new frontier in education for both students and instructors. It is exciting for us, as authors, to be pioneer participants in this promis ing and innovative endeavor. Users of previous editions will also note the appear ance of a coauthor, Jeffery D. Smith. His collaboration in the eighth edition not only brings a fresh perspective to what is now a joint venture but also prepares for the future of this classic text, which first appeared more than 20 years ago. Under Jeffery’s guidance, Ethics and the Conduct of will hopefully continue to remain current and rel evant through many new editions. The eight editions of Ethics and the Conduct of have followed the development of the field of business ethics, which has grown in recent decades into an interdis ciplinary area of study that has found a secure niche in both liberal arts and business education. Credit for this development belongs to many individuals—both philoso phers and business scholars—who have succeeded in relating ethical theory to the various problems of ethics that arise in business. They have shown not only that busi ness is a fruitful subject for philosophical exploration but also that future managers in the world of business can ben efit from the results. Ethics and the Conduct of , eighth edition, is a comprehensive and up-to-date discussion of the most prominent issues in the field of business ethics and the major positions and arguments on these issues. It is intended to be used as a text in business ethics courses on either the undergraduate or M.B.A. level. The substantial number of cases included provides ample opportunity for a case-study approach or a combined lecture–discussion format. There has been no attempt to develop a distinctive ethical system or to argue for specific conclusions. The field of business ethics is marked by reasonable disagree ment that should be reflected in any good text for a course. The focus of Ethics and the Conduct of is pri marily on ethical issues that corporate decision makers face in developing policies about employees, customers, investors, and the general public. The positions on these

issues and the arguments for them are taken from a wide variety of sources, including economics and the law. The study of ethical issues in business is not confined to a sin gle academic discipline or even to the academic world. The issues selected for discussion are widely debated by legis lators, judges, government regulators, business leaders, journalists, and, indeed, virtually everyone with an inter est in business.

An underlying assumption of this course is that ethi cal theory is essential for a full understanding of the posi tions and arguments offered on the main issues in business ethics. Fortunately, the amount of theory needed is rela tively small, and much of the discussion of these issues can be understood apart from the theoretical foundation provided here. The text also contains a substantial amount of legal material, not only because the law addresses many ethical issues but also because management deci sion making must take account of the relevant law. Many examples are used throughout the text in order to explain points and show the relevance of the discussion to real-life business practice.

New to the Edition

Preparation of the eighth edition of Ethics and the Conduct of has provided an opportunity to incorporate new developments and to increase its value in the class room. The major changes from the previous edition are as follows:

Chapter 5 on business information has been expanded to provide greater coverage on confidential information and the duty of confidentiality.

Chapter 6 on privacy has been expanded to include more on the protection of both employee and consumer privacy against intrusions, especially from advances in technology.

The section on product safety has been moved from Chapter 10 on marketing and advertising to the cover- age of worker health and safety in Chapter 9. This change has allowed expanded treatment in Chapter 10

f emerging issues in marketing and advertising, espe- cially those related to the use of social media and data analysis, which have been facilitated by the Internet.

Chapter 12 on corporate social responsibility includes a new section on the recent development of for-profit businesses, known as social enterprises, which operate with a mission to deliver vital social services.

ix

x Preface

The Chapter 13 section on corporate governance has been completely rewritten for greater clarity and coherence.

The eighth edition contains 58 short cases, including 12 new ones on such subjects as a falsified résumé at Yahoo, conflict of interest at Goldman Sachs, a firing at Google for blogging, profiling of Internet visitors by a major bank, variable pricing strategies in grocery stores, Herbalife’s unusual multilevel marketing scheme, Coca-Cola’s water use in India, and bribery by Walmart executives in Mexico.

Acknowledgments

I, John Boatright, am grateful for the support of Loyola University Chicago and especially the Quinlan School of . I have benefited from the resources of the Raymond C. Baumhart, S.J., Chair in Ethics, which was created to honor a former president of Loyola University Chicago, who was also a pioneer in the field of business ethics. To Ray Baumhart I owe a special debt of gratitude. I am grateful as well to Jeffery Smith for graciously accept ing my offer to become a coauthor of this edition and my ultimate successor in the preparation of future editions. Finally, my deepest expression of appreciation goes to my wife, Claudia, whose affection, patience, and support have been essential for the preparation of the eighth edition, as they were for the ones previous. It goes without saying that I, Jeffery Smith, am excited to work with John Boatright on this important project and appreciate his generous offer to continue our collaboration on future editions. I hope to maintain the clarity, depth, and even-handedness that have made earlier editions so valuable to students and instructors. For over a decade, I

have benefited from the support of the Banta Center for , Ethics and Society and my colleagues at the Uni versity of Redlands. For everyone there I am grateful. My thanks also go to DePauw University’s Prindle Institute for Ethics for hosting me as the Nancy Schaenen Visiting Scholar while portions of the eighth edition were written. And I also owe so much to my lovely wife, Rita, who pro vides support when I need it most and continues to keep me grounded.

John R. Boatright Jeffery D. Smith

I, John Boatright, would like to express my gratitude for permission to use material from the following sources:

John R. Boatright, Ethics in , 2nd ed. (Malden, MA: Blackwell Publishers, 2008), copyright © 1999, 2008 by John R. Boatright; Ethics in , 3rd ed. (Malden, MA: Wiley Blackwell, 2014), copyright © 2014 by John Wiley & Sons, by permission of the publisher.

John R. Boatright, “Financial Services,” in Michael Davis and Andrew Stark, eds., Conflict of Interest in the Professions (New York: Oxford University Press, 1999), copyright © 1999 by John R. Boatright.

John R. Boatright, “Corporate Governance,” Ency clopedia of Applied Ethics, 2nd ed., Ruth Chadwick, ed. (Amsterdam: Elsevier, 2011), by permission of the publisher.

John R. Boatright, “The Shareholder Model of Corporate Governance,” in Robert W. Kolb, ed., Ency clopedia of Ethics and Society (Thousand Oaks, CA: Sage Publications, 2008), by permission of the publisher.

About the Authors

John R. Boatright is the Raymond C. Baumhart, S.J., Pro fessor of Ethics in the Quinlan School of at Loyola University Chicago. He has served as the Execu tive Director of the Society for Ethics, and is a past president of the Society. He was recognized by the Society in 2012 for a “Career of Outstanding Service to the Field of Ethics.” He is the author of the book Eth

ics in , and has edited Ethics: Critical Issues in Theory and Practice. He serves on the editorial boards of Ethics Quarterly, Journal of Ethics, and and Society Review. He received his Ph.D. in phi losophy from the University of Chicago.

Jeffery D. Smith is the Boeing Frank Shrontz Chair of Pro fessional Ethics and Professor of Management in the Albers School of and Economics at Seattle Uni versity, teaching ethics to management, accounting and finance students. He currently serves on the executive board of the Society for Ethics and the editorial board of the international journal of the Society, Ethics Quarterly. He is the editor of Normative Theory and Ethics (2008) and has published in a variety of business and philosophy journals. He received his Ph.D. from the University of Minnesota.

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Chapter 1

Ethics in the World of

1.1 Identify ethical issues created by diverse

business situations and relationships and the level of decision making required to address them

1.2 Recognize the role of ethics in the conduct of business, with respect to economic principles and the law

1.3 Distinguish between ethical management

and the management of ethics, and each of the three main roles of a manager

1.4 Analyze how ethical business conduct is

challenged by decision making on individual and organizational levels

Case: Merck and the Marketing of Vioxx

On September 30, 2004, Merck & Co. announced the with drawal of Vioxx, its highly profitable pain reliever for arthritis sufferers, from the market.1 This announcement came only seven days after company researchers found in a clinical trial that subjects who used Vioxx more than 18 months had a sub stantially higher incidence of heart attacks. Merck chairman and CEO Raymond V. Gilmartin described the action as “the responsible thing to do.” He explained, “It’s built into the prin ciples of the company to think in this fashion. That’s why the management team came to such an easy conclusion.”2 In the lawsuits that followed, however, damaging documents emerged casting doubt on Merck’s claim that it had acted responsibly by taking appropriate precautions in the develop ment and marketing of the drug.

Development of Vioxx

Competitive Environment

For decades, Merck’s stellar reputation rested on the company’s emphasis on science-driven research and development. Merck employed some of the world’s most talented and best-paid researchers and led other pharmaceutical firms in the publica tion of scientific articles and the discovery of new medicines for the treatment of serious conditions that lacked satisfactory ther apies. For seven consecutive years in the 1980s, Merck was ranked by Fortune magazine as America’s most respected com pany. Merck received widespread accolades in particular for the decision, made in 1978, to proceed with research on a drug for preventing river blindness (onchocerciasis), which is a debilitat

ing parasite infection that afflicts many in Africa, even though the drug was unlikely to pay for itself. Eventually, Merck decided to give away the drug, called Mectizan, for as long as necessary at a cost of tens of millions of dollars per year. This kind of princi pled decision making was inspired by the words of George W. Merck, the son of the company’s founder: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.” Vioxx is an example of Merck’s innovative research. Devel oped as a treatment for the pain of arthritis, the drug acts as an anti-inflammant by suppressing an enzyme responsible for ar thritis pain. Other drugs in the class of nonsteroidal anti-inflam matory drugs (NSAIDs) inhibit the production of two enzymes COX-1 and COX-2. However, COX-1 is important for protecting the stomach lining, and so ulcers and stomach bleeding are potential side effects of these drugs. The distinctive benefit of Vioxx over other NSAID pain relievers, such as ibuprofen (Advil) and naproxen (Aleve), is that it inhibits the production of only the COX-2 enzyme, and not COX-1. After approval by the Food and Drug Administration (FDA) in May 1999, Vioxx quickly became a popular best seller. More than 20 million people took Vioxx between 1999 and 2004, and at the time of the withdrawal, with 2 million users, Merck was earning $2.5 billion annually or 11 per cent of the company’s total revenues from the sale of the drug.

The success of Vioxx came at a critical time for Merck. Not only were the patents on several profitable drugs due to expire, open ing the way for generic competition, but also the competitive

1

environment of the entire …