Answer the four questions in the attached Word document. Use the attached 3 PDF files (taken from the textbook)

Answer the four questions in the attached Word document. Use the attached 3 PDF files (taken from the textbook) to draft the responses. Answers are limited to one page per question and should be clear and concise (as if making summary presentation to the Board of Directors). Sources need to have references.


CHAPTER
LAW, VALUE CREATION,
AND RISK MANAGEMENT
1
INTRODUCTION
WINNING LEGALLY
Governments immerse modern organizations “in a sea of law.” 2
regulation, including burdensome licensing requirements and
Public law provides the rules of the game3 within which firms
filing fees, can hamper new venture formation.8
compete to create and capture value. Law does more than
“Legally astute” managers who understand and proactively
regulate and constrain, however. It also enables and facili-
manage the legal aspects of business can use the law and the
tates. 4 Indeed, multiple-country studies reveal that the effi-
legal system to increase both the total value created and the share
ciency of a country’s capital markets is directly related to the
of that value captured by the firm.9 As Tom Hinthorne remarked,
country’s legal environment. 5 Researchers found a statistically
“[L]awyers and corporate leaders who understand the law and
significant relationship between a country’s economic pros-
the structures of power in the U.S.A. have a unique capacity to
perity, as measured by the per capita gross domestic product,
protect and enhance share-owner wealth.”10 For example, compa-
and each of the following:
nies can use patents, copyrights, trademarks, and trade secrets to
differentiate their products, command premium prices, erect bar-

Judicial independence.

Adequacy of legal recourse.
Managers can also make their own “private law” by entering into

Police protection of business.
contracts and crafting certain governance structures. A variety of

Demanding product standards.

Stringent environmental regulations.

Quality laws relating to information technology.

Extent of intellectual property protection.

Effectiveness of antitrust laws.6
For example, adequate protection of minority shareholder
rights increases investment in new ventures.7 Conversely, excessive
riers to entry, sustain first-mover advantage, and reduce costs.
legal tools, ranging from insurance policies to contractual indemnification provisions and limitations on liability, can help firms
allocate and manage risk. Finally, managers can lobby and work
with regulators to change the rules of the game.
CH APTER OV ERVIEW
The purpose of this chapter is to provide a framework for
analyzing the intersection of law and management. It introduces
the systems approach to business and society, a descriptive
framework that integrates legal and societal considerations
1. See generally Constance E. Bagley, Winning Legally: How to Use the
Law to Create Value, Marshal Resources, and Manage Risk (2005).
2. Lauren B. Edelman & Mark C. Suchman, The Legal Environments of
Organizations, 23 Ann. Rev. Soc. 479 (1997).
3. Douglass C. North, Institutions, Institutional Change and
Economic Performance 3–4 (1990).
4. Mark C. Suchman, D.J. Steward & C.A. Westfall, The Legal Environment
of Entrepreneurship: Observations on the Legitimization of Venture Finance
in Silicon Valley, in The Entr epr eneurship Dynamic: Origins
of Entrepreneurship and the Evolution of Industries (C.B.
Schoonhoven & E. Romanell, eds., 2001).
5. R. La Porta, F. Lopez-de-Silanes, A. Shleifer & R.W. Vishny, Legal
Determinants of External Finance, 52 J. Fin. 1131 (1997).
6. Michael E. Porter, Enhancing the Microeconomic Foundations of Prosperity:
The Current Competitiveness Index, in World Economic Forum, The
Global Competitiveness Report 2001–2002 (2002).
7. S. Johnson, R. La Porta, F. Lopez-de-Silanes & A. Shleifer, Tunneling,
90 Am. Econ. Rev. 22 (2000).
with mainstream theories of competitive advantage and social
responsibility. The chapter then outlines the four primary public
policies furthered by business regulation in the United States.
It concludes with a discussion of how legally astute managers
can enhance realizable firm value.
8. S. Djankov, R. La Porta, F. Lopez-de-Silanes & A. Shleifer, The Regulation
of Entry, 117 Q.J. Econ. 1 (2002).
9. See Constance E. Bagley, Winning Legally: The Value of Legal Astuteness, 33
Acad. Mgmt. Rev. 378 (2008).
10. Tom Hinthorne, Predatory Capitalism, Pragmatism, and Legal Positivism in the
Airlines Industry, 18 Strategic Mgmt. J. 509 (1996). See also George J. Siedel,
Six Forces and the Legal Environment of Business: The Relative Value of Business
Law Among Business School Core Courses, 37 Am. Bus. L.J. 37 (2000).
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 1
11
THE SYSTEMS APPROACH TO
BUSINESS AND SOCIETY
Society grants rights and powers to business, but society can
revoke those rights and powers if firms do not act responsibly.11 As Tom Stephens, CEO of Manville Corporation,
put it when Manville decided to add labels to its fiberglass
products, warning of possible carcinogenic risks, “The laws
of society are more powerful than any law that Congress
can put on the books. Woe to any businessman who doesn’t
read the laws of society and understand them.”12 As a result,
“the task of anticipating, understanding, evaluating, and
responding to public policy developments within the host
environment is itself a critical managerial task.”13
As shown in Exhibit 1.1, firms operate within a broader
societal context, which directly affects the competitive environment and the value of firm resources.14 At the center is
the top management team (TMT), which evaluates and
pursues opportunities for value creation and capture while
managing the attendant risks. Given the characteristics of
the members of the TMT and their values, the parameters
set by the public law, the firm’s position within the competitive environment, and the nature and uniqueness of the
firm’s resources, the TMT defines the value proposition
and selects and performs the activities in the value chain.
EXHIBIT 1.1
Systems Approach to Business and Society
Public
Law
Competitive
Environment
Top
Management
Team
Firm’s
Resources
Value
Proposition
and Activities in
Value Chain
Societ al Cont ext
11. D.J. Wood, Corporate Social Performance Revisited, 16 Acad. Mgmt. Rev.
691 (1991).
12. William Glaberson, Of Manville, Morals and Mortality, N.Y. Times, Oct. 9, 1988.
13. Lee E. Preston & James E. Post, Private Management and Public Policy:
The Principle of Public Responsibility 4 (1975).
14. See generally Constance E. Bagley, What’s Law Got to Do with It?: Integrating Law
and Strategy, 47 Am. Bus. L.J. 587 (2010).
LAW, VALUE CREATION, AND RISK MANAGEMENT
3
1-1a Meeting Societal Expectations
The systems approach recognizes that “business decisions
consist of continuous, interrelated economic and moral
components.”15 It also builds on stakeholder theory’s
insight that firms have relationships with many constituent groups, which both affect and are affected by the
actions of the firm.16
1-1b Effect of Law on the Competitive
Environment and the Firm’s Resources
Law helps shape the competitive environment and affects
each of the five forces, identified by Michael Porter, that
determine the attractiveness of an industry: buyer power,
supplier power, the competitive threat posed by current
rivals, the availability of substitutes, and the threat of new
entrants.17 Exhibit 1.2 shows how managers can use law
to affect these forces and also indicates the public policies
behind the relevant laws.
Law also affects the allocation, marshaling, value, and
distinctiveness of the firm’s resources. Under the resourcebased view (RBV) of the firm, a firm’s resources can be
a source of sustained competitive advantage if they are
valuable, rare, and imperfectly imitable by competitors
and have no strategically equivalent substitutes.18 Legal
astuteness is a valuable managerial capability that may be
a source of sustained competitive advantage.19 Conversely,
failure to integrate law into the development of strategy
and of action plans can place a firm at a competitive disadvantage and imperil its economic viability.20
Consider the fall of Enron and its once venerable
accounting firm Arthur Andersen (described in Chapter 2)
and the collapse of WorldCom in the wake of massive
accounting fraud; the implosion of Barings, England’s
oldest merchant bank, after illegal trades by Nick Leeson;
and the collapse of mortgage brokerage firms implicated
in predatory lending (described further in the “Inside
Story” in Chapter 18). Violation of criminal laws can
also land an executive in prison, as happened to Jeffrey
Skilling, former CEO of Enron, who was convicted of
fraud and originally sentenced to more than twenty-four
years in prison. (His sentence was reduced to fourteen
years in June 2013 as part of a court-ordered reduction
and plea bargain.)
15. D.L. Swanson, Addressing a Theoretical Problem by Reorienting the Corporate
Social Performance Model, 20 Acad. Mgmt. Rev. 43 (1995).
16. Thomas Donaldson & Lee E. Preston, The Stakeholder Theory of the
Corporation: Concepts, Evidence, and Implications, 20 Acad. Mgmt. Rev. 65
(1995).
17. Michael E. Porter, How Competitive Forces Shape Strategy, in On Competition
21–22 (1996). See also Richard G. Shell, Make the Rules or Your Rivals
Will (2004).
18. Margaret A. Peteraf & Jay B. Barney, Unraveling the Resource-Based Tangle, 24
Managerial & Decision Econ. 309 (2003). See also George J. Siedel, Using
Law for Competitive Advantage (2002).
19. Bagley, supra note 14.
20. Bagley, supra note 9.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
4
UNIT I
EXHIBIT 1.2
FOUNDATIONS OF THE LEGAL AND REGULATORY ENVIRONMENT
Using Law to Affect the Competitive Environment
Public Policy
Objectives
Porter’s Five Forces
Supplier
Power
Direct Competition
Threat of Entry
Substitution
Buyer Power
Promote
economic
growth
Obtain development
subsidies, tax breaks for
domestic firms. Litigate
application of antitrust laws.
Secure patents and
other IP rights. Lobby
for protectionist
tariffs to advantage
domestic firms.
Secure trademarks.
Bundle products.
Enter into longterm supply
contracts.
Secure cost-plus
government contracts
and no-bid contracts
from Department of
Defense. Enter into
exclusive dealing
contracts. Use
contracts or intellectual
property rights to
bundle products.
Protect
worker
interests
Restrict availability of visas
needed by rivals. Lobby
for tighter worker safety
regulations to detriment of
lesser rivals.
Seek limits on
overseas outsourcing.
Enter into
employment
agreements with
covenants not to
compete. Subject
stock to vesting.
Litigate
definition of
“employee.”
Lobby for ban on
products made with
child or slave labor.
Promote
consumer
welfare
Seek to outlaw competing
products on safety grounds.
Promote expedited
regulatory approval of
generic drugs and biologics.
Disclose product ingredients
and place of manufacture.
Impose licensing
regime. Demand
posting of bond by
service providers.
Seek to outlaw
substitute products
on safety grounds.
Require labeling
of “foreign”
parts.
Require purchasers
to buy services
from state-licensed
providers.
Promote
public
welfare
Obtain ethanol-style
subsidies for firm’s
product. Lobby for tougher
environmental standards.
Resist reforms
designed to
reduce the costs
of incorporating,
obtaining licenses,
and issuing securities.
Seek to
grandfather
existing products
and facilities
from new taxes
and regulatory
requirements.
Lobby for
reduced
import duties
on foreign
suppliers.
Lobby for domestic
content requirements
and higher
transportation taxes.
Promote bans on the
payment of bribes.
Source: Bagley, supra note 14, at 599.
Even if the firm survives, noncompliance destroys
value. Illegal conduct can put a firm at a competitive
disadvantage by diverting funds from strategic investments, tarnishing the firm’s image with customers and
other stakeholders, raising capital costs, and reducing
sales volume. 21 Researchers found that Fortune 500
firms convicted of illegal conduct earned significantly
lower returns on assets than unconvicted firms. In the
case of WorldCom, $200 billion of shareholder value
was lost in less than a year, making it the largest corporate fraud in history.22
More recently, JPMorgan Chase, the largest U.S. bank
based on assets, agreed during one three-month period
in 2013 to pay billions of dollars in fines and settlements. They included a $13 billion settlement with the
Justice Department stemming from its subprime mortgage business,23 penalties of $920 million to settle charges
relating to $6.2 billion of losses from risky trading (the
21. Melissa S. Baucus & David A. Baucus, Paying the Piper: An Empirical
Examination of Long-Term Financial Consequences of Illegal Corporate
Behavior, 40 Acad. Mgmt. J. 129 (1997).
22. See Richard Breeden, Restoring Trust, filed with the WorldCom bankruptcy
court on August 26, 2003.
23. Jessica Silver-Greenberg & Ben Protess, JP Morgan Reveals How It Formed
Mortgages, N.Y. Times, Nov. 20, 2013, at B1.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 1
so-called London Whale trades),24 and an additional fine
of $100 million by the U.S. Commodity Futures Trading
Commission after admitting that reckless behavior had
led to the London Whale debacle.25
In contrast, at least under certain circumstances, the
ability to proactively go beyond the letter of the law can
result in competitive advantage.26 Legally astute management teams practice strategic compliance management.27
They view the cost of complying with government
regulations as an investment, not an expense. Instead
of just complying with the letter of the law, they seek
out and embrace operational changes that will enable
them to convert regulatory constraints into innovation
opportunities.28
Proactive strategies for dealing with the interface
between a firm’s business and the natural environment that
go beyond environmental regulatory compliance have been
associated with improved financial performance.29 Yet
firms’ ability to reduce pollution became a source of competitive advantage only after managers replaced the mindset
of reducing pollution to meet government end-pipe restrictions with a search for ways to use environment-friendly
processes to create value.30
LAW, VALUE CREATION, AND RISK MANAGEMENT
5
1-1d Law Is Dynamic
just a static external force acting upon managers and their
firms. Instead, law and organizations are “endogenously
coevolutionary.”31 By lobbying legislators and members
of the executive branch, forming coalitions, and working
directly with regulatory bodies, managers can help shape
the environment in which they do business.32 As with any
other activity, managers engaged in lobbying and other
political activities must be mindful of the ethical aspects
of their actions.
Unfortunately, enlightened self-interest is not always
a substitute for government regulation. Paul Krugman
criticized former Federal Reserve Board Chair Alan
Greenspan and other banking regulators for ignoring
warnings about predatory lending practices,33 which
ultimately contributed to the subprime mortgage crisis
in 2007–2008. Krugman quoted a 1963 essay in which
Greenspan dismissed as a “collectivist myth” the idea that
business leaders, left to their own devices, would “attempt
to sell unsafe food and drugs, fraudulent securities and
shoddy buildings”; instead, Greenspan asserted that “it is
in the self-interest of every businessman to have a reputation for honest dealings and a quality product.” Krugman
faulted Greenspan for putting “ideology above public
protection.”34 Greenspan himself subsequently remarked:
“Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state
of shocked disbelief.”35
Laws enacted in response to corporate misdeeds often
impose greater restrictions and costs on business than
would have been imposed had firms acted more responsibly at the outset. A prime example is the Dodd–Frank
Wall Street Reform and Consumer Protection Act of 2010
(discussed in Chapters 6, 17, 18, 21, and 23), which was
enacted after widespread abuses in the subprime mortgage
market led to near-global financial collapse.
The systems approach recognizes the dynamic nature
of law. Law affects the market and market players, but
market players also affect the law and the way it is interpreted, applied, and changed over time. Thus, law is not
12
1-1c Law and the Value Chain
As shown in Exhibit 1.3, each activity in the value chain
has legal aspects. From a firm’s choice of business entity
to the warranties it offers and the contracts it negotiates,
law pervades the activities of the firm, affecting both its
internal organization and its external relationships with
customers, suppliers, and competitors.
24. Jill Treanor, JP Morgan Boss in Talks Over Fine for Sub-Prime Bond Sales;
Bank May Have to Settle on Record $11bn Penalty, The Guardian (U.K.),
Sept. 27, 2013, at 37.
25. Virginia Harrison, JP Morgan to Pay Fresh $100M London Whale Fine,
CNNMoney (Oct. 16, 2013), http://money.cnn.com/2013/10/16/news/
companies/jpmorgan-whale-settlement.
26. Bagley, supra note 9.
27. Bagley, supra note 1.
28. Regulation may prompt firms to innovate, making them more competitive. Barry
M. Mitnick, The Strategic Uses of Regulation—and Deregulation, in Corporate
Political Agency: The Construction of Competition in Public Affairs
(Barry M. Mitnick ed., 1993); Michael E. Porter & C. van der Linde, Green and
Competitive, Harv. Bus. Rev., May 1995, at 120.
29. See William Q. Judge & Thomas J. Douglas, Performance Implications of
Incorporating Natural Environmental Issues into the Strategic Planning Process:
An Empirical Assessment, 35 J. Mgmt. Stud. 241 (1998); Robert D. Klassen &
D. Clay Whybark, The Impact of Environmental Technologies in Manufacturing
Performance, 42 Acad. Mgmt. J. 599 (1999).
30. Chad Nehrt, Maintainability of First Mover Advantages When Environmental
Regulations Differ Between Countries, 23 Acad. Mgmt. Rev. 77 (1998).
LAW AND PUBLIC POLICY
Public law—the formal rules embodied in constitutions,
statutes enacted by legislatures, judicial decisions rendered
by courts, and regulations promulgated by administrative
agencies—both reflects and helps shape societal expectations. The laws and regulations applicable to U.S. business
further four primary public policy objectives: promoting
economic growth, protecting workers, promoting consumer welfare, and promoting public welfare. This
typology is depicted in Exhibit 1.4.
31. Edelman & Suchman, supra note 2, at 501.
32. See L.G. Weber, Citizenship and Democracy: The Ethics of Corporate Lobbying, 6
Bus. Ethics Q. 253 (1996).
33. Id.
34. Paul Krugman, Disastrous De-Regulation: For Greenspan and Bush, Ideology
Trumps Oversight, Pittsburgh Post-Gazette, Dec. 22, 2007, at B7.
35. Alan Greenspan, We Will Never Have a Perfect Model of Risk, Fin. Times,
Mar. 17, 2008, at 13.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
6
UNIT I
EXHIBIT 1.3
Support
Activities
FOUNDATIONS OF THE LEGAL AND REGULATORY ENVIRONMENT
Law and the Value Chain
Firm
infrastructure
Limited liability, corporate governance, choice of business entity, tax planning,
and securities regulation
Human
resource
management
Employment contracts, at-will employment, wrongful termination, bans on
discrimination, equity compensation, Fair Labor Practices Act, National Labor
Relations Act, workers’ compensation, and Employee Retirement Income
Security Act
Technology
development
Intellectual property protection, nondisclosure agreements, assignments of
inventions, covenants not to compete, licensing agreements, and product liability
Procurement
Contracts, Uniform Commercial Code, Convention on the International Sale of
Goods, bankruptcy laws, securities regulation, and Foreign Corrupt Practices Act
Inbound
logistics
Operations
Outbound
logistics
Marketing
and sales
Service
Contracts
Workplace
safety
and labor
relations
Contracts
Contracts
Environmental
compliance
Uniform
Commercial Code
Strict product
liability
Antitrust
limits on
exclusive
dealing
contracts
Environmental
compliance
Environmental
compliance
Consumer
privacy
Strict
product
liability
Process
patents and
trade secrets
Warranties
Convention on
the International
Sale of Goods
Waivers and
limitations of
liability
Consumer
protection laws,
including privacy
protection
Doctrine of
unconscionability
Bans on
deceptive or
misleading
advertising or
sales practices
Customer
privacy
Antitrust limits
on vertical
and horizontal
market division,
tying and
predatory pricing
Import/export
controls
World Trade
Organization
Primary
Activities
Margin
Sources: Diagram and text in roman type from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (1985);
text in italic type adapted from Bagley, supra note 1, and M.E. Porter & M.R. Kramer, Strategy and Society: The Link Between Competitive Advantage and Corporate
Social Responsibility, Harv. Bus. Rev., Dec. 1, 2006, at 78.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 1
EXHIBIT 1.4
LAW, VALUE CREATION, AND RISK MANAGEMENT
7
Underlying Public Policy Rationales of U.S. Laws
Promote Economic Growth
Protect
Property
Rights
Enforce
Contracts
Allocate
Risks
Facilitate
Capital
Markets
Create
Incentives to
Innovate
Promote Liquid
and Skilled
Labor Markets
Provide Economic
Incentives and
Infrastructure
Promote
Free Trade
Protect Workers
Regulate Certain
Terms and
Conditions of
Employment
Require Employer to Provide
Certain Benefits
Protect Civil
Rights in
Workplace
Promote Consumer Welfare
Facilitate LowCost Products
and Services
Promote Safe
Products and
Services
Prevent
Deceptive
Practices
Facilitate Innovative
Products and Services
Promote Public Welfare
Promote
Effective
Administration
of Justice
Collect
Taxes and
Spend Money
Other major economic powers tend to have laws that
further these same objectives, albeit with varying degrees
of emphasis on the different objectives and varying ways
of furthering them.36 Indeed, much of the current debate
on what constitutes good corporate governance turns on
how much weight each country gives to the interests of
shareholders, debt holders, employees, customers, and suppliers and to the protection of the environment.
1-2a Promoting Economic Growth
Various laws and regulations promote economic growth.
As Exhibit 1.5 shows, this is done by protecting private
property rights; enforcing private agreements; allocating
risks;37 facilitating the raising of capital; creating incentives
to innovate; promoting liquid and skilled labor markets;
providing subsidies, tax incentives, and infrastructure;
and promoting free trade in the global markets.
36. For example, Germany seeks to promote economic growth by facilitating
the capital markets, but its goal of protecting workers has led to the system
of codetermination whereby half of the members of the supervisory boards
of large German corporations are elected by the workers and unions, and
half are elected by the shareholders.
37. For an excellent discussion of government’s role in allocating risk, see David A.
Moss, When All Else Fails: Government as the Ultimate Risk Manager
(2001).
Protect
Fundamental
Rights
Protect
Environment
1-2b Protecting Workers
Worker protection constitutes a second major public
policy underlying U.S. business law. This is accomplished by regulating certain terms and conditions of
employment, requiring the employer to provide certain
benefits, and protecting workers’ civil rights, as outlined in Exhibit 1.6. Complying with these requirements
imposes costs on employers that society, acting through
the legislature and the courts, has deemed appropriate
for employers to bear.
1-2c Promoting Consumer Welfare
Business regulation is designed to promote consumer
welfare by encouraging the sale of safe and innovative
products and services at a fair price, preventing deceptive
practices, and protecting consumer privacy, as shown in
Exhibit 1.7.
1-2d Promoting Public Welfare
As depicted in Exhibit 1.8, business regulation promotes
public welfare by ensuring the effective administration of
justice, collecting taxes and spending money, protecting
fundamental rights, and protecting the environment.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
8
UNIT I
EXHIBIT 1.5
FOUNDATIONS OF THE LEGAL AND REGULATORY ENVIRONMENT
How U.S. Law Promotes Economic Growth
Promoting Economic Growth
Promote Free
Trade
Protect
Property
Rights
WTO
NAFTA
Property law
Other free-trade
agreements
Enforce
Contracts
Allocate
Risks
Contract law
Strict liability
for products
Provide
default rules
Environmental
liability
Strict liability for
ultrahazardous
activities
Respondeat
superior
Create
Incentives to
Innovate
Facilitate
Capital
Markets
Choices of
business entity
Intellectual
property protection
Securities
regulation
Agency law
Abolition of
slavery
At-will
employment
Nonconfiscatory
taxes
Provide
Economic
Incentives and
Infrastructure
Subsidies
Tax incentives
Infrastructure
Ban on
unreasonable
covenants not to
compete
Bankruptcy law
Doctrine of
unconscionability
EXHIBIT 1.6
Promote Liquid
and Skilled
Labor Markets
Public education
How U.S. Law Protects Workers
Protecting Workers
Regulate
Certain Terms
and Conditions
of Employment
Require
Employer to
Provide Certain
Benefits
Protect
Civil Rights In
Workplace
Minimum
wage
Workers’
compensation
Bans on
discrimination
Safety rights
Unemployment
insurance
Bans on
harassment
Social Security
and Medicare
taxes
Privacy
protection
Consequences
of wrongful
termination
Right to ply
trade
Right to form
unions
Regulation of
employee
benefit plans
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 1
EXHIBIT 1.7
LAW, VALUE CREATION, AND RISK MANAGEMENT
9
How U.S. Law Promotes Consumer Welfare
Promoting Consumer Welfare
Promote Sale of
Safe Products
and Services
Product liability
law
Product safety
requirements
Facilitate LowCost Products
and Services
Antitrust law
Bans on unfair
business practices
Facilitate
Innovative
Products and
Services
Prevent
Deceptive
Practices
Intellectual
property protection
Ban on deceptive
advertising
Limits on postemployment
restrictions on competing
Fair lending requirements
Unconscionability
Prospectus delivery
and periodic reporting
requirements
Protection of consumer
privacy
Other consumer
protection laws
EXHIBIT 1.8
How U.S. Law Promotes Public Welfare
Promoting Public Welfare
Ensure
Effective
Administration
of Justice
Define torts
and crimes
Enforce laws
and punish
violators
Provide
impartial
judicial
system
Collect
Taxes and
Spend
Money
Protect
Fundamental
Rights
Tax laws
Due process
Provide
government
funding
Equal protection
Redistribute
wealth
Spur
investment
1-2e Policy Conflicts
Sometimes, these public policies conflict. In the following
case, the Supreme Court considered whether the public
Free speech
Protect
Environment
Environmental
law
Land use
Voting
Jury trial
Unenforceability
of unconscionable
contracts
policy of ensuring freedom of expression outweighed the
interest of physicians in keeping their prescribing practices
private and the interest of the state in reducing health-care
expenses.
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
10
UNIT I
FOUNDATIONS OF THE LEGAL AND REGULATORY ENVIRONMENT
A CASE IN POINT
SUMMARY
Sorrell v. IMS Health Inc.
Facts!A Vermont statute prohibited pharmacies from selling prescriber-identifying information for marketing prescription drugs without the prescriber’s consent. This information
identifies the drugs and dosages that individual doctors prescribe for their patients. Data
miners analyze such information and sell it to pharmaceutical manufacturers, which use the
information to refine their sales pitches to physicians and thereby increase sales of brandname drugs. Vermont data miners and an association of brand-name drug manufacturers
challenged the statute as a violation of their free-speech rights under the First Amendment
of the U.S. Constitution, as applied to the states by the Fourteenth Amendment.
Supreme Court of the
United States
131 S. Ct. 2653 (2011).
CASE 1.1
Issue Presented!Is a state law banning the sale of prescriber-identifying information
to pharmaceutical firms without the prescriber’s consent constitutional?
Summary of Opinion!The U.S. Supreme Court
began by noting that speech in aid of drug manufacturing is protected by the Free Speech Clause of the First
Amendment. The Vermont statute precluded detailers—
drug reps who meet with physicians to provide details
about brand-name drugs and often free samples—from
obtaining prescriber-identifying information but permitted its purchase by others. Because the statute disfavored
speech with a particular content (marketing) and disfavored
specific speakers (detailers), it was subject to “heightened
judicial scrutiny.” For the statute to pass muster, Vermont
had to show that it directly advanced a substantial government interest and that it was narrowly drawn to achieve
that interest.
“the State may not seek to remove a popular but disfavored product from the marketplace by prohibiting truthful, nonmisleading advertisements that contain impressive
endorsements or catchy jingles.” As for disruptive visits,
physicians are free not to meet with detailers.
Vermont argued that the law was necessary to protect
the privacy of prescribing physicians and to reduce the
likelihood that physicians would prescribe expensive
brand-name drugs that are not in the best interests of
patients or the State. The legislature found that detailing
“increases the cost of health care and health insurance;
encourages hasty and excessive reliance on brand-name
drugs, before the profession has observed their effectiveness