CASES and Articles:

Chevron v. NRDC, et al. (1984)

Institutions are rules (1.permanent change but slow, 2. Institutions provide stability

Interest groups , firms are driving the rules and regulations.

Rules are more reactive and not proactive (not the way how it should be) as a result of people’s
actions.

Non market stategy: law regulations , governmental regulations, you can use them as enablers
because it protects patents and provides an opportunity that might otherwise not be there.

Help with market strategy to create en try barriers to other firms (through regulation)

• Players:

○ Chevron (Chevron petitioned to take over the set of points the government was
fighting)

○ Congress

○ EPA (defines bubble)

○ interest groups such as the NRDC-National Resources Defense Council

○ Judicial branch (weighted in on Chevron Case)

• Authority:

○ Congress

• Controversy: (what had the agency done)?

○ Legislative term “stationary source” is not defined well

○ Congress amended the Clean Air Act in 1977 to address states that had failed to
attain the air quality standards established by the Environmental Protection Agency
(EPA) (Defendant). "The amended Clean Air Act required these 'nonattainment'
States to establish a permit program regulating 'new or modified major stationary
 sources' of air pollution." 467 U.S. at 840. During the Carter administration, the EPA
defined a source as any device in a plant that produced pollution. In 1981, after
Ronald Reagan's election, the EPA adopted a new definition that allowed an existing
plant to get permits for new equipment that did not meet standards as long as the
total emissions from the plant itself did not increase. The Natural Resources Defense
Council (NRDC), an environmental protection group, challenged the EPA regulation
in federal court. Chevron, an affected party, appealed the lower court's decision.

○ Bubble was acceptable (Carter Admin. EPA)

• How did the Court of Appeals (lower court act)?

○ The Court of Appeals reversed the agency, primarily on grounds that while the
language of the act was ambiguous, the pollution reducing purpose of the non-
attainment provisions made the bubble policy "inappropriate" for those areas.

• Step by Step

○ First it looked to congress who didn’t specify the information

○ Then they looked at the Clean Air Act which said congresses duty to
protect the air

○ Then they looked at their own decisions and the precedent that the
court of appeals set for themselves

○ Court of Appeals found on precedent that it should strike down the current appeal if:

• Congress specifies how the agency is supposed to act, or

• The definition is inconsistent with the source

○ Appeals case was NRDC v US: EPA lost, Chevron comes in as an interest group Court
of Appeals – Congress finds Clean Air Act & Amendments were in conflict w/ main
purpose – to protect clean air

• What does the Supreme Court say?

○ If Congress left a gap then Administrative Agency, EPA had the right to fill in the
gaps, EPA’s definition of “source” is permissible

• Key Learnings:

○ Definitive rule on how courts are supposed to make decisions involving agencies

○ The courts can’t made a definitions (such as defining the bubble) but they can make
sure the definition is consistent with the statute

○ The find the Regan rule (change of source definition) is admissible

○ Side note: agencies are required to give notice and ask for comments

• Role of Interest groups in making the law?

○ Bringing their controversy to the court

 ○ Brings info into the process

○ Buy (campaign contributions)

○ Bribes

○ Leveraging (threats of all kinds)

• Executive Order 1221 – (under Reagan Administration) – a cost-benefit analysis had to

be performed for various decisions, some confusion on how to measure benefits

• Can executive order be challenged in court system? No, because they only effect the
executive branch and are limited to this area

• Where do executive branch and judicial branches overlap? (when Nixon didn’t want to turn
over tapes)

SUMMARY:

Chevron v. NRDC, et al. (1984)

• Article Summary- Perhaps the most frequently cited decision in modern American
Administrative Law is Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S.
837 (1984). At issue in Chevron was the Environmental Protection Agency's
decision to allow "bubble" definitions of pollution sources in Clean Air Act non-
attainment areas. (A non-attainment area is one in which the concentration over time of
a major regulated pollutant exceeds the regulatory maximum.) The bubble policy allows
polluters to treat entire plants as if they exist under a large bubble. The focus of regulation
is not on the emissions of individual smokestacks or pieces of equipment within the plant,
but rather on the total amount of pollution coming out of the bubble. Polluters are free
(within limits that need not be discussed here) to change processes and equipment within
the bubbled plant so long as the total amount of pollution coming out of the bubble does
not increase.

The bubble policy was adopted in an informal rulemaking proceeding by the recently
installed Reagan administration (although it had been seriously considered in the Carter
administration and it was already applicable in attainment areas). The Natural Resources
Defense Council immediately and vigorously challenged it. NRDC's concern was that
the policy would allow polluters to modify equipment within aging plants
without making the upgrades to meet the higher standards applicable to new
sources and major modifications. The NRDC found this particularly troubling in light of
the Clean Air Act's expressed goal of bringing non-attainment areas into attainment. The
EPA defended the policy on grounds that it would result in no more pollution over time
than a stricter policy -- since many existing polluters had long been avoiding all
modifications that might subject them to higher standards, that it would reduce the
confusion of having different rules applicable in attainment and non-attainment areas [the
same area can be attainment for some pollutants and non-attainment for others], and that
it was in fact consistent with the Clean Air Act.
 The Court of Appeals reversed the agency, primarily on grounds that while the
language

of the act was ambiguous, the pollution reducing purpose of the non-attainment

provisions made the bubble policy "inappropriate" for those areas.

The Supreme Court treated the problem as one of statutory interpretation. The
question was whether the bubble definition of "source" was consistent with the Clean Air
Act. After carefully reviewing the (somewhat Delphic) definitions of source in the Act (e.g.,
"building, structure, facility, or installation") the court concluded that the statute did not
make a clear choice on the question. Justice Stevens' opinion went on to lay down the
following guidelines:

When a court reviews an agency's construction of the statute which it

administers, it is confronted with two questions. First [this is now known as
"Chevron Step I"], always, is the question whether Congress has directly spoken
to the precise question at issue. If the intent of Congress is clear, that is the end
of the matter; for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress. If, however, the court determines
Congress has not directly addressed the precise question at issue, ["Chevron
Step 2"] the court does not simply impose its own construction on the statute,
as would be necessary in the absence of an administrative interpretation.
Rather, if the statute is silent or ambiguous with respect to the specific issue,
the question for the court is whether the agency's answer is based on a
permissible construction of the statute.

"The power of an administrative agency to administer a congressionally created

. . . program necessarily requires the formulation of policy and the making of
rules to fill any gap left, implicitly or explicitly, by Congress." Morton v. Ruiz,
415 U.S. 199, 231 (1974). If Congress has explicitly left a gap for the agency to
fill, there is an express delegation of authority to the agency to elucidate a
specific provision of the statute by regulation. Such legislative regulations are
given controlling weight unless they are arbitrary, capricious, or manifestly
contrary to the statute. Sometimes the legislative delegation to an agency on a
particular question is implicit rather than explicit. In such a case, a court may
not substitute its own construction of a statutory provision for a reasonable
interpretation made by the administrator of an agency...

Judges are not experts in the field, and are not part of either political branch of
the Government. Courts must, in some cases, reconcile competing political
interests, but not on the basis of the judges' personal policy preferences. In
contrast, an agency to which Congress has delegated policymaking
responsibilities may, within the limits of that delegation, properly rely upon the
 incumbent administration's views of wise policy to inform its judgments. While
agencies are not directly accountable to the people, the Chief Executive is, and
it is entirely appropriate for this political branch of the Government to make
such policy choices -- resolving the competing interests which Congress itself
either inadvertently did not resolve, or intentionally left to be resolved by the
agency charged with the administration of the statute in light of everyday
realities.

We hold that the EPA's definition of the term "source" is a permissible

construction of the statute which seeks to accommodate progress in reducing
air pollution with economic growth. "The Regulations which the Administrator
has adopted provide what the agency could allowably view as . . . [an] effective
reconciliation of these twofold ends. . . ."

Wiki definition: A major stationary source is a source that emits more than a certain amount of
a pollutant as defined by the U.S. Environmental Protection Agency (EPA). The amount of pollutants
allowed for certain new sources is defined by the EPA's New Source Performance Standards (NSPS).

A stationary source in air quality terminology is any fixed emitter of air pollutants, such as fossil
fuel burning power plants, petroleum refineries, petrochemical plants, food processing plants and other
heavy industrial sources.

A mobile source in air quality terminology is a non-stationary source of air pollutants, such as
automobiles, buses, trucks, ships, trains, aircraft and various other vehicles.

Minton v. Caveney (California, 1961)

Court said there was not corporations because they did not have any assets and he was
personally liable (he would have been protected if he had assets, and keep records—in this case
if he lost his assets they won’t go after you.. but if you start with no money and comingled
personal money they can go after you)

Piercing corporate veil (must buy insurance etc.. he did not)

Torts system case: because the company was undercapitalize and this was unfair to the
customers to not be protected.

Into
Summary:

Plaintiff’s daughter drowned in swimming pool run by Seminole Hot Springs Corporation. Present
action to hold defendant Cavaney personally liable for the judgment against Seminole. Cavaney
is shareholder, secretary, and treasurer, Board member, and also the corporation’s
lawyer. Cavaney kept the records in his office.

The trial court entered judgment for plaintiffs for $10,000. Defendant appeals.

Tort Actions Against the Corporation?

Judge Trainer says limited liability doesn’t apply to Caveney comingled personal funds with
corporate funds and there were no assets in the corporation

Leasing the Pool: Is a lease an asset? Not if the market value is less than lease

Traynor says there are 3 situations in which we pierce the corporate veil:

• Stockholders treat the corporate assets as their own and add and withdraw at will

• Stockholders hold themselves out as personally liable for the debts of the corporation

• Stockholders provide inadequate capitalization AND actively participate in the

management of the business.

○ Why? Because the managers are the ones who should be buying the insurance.
Passive shareholders do not buy insurance. Passive shareholders do not decide to
open the pool to the public.

○ The active direction/management of the business should deal with the costs of
doing business and should be held liable for failure to insure against foreseeable
risks of the business.

○ But what does Traynor MEAN by active involvement?

 The fact that Cavaney kept the records in his office was enough in this case was
enough for Traynorto say he was actively involved. But he wasn’t there on a
daily basis, he wasn’t the president, he wasn’t responsible for getting
insurance…

 how important is the active involvement part of the test? Ans: not very. The
undercapitalization, for Traynor, is the important part of this test because it’s
really easy to find active involvement.

Was the capital inadequate in this corp?

 • ZERO capitalization case. No $ in the business and no insurance and it is foreseeable that
there would be an injury or death at a swimming pool

What was the basic rule of law? Limited Liability to shareholders

"Piercing the Corporate Veil" = disregarding the corporate entity; it defeats limited

liability, and may occur in cases of:

• treating the corporate assets as one’s own, adding or withdrawing capital at will

• holding one’s self out as being personally liable for the corporation

• providing inadequate capitalization to run business affairs, and take active part in
managing

Different states have different rules:

In New York, “piercing the corporate veil” may be possible in cases of:

• undercapitalization

• commingling of corporate and personal assets

• failure to follow corporate protocols

• failure to keep records

wiki definition: The corporate law concept of piercing (lifting) the corporate veil describes a legal
decision where a shareholder or director of a corporation is held liable for the debts or liabilities of the
corporation despite the general principle that shareholders are immune from suits in contract or tort that
otherwise would hold only the corporation liable. This doctrine is also known as "disregarding the
corporate entity". The phrase relies on a metaphor of a "veil" that represents the veneer of formalities and
dignities that protect a corporation, which can be disregarded at will when the situation warrants looking
beyond the "legal fiction" of a corporate person to the reality of other persons or entities who would
otherwise be protected by the corporate fiction.

Piercing the corporate veil is not the only means by which a director or officer of a corporation can be held
liable for the actions of the corporation. Liability can be established through conventional theories of
contract, agency, or tort law. For example, in situations where a director or officer acting on behalf of a
corporation personally commits a tort, he and the corporation are jointly liable and it is unnecessary to
discuss the issue of piercing the corporate veil.
Walkovsky v. Carlton (New York, 1966)

Carlton (cab owner) was solvent (have enough money) whenstarted the business, because he
was insolved at the time when he was incorporated. But he runs out of money afterwards.

Summary:

• 40 taxi cabs under 20 corporations

• Walkovsky is run down by a cab, sues the company, total assets of corp = 2 cabs

• Courts will not equate insolvency with under capitalization…it is initial

capitalization that concerns them, the working of what looks like intentional
fraud

Generally, some fraud (like undercapitalization) must occur, plus the shareholder whose
personal assets are at risk must be involved in corporate decisions (active participation).

Wiki: Walkovszky v. Carlton, 223 N.E.2d 6 (NY 1966)[1], is a leading decision on the conditions under
which Courts may pierce the corporate veil. A cab company had shielded themselves from liabilityby
incorporating each cab as its own corporation. The New York Court of Appeals refused to pierce the veil on
account of undercapitalization alone.

Justice Keating, in dissent, said that Carlton should be liable. The corporation was intentionally
undercapitalized in order to avoid liability, which is a clear abuse of the corporate entity. The interests of
the state in protection of victims of negligence is a sufficient basis to pierce the corporate veil. He held
that "a participating shareholder of a corporation vested with a public interest, organized with capital
insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business,
may be held personally responsible for such liabilities." This "insufficient capitalization" rationale has not
been widely persuasive with courts, perhaps due to a fear that it would chill entrepreneurial activity.

Pillsbury v. Honeywell, Inc. (Minnesota, 1971)

 Pillsbury wanted a list of shareholders ,so bought a share to become a shareholder.

Lost because it was not for economic benefit of the company.

Summary:

• Background: Pillsbury wanted access to shareholders list and corporate records regarding
munitions manufacture

• Shareholder seeks from corporation access to original and current s/h ledgers and records
related to munitions manufacturing. Loses at trial.

• Purpose? Communicate with other shareholders, attempt to change Board and policy.

• Did Delaware or Minnesota law apply? Trial court chooses Delaware.

• What is the rule for inspecting corporate records in Delaware? Shareholder must show a
“proper purpose, germane to his interest as a shareholder.”

• What is a “proper purpose?”

○ curiosity, speculation, or vexation? No

○ desire to change management for economic benefit? Yes
○ Opposition to the war is not a problem so long as interest in getting records is to
safeguard the company (Pillsbury was not trying to safeguard the company so he
shouldn’t be able to get the shareholder’s list)

• Court looks to precedent, McMahon versus Dispatch Printing

○ inspection denied in NJ because purpose was to embarrass a board member

• Court says Pillsbury standing as a shareholder is dubious

○ shares purchased to bring this suit, not for economic returns

○ his only motive was to impress his opinions on others

• Trial court found that Pillsbury did not have an interest in either Honeywell’s or in his own
financial well-being

○ Could someone challenge Honeywell’s munitions manufacture? Yes, but

only if motivated by profits

What's a "proper purpose?" Generally limited to economic interests.

Trail Court affirmed

Shlensky v Wrigley (Illinois, 1968)

Wrigley : Director, did not wanted the lights in the court

As long as director is acting in good faith and is reasonable and believes in what he does
(even if he is wrong) he has the right to not put the lights.

Summary:

• Chicago National League Ball Club (Cubs)

This is an appeal from [a dismissal by the trial court of the original suit, the original
suit being a shareholder action filed against the company's board of directors for
negligence and mismanagement. The corporation was also made a defendant.
Plaintiff sought damages and an order that defendants cause the installation of
lights in Wrigley Field and the scheduling of night baseball games. Defendant Philip
K. Wrigley is also president of the corporation and owner of approximately 80% of
the stock

• Majority shareholder and inside board of directors make corporate policy. Minority
shareholders sue, claiming that shareholder value is being squandered.

○ Shlensky--Wrigley violated his duties to the firm

○ Plaintiff argues according to the logic of Dodge v. Ford Motor Co.
 10% shareholders sue, claiming that corporate policy to amass profits in the
firm was a policy to benefit the community, not the shareholders--thus Ford
must pay dividends.

○ But…Court looks to the logic of Wheeler v. Pullman Iron and Steel Company
 'It is, however, fundamental in the law of corporations, that the majority of its
stockholders shall control the policy of the corporation, and govern the lawful
exercise of its franchise and business.

 The majority of shares of its stock, or the agents by the holders thereof
lawfully chosen, must be permitted to control the business of the corporation
in their discretion, when not in violation of its charter or some public law, or
corruptly and fraudulently subversive interests of the corporation or of a
shareholder.'

• "Business Judgment Rule"

○ Director must discharge duties

 (a) in good faith

 (b) with the care of an ordinary prudent person

 (c) in a manner "reasonably believed" to be in the best interests of the

corporation
 • Insulates a director who, in good faith, made bad decisions; Courts generally are reluctant
to engage in "Monday morning quarterbacking"

Trial Court is Affirmed

Wiki: Brief Fact Summary

The plaintiff was a shareholder in The Chicago National League Ball Club, Inc., a Delaware corporation. He brought a
derivative suit against the company's directors and majority shareholder and President, Phillip K. Wrigley, charging that
Wrigley did not exercise reasonable care in his failure to schedule night games, which, according to the plaintiff, resulted
in the company suffering economic losses. The plaintiffs suit was dismissed for failure to state a cause of action and he
appealed.

Rule of Law and Holding

"Courts will not step in and interfere with honest business judgment of the directors unless there is a showing of fraud,
illegality or conflict of interest."

MCI
Worldcom had a lots of problems and hired Breeden to fix them. He writes a letter and
specify the types of boards

Summary:

Richard Breeden (former chairmen. Monitor) proposed corporate governance reforms for MCI.
Breeden is a former chairman of the SEC who was a court-appointed "corporate monitor" for the
troubled company (formerly WorldCom). The company must adhere to the proposals unless
excused by a court order.

• Corporate Liability

• Failings at WorldCom:

○ Officers

 Ethical failures

 Inadequate controls

 Cronyism “golfing and buddies”

○ Board

 Inadequate controls

 Governance issues / cronyism

 Ethical failures

 Limited exposure
 ○ Shareholders

 Lack of transparency

• “entire country has a stake in finding ways to improve what is already a very good
system”

Types of Boards

• Passive Board – WorldCom

• Certifying Board- MCI under Breeden

• Engaging Board – MCI under Breeden

• Intervening Board

• Operating Board

Breeden Letter

• Limits on choosing shareholders

• Limits on compensation

• Transparency requirements

Note on Antitrust and Competitive Tactics:

Goals for Antitrust Laws:

• Keep markets competitive

• Efficient allocation of resources

Per se violations:

• Always illegal

Rule of reason violations

• Must adversely affect competition

3 Categories of Antitrust laws:

• Single firm actions

• Multiple firm actions

• Mergers and acquisitions

Common AntiTrust Issues:

• Price Discrimination-Robinson-Patman Act (amendment to the Clayton Act) = illegal to

charge different prices to different buyers when the difference causes competitive injury
 • Vertical Agreements-example- agree not to sell to another retail chain in order to do
business with corporation(s). Rule of Reason Standard used here. Courts must have proof
that there is an adverse affect on competition

• Horizontal Market Acquisition-market share leader acquires another firm in the same
market, presumed price increases. In order to avoid this issue parties may divest lines,
plants or patents to deal with concerns.

Managing Antitrust Risk:

• Make sure tactics are legal (laws not black and white)

• Decide if lawsuit is likely (not all violations are prosecuted)

• Determine costs to lawsuit (direct and indirect – including uncertainty, time and effort, and
bad publicity)

• High Risk Areas:

○ Price Fixing

○ Market Division

3 Types of Violations:

• Price: Fixing, collusion

• NonPrice: Market division, group boycott, strategic alliances, non-compete agreements,

joint lobbying

• Leveraging: Patent pools, cross licensing, exclusive dealing, conditional sales

US versus Oracle (PeopleSoft Acquisition)

Must define the market by product and geography to see if the have a monopoly
( department of justice said that geography was US, and Oracle said their definition for the
product was too specific, and the geographic market was to narrow and should include
Europe too = Oracle won—was not a monopoly)

Summary:

Department of Justice sues Oracle during 2004 to prevent the acquisition of Peoplesoft under the
Clayton Act on grounds that it would substantially lessen competition.

Clayton Act, Section 7 Prohibits mergers and acquisitions where the effect "may be
substantially to lessen competition, or to tend to create a monopoly." Determining whether
a merger will have that effect requires a thorough economic evaluation or market study.
"market definition" analysis Section 7A of the Clayton Act, called the Hart-Scott-Rodino
Act, requires the prior notification of large mergers to both the FTC and the Justice
Department.

Requirement
"Market definition" requires the identification of the "relevant market"

Relevant market: Both Product and Geography

Government argument:

• Relevant product market was in "high-function" enterprise software, in which only Oracle,
SAP, and Peoplesoft competed.

• Relevant geography = US, because prices overseas do not affect domestic prices and visa
versa.

Oracle argument:

• No, this product definition is to specific for market

• Product includes mid-market products

○ DOJ: these only offer routine HR and financial functionality, unlike the high-function
products.

○ Oracle: No, this geographic market is too narrow, should include Europe at least.

Court Finds for Oracle

Salomon and the Treasury:

Mozar using others name to purchase products (other errors) – He should have been reported as
soon as it was find out, instead they cover the situation and let things got worse.

Background on Treasury Bond Scandal: Set in June 1991, two months prior to Salomon Brothers'
announcement that thefirm had violated the Treasury Department's rules governing the auctions of new
Treasury securities. Salomon Vice Chairman John Meriwether must decide how to address problems that
continue to appear in the management of the firm's government bond trading activities. In April 1991,
one of his managers admitted that he had submitted an illegal auction bid in February 1991. Now, one
month later, there is mounting speculation in the press that Salomon tried to corner the market

Summary:

Salomon and Investment Banking Community

• Salomon Brothers – founded in 1910 – (82 years old); eventually ranked 4th in US

• Also, SB helps clients evaluate potential M&A (for a fee)

• Arbitrage – buying securities at a low price in one market then selling at a slightly
higher price in a different market
 • Firms willing to commit large amounts of capital could generate substantial returns
from these small companies

• Meriwether headed Arbitrage unit until late 1980s, then picked to head all of SB’s
fixed income securities activities

• Controversial compensation system negotiated with CEO

Treasury BondScandal:

In April 1991, Mozer admitted that he had submitted an illegal auction bid in February 1991.
Mounting speculation in the press that Salomon tried to corner the market for May 2-year
notes.

Result of Case: In 1991, Salomon was caught submitting false bids to the U.S. Treasury by
Deputy Assistant Secretary Mike Basham, in an attempt to purchase more Treasury bonds than
permitted by one buyer between December 1990 and May 1991.

Who was Salomon? What was their competitive advantage?

• Government bond specialist

• Information network  customers

• Talent and creative employees

• Holding inventory as service to customers

• $60 million compensation over 12 people (sustainable?- compensation increasing as

revenues decreasing)

• $3.5 Billion capital base

• Increasing market share

• “flat” local org

• What problem did Meriwetheer face in early June?

• Mozer- report him?

• US Treasury upset and May squeeze

• Risk of investigation

• How serious was Mozer’s conduct?

• Serious

 Using Warburg’s name

 Playing fast and loose with customers

 Playing with reputation

 Cover-up?

 Risk in investigation
  Formal

 > 35%

 SEC regulation

 Manipulative and deceptive

 Government might “ignore” the problem – what precedent does that set?

• Not Serious

 Rules not formalized

• Informal

• Implied

 $ not a big deal?

 Beneficial to US Treasury and Company

• What aspects of Solomon’s organization or culture contributed?

• Inadequate supervision

• Inadequate control

• Redesign incentives?

 Anyone who breaks laws should lose their bonuses (but this didn’t happen in
the case of Solomon)

• Suppress written confirmation (regulation about record-keeping)

• What options are available to Meriwether?

• Notify Government of February “Squeeze”

• Fire Mozer/Fire Murphy

 Pro:

• Sends a clear signal internally and externally that Mozer’s conduct was
in appropriate (employees, customers, US Treasury)

• CYA

 Con:

• Go to competitor (employees and or customers)

• Could Backfire

• Blab- employees saying if you think that is bad here are other things
going on?

• Reputation damage
 • Feb? (information known and held for over 5 months)- looks bad

• Discipline Mozer and Notify SEC of actions

What does it take to be a successful trader?

• In depth knowledge

• Ruthlessness

• Aggressive

• Intuition/instinct

○ Value/demand

○ trend

• Risk loving

• Flirting at the boundaries

• Creativity

• Bluffing

• Information + (-)

• Nimble (take info, analyze and make good decisions quickly)

• Deceive

• Detached emotionally

What makes for an effective trading organization?

• Capital reserves

• Flat organization locally

• Talent

• Leverage

• Good relationship with clients

• Competitive advantage/sustainable

• Acess to organizational info

• Reputation

• Secondary girth (less important)

• Resources/inventory

• Motivating
 • Incentive compensation structure

Squeeze-unpredicted shortness of supply or high demand for product

3 Lines Crossed

• 35%

• Section 10b

• Record Keeping

Section 10 -- Manipulative and Deceptive

Devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of

interstate commerce or of the mails, or of any facility of any national securities exchange --

a.

To effect a short sale, or to use or employ any stop-loss order in connection with the
purchase or sale, of any security registered on a national securities exchange, in
contravention of such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors.

Paragraph (1) of this subsection shall not apply to security futures products.

b.

To use or employ, in connection with the purchase or sale of any security registered on a
national securities exchange or any security not so registered, or any securities-based
swap agreement (as defined in section 206B of the Gramm-Leach -Bliley Act), any
manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.

Rules promulgated under subsection (b) that prohibit fraud, manipulation, or insider trading (but
not rules

imposing or specifying reporting or recordkeeping requirements, procedures, or standards as

prophylactic

measures against fraud, manipulation, or insider trading), and judicial precedents decided under
subsection (b)

and rules promulgated thereunder that prohibit fraud, manipulation, or insider trading, shall
apply to security -
based swap agreements (as defined in section 206B of the Gramm-Leach-Bliley Act) to the same
extent as

they apply to securities. Judicial precedents decided under section 17(a) of the Securities Act of
1933 and

sections 9, 15 , 16 , 20 , and 21A of this title, and judicial precedents decided under applicable
rules promulgated

under such sections, shall apply to security-based swap agreements (as defined in section 206B
of the Gramm-

Leach -Bliley Act) to the same extent as they apply to securities.

What happened?

• Mozer placed bid under the client’s name (Mercury) without authorization and for
the company as well which resulted in more than 35% of the shares

• Asked the client (Mercury) to request that the firm not respond to the letter from the
Treasury

• Did it again

• Mgrs never reported to SEC

Result:

Fined $290 million, the largest fine ever levied on an investment bank at the time, weakening it
and eventually leading to its acquisition by Travelers Group. CEO Gutfreund left the company in
August 1991; a SEC settlement resulted in a fine of $100,000 and his being barred from serving
as a chief executive of a brokerage firm.

ADM
Lysine price fixing international, US government went after them. 100M to prove
importance that they will go after you.

Violated the Sherman act.

Summary:

Lysine Price Fixing Conspiracy

 3 ADM executives indicted on price fixing and market allocation

 Violated Sherman antitrust act, conspired w/ 4 other companies in the lysine market

 Conspirators agreed on price levels, sales volumes, had meetings to monitor price
agreements

 Company pleaded guilty and was sentenced with $100M which is the largest criminal antitrust
fine ever
 Meant as signal that these violations made by individuals and cartels would be vigorously
prosecuted wherever they are

 Individuals involved with wrongdoing will be prosecuted as well as company

Ring of Thieves, MCI

 Walter Pavlo: cooked the books
– Reported uncollected revenue, hiding accounts receivable, start sending money to
Caiman Island

– Prepaid card resellers

– Turned unpaid bills into promissory notes

White Collar Crime an Overview

 White collar crime: committed by a person of respectability and high social status in the
course of his occupation; nonviolent crimes committed in commercial situations for financial
gain

 Most common offenses: antitrust, computer/internet fraud, credit card fraud,

phone/telemarketing fraud, bankruptcy fraud, healthcare fraud, insurance fraud, bribery,
insider trading, money laundering, kickbacks, economic espionage, tax evasion, trade secret
theft

 White collar crime costs the US more than $300B annually

 Commerce Clause gives Congress authority over White Collar Crime

 Some Federal agencies also have authority over WCC such as the FBI, IRS, Secret Service,
EPA, Customs, SEC

 States also have agencies to enforce at State level.

Kiplinger: Are You Guilty of Insider Trading?

 Context of information matters: burglar (someone that breaks into your house and takes your
stuff when you are not home) can act on information he finds: no duty to his victims

 Trading on information that rightly belongs to someone else

 Mosaic theory: if you see suits in the office that lead you to believe there may be a merger in
the works, you cannot trade on that speculation—both informer and trading are in trouble (if
you see or hear something important and it is use to generate income)

 Both informer and trader are in trouble

 SEC targets small fry traders

White Collar Crime Alert

 Coming down harder in people doing white collar crime

 Accounting fraud case in Houston (Dynergy Inc.) sentenced more than 24 years in prison
 Judges are rejecting guilty plea bargains

 Increasing tension among sentencing court, prosecutors, and defense counsel in white collar
cases

 Harsher sentences for offenders

TEECE: The Knowledge Economy and Intellectual Capital

Management
Free Trade has lowered tariff and non-tariff barriers

The decreased cost of information flow, increases the in the number of markets, the liberalization
of product and labor markets in many part of the world, and the deregulation of international
financial flows is stripping away many traditional sources of competitive differentiation and
exposing a new fundamental core as the basis for wealth creation. That fundamental core is the
development and astute deployment and utilization of intangible assets, of which knowledge,
competence, and intellectual property are the most significant. Also included are other
intangible such as brands, reputations, and customer relationships.

Two classes of explanation for the use of knowledge management:

• What has been obvious to some- namely, that knowledge and its applications are at the
very roots of modern economic growth and prosperity-has not been transparent to all.

• Relates to structural changes that have occurred in the economies of advanced

countries.

Liberalization of Markets – tariffs are lower, transportation costs are lower

Expansion of what’s tradable –

Most apparent in securities markets where swaps, index futures, program trading,
etc are now commonplace. Also firms are outsourcing more. Few firms‘corner the
market’ anymore.

Strengthening of Intellectual Property Regime: important in all industries.

The Growing importance of increasing returns driven by:

1. Standards and network externalities. Must be compatible.

 2. Customer Lock-in

3. Large up front costs

4. Producer Learning – more efficient as expertise is gained.

○ Decoupling of information flows from the flow of goods and services: New IT and the adoption
of standards are greatly assisting connectivity. Can do things online like buy insurance (no
salesman needed). Also helps with sharing of information.

○ Ramifications of new information and communications technologies: basically ERPs exist to

connect all different departments. Networking computer makes it easier to collaborate.
Formalization (the sharing of personal knowledge) may impede learning.

○ Product Architecture and Technology ‘Fusion’: new products are rarely stand-alone. They are
usually components of broader systems.

○ Implications: changes dynamic of competition and competitive advantage. Must have non-
tradable assets for advantages.

The Nature of Knowledge:

• Codified/Tacit – difficult to articulate in a way that is meaningful and complete

• Observable/Non-observable in Use – can be bought and reverse engineered

• Positive/Negative Knowledge – keep failures secrets because of embarrassment

• Autonomous/Systemic Knowledge – that which yields value without major

modifications of the system in which it might be embedded (fuel injection did not
require change to cars but they run better)

• Intangible Assets, Tangible Assets, and IP

Differences between Intangible and Tangible Assets

Knowledge Physical (tangible)

(intangible) assets assets
Publicness Use by one party need Use by one party
not prevent use by prevents simultaneous
another use by another
Depreciation Does not ‘wear out’; but Wears out; may
usually depreciates depreciate slowly or
rapidly quickly
Transfer Costs Hard to calibrate Easier to calibrate
(increase with the tacit (depends on
portion) transportation and
related costs)
Property Rights Limited (patients, trade Generally comprehensive
secrets, copyrights, and clearer, at least in
trademarks, etc) and developed countries
fuzzy even in developed
countries.
 Enforcement of Relatively difficult Relatively easy
Property Rights

Characteristics of Legal Forms of Protection in the USA

Mask
Works
Consideratio Trade Trademar (semi
Copyright Patent
ns Secret k conductor
industry
only)
National Yes No Yes Yes Yes
Uniformity
Protected Expression Secret Invention Goodwill Semi-
Property of Idea information conductors
Scope of Exclusive Right to Right to Proscribes
Protection right to make, use exclude against
reproduce, and sell others from misreprese
prepare secret and making, ntation of
derivative to protect using, source
works, against, selling
publically improper
distribute, use or
display and disclosure
perform
Effective date Creation of From date Patent Use and/or First
of protection work of application filing date commercial
conception date of US exploitation
or receipt application
of secret issuing as
information principal
registratio
n on or
after
11/16/198
9
Cost of Low Low Moderate Low Low
obtaining
prosecution
Term of Life of Possibility 20 years Perpetual 10 years
protection author plus of if used
50 years, perpetual correctly
or 70 years protection; and
or diligently
termination policed
at any time
by
improper
disclosure
 or
individual
developme
nt by
others
Cost of Nil Moderate Moderate Moderate Nil
maintaining
protection
Cost of Moderate High High Moderate Moderate
enforcing
rights against
violators

Replicability, Imitability, Appropriability

Appropriabilityregimes can be used to describe the ease of imitation.

Appropriability Regimes for Knowledge Assets

Inherent replicability
Easy Hard
IP Loose Weak Moderate
Rights Appropriability Appropriability
Tight Moderate Strong
Appropriability Appropriability

The main classes of nontradable assets today are locational assets, knowledge assets and
competences.

Inherent Tradability of Different Assets

Characteristics Know-How/IP Physical commodities

1. Recognition of Trading Inherently Difficult Inherently easy
opportunities
2. Disclosure of Relatively difficult Relatively easy
attributes
3. Property Rights Limited (patents, trade Broad
secrets, copyright etc.)
4. Property boundaries Often fuzzy Generally sharp
5. Item of Sale License Measurable Units
6. Variety Heterogeneous Homogeneous
7. Unit of Consumption Often Clear Weight, volume, etc
Inherent Tradability LOW HIGH
 Some Sectoral Difference in the Market for Know-How

Challenge Chemical/Pharmaceutical Electronics

Recognition Manageable Extremely complex, often
impossible
Disclosures Handled by NDA, patents More difficult
common
Interface issues Compatibility generally Compatibility generally
not an issue critical
Royalty Stacking, royalty Infrequent Frequent
based dilemmas

Value Context Dependent Strongly so Very strongly so

Patent Strength Generally high Sometimes limited
Development cycle Often long Generally short
Know How Market Generally well Often poorly
Works

Complementary Assets:

○ Licensing: the licensing of technology and IP is of course a direct manifestation of

transactions in the market for know-how. If the market is efficient, then the IP ought to be
able to extract full value by simply selling their assets in the market.

○ Dynamic Capabilities: ability to sense and seize opportunities.

○ External Sensing: During ‘sensemaking’ the organization receives and interprets messages
about new markets, new technologies, and competitive threats.

○ Organizational Action: must seize after the opportunity is sensed.

○ Implications for the Theory of the Firm: Stress entrepreneurial side not administrative.

○ Conclusion: Knowledge, competence, and related intangibles have merged as the key drivers
of competitive advantage.

The Teece Model

David Teece clarified that two factors – imitability and complementary assets - will have a strong
influence in determining who will ultimately profit from an innovation. Imitability refers to how
easily competitors can copy or duplicate the technology or process underpinning the innovation.
There are many examples of barriers a company could use to protect itself from imitation,
including intellectual property rights, complex internal routines or tacit knowledge.

Consider the case of RC Cola, it was the first firm to introduce a diet cola on the market, but
since it could not protect itself from imitation soon Pepsi and Coca-Cola jumped in, and using
their complementary assets (distribution channels, brand name, etc.) they appropriated all the
profits of the segment. Complementary assets, therefore, are equally important. They include
any activity that gravitates around the core innovation such as distribution channels, reputation,
marketing capabilities, strategic alliances, customer relationships, licensing agreements, among
others.

If ability to imitate is high and complementary assets are freely available or unimportant it will be
difficult to make money out of the innovation (exceptions can be made at the very short run).
If complementary assets are tightly held and important and ability to imitate is once again high,
the holder of such assets will be the one profiting on the innovation, independently of who
developed it like in the diet cola case.
If ability to imitate is low the innovator will find himself in a much better position. When
complementary assets are not controlled by other economic actors he will be able to collect most
of the profits being generated. When, on the other hand, complementary assets are important
and tightly held negotiation will take place, profits will be shared in proportion to bargaining
power of the parts involved.
The Teece model can be used not only to predict who will profit from an innovation but also to
understand what company will have higher incentives to invest in certain innovations. The threat
of imitation and the importance of complementary assets had already being used under other
frameworks, but usually they were employed individually or were used to dissect the overall
market structure (i.e. Porter’s Five Forces) and not the innovation dynamics. The major flaw one
can find the this theory is the lack of empirical evidence, which results from the difficulty to
isolate the imitability and the complimentarily effects from other factors.

Aberlyn July 1993

Leasing an intangible asset

Main Ideas:

Flip- Valuation of patent which allowed the company to offer financing for leasing the payments.
This allowed the company to place the lease payments on the balance sheet and received capital
for giving up relatively little capital. Aberlyn didn’t account correctly for the risk taking.
Problems with Aberlyn’s Process:

• Hard to value

• Protecting patent

• Lessee defaulting – how do you use the patent you have acquired

Patent- right to protect something in court

Case Summary:
Aberlyn Capital Management, a venture leasing firm specializing in providing capital to
biotechnology firms, proposes to introduce a new product. Aberlyn will base a lease on an
intangible product: the patent of a biotechnology firm. This poses a series of short and longer run
challenges.

Background Info

• Est. 1989 to provide investment banking services to biotech/biomed industries

• Developed concept of providing leases based on patents (this allowed growing firms to
finance their need for working capital through leasing, rather than just equipment purchases)

• Strategy to lease intellectual property as a niche player

• Provided financing via bridge financings, private placements, venture leasing (1992)

○ Leased tangible assets (i.e. lab equipment) to high-risk young firms

○ Concluded biotech would be suitable for venture lease transactions

 Biotech was representing an increasing share of venture transactions

 Biotech firms’ ability to access public markets uneven, w/ lengthy droughts

 Biotech very capital intensive; ratio was $75,000/emp vs $6-$10K/emp (mfg)

• Much of capital equipment was expensive but standardized

○ Compensation: Aberlyn was compensated with promised regular cash payments +

warrants to purchase common stock of the firms for which it provided financing

○ New deal called for Aberlyn to lease on an intangible asset: patent of a biotech firm
 RhoMed would sell its patent to Aberlyn, lease it back for life of the 3-yr deal
○ Issues to consider:
 How much was the patent really worth? (US Patent #4,940670)

 Was Aberlyn being fairly compensated?

  What were the risks in this novel transaction?

 If successful, how could Aberlyn capture max profits from its innovation (LR)

What is a patent?

• Protecting your intellectual property for a period of time

• The right to enforce this thing in a court.

What is Aberyln’s strategy?

• Innovator (Differentian)

• Niche player-venture leasing assets physical and intellectual

• Financial Innovator (venture providers)

○ FLIP- Finance Lease on Intellectual Property

• Side Note: Understands VC market and patents

Money received in 3 forms:

○ Regular Lease payments (interest payments); spread over UST rates or prime

○ Money paid as a purchase option at the end of the lease; lessee can pay FMV not to
exceed 25% of original cost of the equipment

○ “Warrant Coverage” Lessor (Aberlyn) granted warrants to purchase the common stock of
the lessee, at a certain date, for a prespecified exercise price;

 Lessor’s ability to sell or transfer warrants for 3 yrs was sharply restricted by
SEC Rule 144 (forbids sale of unregistered securities for two years after the
transaction, limits the volume of sales in the following year; typically have
“piggyback” rights

 “Warrant coverage” is % of the value of the cash advanced by the lessor

 “ Describes the amounts (but not he values) of warrants granted

 Combination of lease payments and purchase prices and warrant coverage

define the return available to a venture lessor

Why that strategy?

They understand the VC market and patents. (need more info here)

What are key elements of Aberlyn’s strategy?

 • FLIP- Finance Lease on Intellectual Property

• Capabilities in

○ valuation of intellectual property (IP)

○ valuation of biotech (value is wrapped up in other capabilities of the firm)

• Patent

○ Right to sue others for infringement of technology

Benefits of strategy to Aberlyn:

• Accounting (when buy patent can put value of patent on balance sheet (versus company
creates patent can only put cost of patent))

• Secured interest/Residual (if company defaults they own the patent)

• Recurring payments

• Warrants

• Relationships, future deals (Intangible- relationships with companies for future business)

• Brand/Model validation

• Non-voting seat on board of directors

What are the risks of strategy to Aberlyn?

• Validation is difficult

○ Hard to find out value of patent

○ Conflicts of interesting how patents are evaluated

• Protect; ownership (have to protect patent)- could be pushed back on lessee, however, if
they don’t protect and they default

Aberlyn had 2 rounds of VC funding totaling $60M

• Invested in 32 biotech firms, telecom ($50M fund)

Who is RhoMed?

• Candidate for a FLIP

• Biotechnology firm specializing in developing radio-pharmaceutical (i.e. nuclear medicine)

• 1994: settlement after “interference”

• 1996: changed name to Interfilm, than to Palatin Tech

• 1998: State Street Bank – 1st to patent an official “Business Method”

Why should it matter than RhoMed couldn’t make it work?

• If no one else cares there is no value in it

• Ideas has to be coupled with idea on how to form a revenue stream

Evaluation techniques: (need more work here)

First looked at it from cancer treating perspective

Then looked at it from royalty

10% discount factor (maybe they should have used 15-20% instead)

Didn’t capture how widely the numbers could swing

Looked at segment from Collin and rector (sp?)

Professor’s outside experience says that:

Most deals made on people (95%) and only (5%) of cases bet on patent.

Being smart with more information is still better than less

Updates:

Rho-med

• 1994 an “interference” was launched pitting RhoMed’s patent and an application by

Immunomedics (holding 1141 patents)

• Oct. 1995 settlement Rhomed agreed to

• No challenge of Immunomedics patent aware

• Merged into a shell company Interfilm

• Agreed to: Name change to Palatin Technologies (still around today with stock price
at $0.12/share)

Aberlyn CM (still around today)

Disclosures
 • Investment types: startup, first and second stage, leveraged buyout, and special situation

• Industry Preferences: Diversified computer technology, food and beverage products,

genetic engineering, and healthcare

• Investment (pref): $25M (min)

• Prefers to play the role of deal originator (SDC)

Main Takeaways

• There is a lot of uncertainty (difficult to value, so much is wrapped up in the VC).

○ It is risky to build business model on this

○ Valuation is wrapped up in other things

○ Tried to do it right in building capabilities in valuating and evaluating space

• Innovative idea was good

• Need to protect patents

Aberlyn – considering new proposal

○ Emerging company in the nascent venture leasing business

○ Leased tangible assets (i.e. lab equipment) to high-risk young firms

○ Aberlyn was compensated with promised regular cash payments + warrants to purchase
common stock of the firms for which it provided financing

○ New deal called for Aberlyn to lease on an intangible asset: patent of a biotech firm
 RhoMed would sell its patent to Aberlyn, lease it back for life of the 3-yr deal
○ Issues to consider:

 How much was the patent really worth? (US Patent #4,940670)

 Was Aberlyn being fairly compensated?

 What were the risks in this novel transaction?

 If successful, how could Aberlyn capture max profits from its innovation (LR)

Aberlyn Capital Mgt

• Est. 1989 to provide investment banking services to biotech/biomed industries

• Provided financing via bridge financings, private placements, venture leasing (1992)

• Concluded biotech would be suitable for venture lease transactions

 ○ Biotech was representing an increasing share of venture transactions
○ Biotech firms’ ability to access public markets uneven, w/ lengthy droughts

○ Biotech very capital intensive; ratio was $75,000/emp vs $6-$10K/emp (mfg)

 Much of capital equipment was expensive but standardized

• Aberlyn attempted to adjust risk/return of its venture leasing portfolio

○ Kept a # of technical specialists both on its staff and on advisory boards

○ Intentionally constrained the firms to which it would provide leasing (min 2 rds)
○ Evaluated potential lessees on a five-part scale attempting to rank firms on the
basis of the likelihood that Aberlyn would be repaid; goals in Exhibit 5

○ Asked (in some cases) to have a nonvoting rep placed on BoD of any firm to which
Aberlyn would provide financing

• Aberlyn’s returns could be received in three forms

○ Regular lease payments (interest payments); spread over UST rates or prime

○ Money paid as a purchase option at the end of the lease; lessee can pay FMV not to
exceed 25% of original cost of the equipment

○ Lessor (Aberlyn) granted warrants to purchase the common stock of the lessee, at a
certain date, for a prespecified exercise price;

 Lessor’s ability to sell or transfer warrants for 3 yrs was sharply restricted by
SEC Rule 144 (forbids sale of unregistered securities for two years after the
transaction, limits the volume of sales in the following year; typically have
“piggyback” rights

 “Warrant coverage” is % of the value of the cash advanced by the lessor

 “ “ Describes the amounts (but not he values) of warrants granted

○ Combination of lease payments and purchase prices and warrant coverage define
the return available to a venture lessor

• Aberlyn established policy guidelines for the terms it charged lessees, as a function of
their position in Aberlyn’s five-part risk class

The Proposed Intellectual Property Leases

• 1992 – Aberlyn starts leasing patents

○ Aberlyn buys the patent, firm leases it back to gain the legal right to use patent
○ FLIP – Finance Lease on Intellectual Property – attractive for several reasons:

 Lessees would be able to obtain working capital while giving up only a small
equity stake
  Helps reconcile firms’ economic value with their accounting statements

• Firms can only value discoveries for the cost of the patent application;
firms that acquire patents record them on their balance sheets at their
purchase price (reflecting market value)

○ Temporary benefit: value of patent on firm’s balance sheet

would shrink as the lease was repaid

○ FLIP implementation proposed several management problems for ACMC:

 Valuation of the patent

• Estimate ultimate profits from the patent, discount CF back to PV at a

rate that reflects the transactions risk, then execute a sales & lease-
back for up to 75% of the patent’s assessed value

 If the patent was ever seized from a defaulting firm, predicting the resale
market value would be difficult

• Would have to analyze value to firms with current patent positions in

similar research areas, patent pending firms, etc.

• Might be forced to defend the patent from potential infringement while

marketing it

 Selection of the patent on which to base the lease – needed to select patents
covering IP distinct and separate from the firm’s other claims

○ Aberlyn stated certain limitations on their use of IP leases

 Licenses would be restricted to issued US patents (no patent-pending)

 Aberlyn would not execute a lease for > 80% of the NPV of patent
 Patent leases restricted to 10% of overall investments by the fund

RhoMed, Inc.

• Early 1993, Aberlyn’s mgt met Robert Stern, CFO of RhoMed

○ Dr Buck A Rhodes – Johns Hopkins- monoclonal antibodies (identical cultures)

○ Rhodes developed ways to label antibodies with small amounts of radioactive

Technetium – written six textbooks and over 160 articles in referenced journals

○ Rhodes joins University of Arizona, Los Alamos National Lab, SVP (Scientific Affairs)
of Summa Medical Corp (firm goes bankrupt)

○ Rhodes starts own company out of his garage, financing from SBIR (Small Business
Innovation Research) program

 Within 1st year, RhoMed won two Phase I awards, one from NIH, led to a Phase
II award; other from DOE, led to $500K grant to commercialize
 ○ State establishes NMRDI (New Mexico Research and Development Institute)

 NMRDI provides loans, receives royalties on future sales

○ Rhodes sought national lab assistance – CRADAs (Cooperative Research and

Development Agreements)

○ Rhodes tapped into third financing arm – strategic alliances w/ large pharmaceutical
firms motivated to work with and fund RhoMed because of product line under
development:

 RhoChek

 LeukoScan

 Collaborative Agreement with Sterling Winthrop

 Collaborative Agreement with Genentech

 Related projects to identify blood clots, ulcers, etc.

The Proposed Transaction

○ Aberlyn saw RhoMed as attractive FLIP candidate because:

 RhoMed IP position was very strong
• Pioneers of biotech and nuclear medicine

• Aggressively pursued patent protection

 Mgt team, having retained a controlling interest in the firm to this point, was
unwilling to give up a large share of the firm to venture capitalists

• Most VCs wanted 30% stake, control through strict covenants

 RhoMed had so little external financing in the past – clear example of the disparity
between accounting and economic value

○ Doug Brian, SVP Aberlyn, structured the deal:

 Aberlyn pays RhoMed $1M, RhoMed doesn’t have to make any interest payments
until beginning of the second year. RhoMed would make 3 even payments of
principal, at the end of years 1, 2, 3, plus 15% of the amount outstanding before the
repayment (interest rate) – Risk Class 2

 Patent was valued at $5M – comfortable safety margin for Aberlyn; RhoMed could
purchase its patent back for $1 at the end of the three-year lease after repaying
Aberlyn’s loan

 Warrant Coverage of 10%; warrants’ life at 5 years and exercise price at $1.45

○ Aberlyn saw RhoMed’s mgt team as excited about the deal:

 Leasing proposal consistent with RhoMed’s goal of assuring the firm’s progress
while maximizing their control over the firm’s equity
  Aberlyn had strong capability to raise capital from Euro/ME sources; this transaction
could serve as a bridge until a private placement (assuring financial stability until it
made sense to go public)

 IPO would be appropriate in October, 1994 after product development was further
advanced

HAMER vs. SIDWAY (April 14, 1891)

He got the money from his uncle’ estate

Summary:

• Uncle promised nephew $5,000

• Uncle told nephew that he would give him $5K if he didn’t drink, swearing, play cards, or
billboards etc. until 21

• Uncle dies without paying

Consideration Doctrine -allows the common law to distinguish between contracts and mere
promises of gifts (the latter are generally unenforceable).

• May be a benefit or a burden

• Court says it doesn’t matter if it is a benefit (still says he refrained from action that gave
him consideration- he gave up something, each party in contract needs to bring sufficient
consideration, in this case it was giving up his rights to receive $5K)

Offer and Acceptance-the bargain-bargained for exchange. A “meeting of the minds”

• Do the words and actions of the parties constitute an offer, and an acceptance of that
offer?

• Common law applies the mirror image rule: Parties must offer and agree to mirror
provisions in order for a contract to be enforceable

Alaska Packers Ass’n v. Domenico 1902

Summary:

Fisherman want more money on the high seas

○ In Alaska a group of men sign a contract with a company to work on a fishing boat
for a season for $50 plus $0.02 per salmon

○ Once in Alaska the men stopped working and said they wouldn’t keep working until
the got $100 per person

○ Is the court going to enforce the second agreement? They say no on the grounds
that “the captain said he didn’t have any authority to
 ○ Workers gave no additional consideration for new rate/new contract (Doctrine of
fresh consideration- comes in when trying to modify a contract)

• Agency contract

○ Which employees can bind organization when they are making contracts?

 Authority- explicit OR

 Job Description (is employee acting within their job description) AND other
party reasonably believed the authority

• Fresh Consideration-has to have something new to bring to the table. modification of an

existing contract requires new consideration

• Capacity- He did not have the authority to make the decision. thecommon law recognizes
that parties to a contract must possess the necessary mental capacity to bargain. The
common law generally recognizes both infancy and mental illness as bases for non-
capacity

• Duress- The guy did not have any other option. The law requires that parties enter a
bargain of their own free will. A party can claim duress in contracting to void the
agreements

Common law elements in a defense of Duress (all four must exist)

1. Party involuntarily accepts a contract

2. Party robbed of “free will”

3. Party had no reasonable alternative

4. Stronger party makes improper threat (tortuous; in bad faith)

If you can prove all four of these then weaker party can claim Duress.

Hawkins vs. McGee

He promise a perfectly good hand.

There was evidence to the effect that before the operation was performed the plaintiff and his
father went to the defendant's office, and that the defendant said before the operation was
decided upon, "I will guarantee to

make the hand a hundred per cent perfect hand or a hundred per cent good hand."

• The plaintiff claims that the words establish the giving of a warranty.

 The defendant argues no reasonable man would understand that they were used with the
intention of entering "into any contractual relation whatever," and were only " expression
 in strong language”that he believed and expected that as a result of the operation would
be a success

The jury was permitted to consider two elements of damage:

(1) Pain and suffering due to the operation; and

(2) Positive ill effects of the operation upon the plaintiff's hand.
Concluded: the plaintiff's damage is the difference between the value to him of a perfect hand
or a good hand, such as the defendant promised him, and the value of his hand in its present
condition, including any incidental consequences fairly within the contemplation of the parties
when they made their contract. And they send it back to court and determine what it was. New
trial was ordered

CVD vs. Markham

Summary:

Employee contract was shown to be contrary to public interest, there was no breech of employee
contract

Markham did not have trade secrets because they did not reasonably protect them

Jury ruled that Markham claimed ‘trade secret’ defense in bad faith

Licensing Agreement found to be an attempt to restrain competition in the production of zinc

sulfide and zinc selenide

Licensing Agreement found to be an attempt to monopolize the production of zinc sulfide

Issues

• Duress?

• Trade Secret?

• Breach of Employment

• Markham’s “Proprietary” properties

• Licensing Agreement valid?

• Trade Secret Maintenance

• Breach of Licensing Agreement?

• Anti-trust issues?

• Re-negotiating provision breech?

• Valid consideration?
Was the Process protected?

• Patent? There was an earlier patent about CVD process, similar to Markham.
Patents need to be:

○ Novel

○ Useful

○ Non-obvious

○ Adequate description

• With Markham there is uncertainty if there is proprietary information, info seems to

fit all of the things listed her to make it patentable except the government paid for
development of the technology so no novelty here

• If the bar to patentability is reasonably low the three things that Markham added
could have given them a reasonable chance to get a patent

• Two steps

○ Get a patent

○ Validate it (bring it into court and see how enforceable it is)

• Patent is still a powerful tool even if small likelihood that it will get upheld in court

• Problem with coordination (no one steps forward to challenge these things because
in doing so they still help their competitors)(no one steps forward even though
they believe they would win in court)

○ Why didn’t Markham patent?

 They didn’t believe there were commercial applications

 Government use royalty-free

 Then they would have to disclose methods (if they didn’t receive
patent competitors in the process would have seen all of their info)

○ Wanted to pursue a trade secret?

 Trade secret can’t be commonly known

 Involves info that gives a commercial advantage

 Firm has to make reasonable attempts to keep it secret

 Not obvious – not put in the database of TS’s

 Gas mixture, alumina tip, hexagonal bolt?

In order to be a trade secret, the secret cannot be commonly known

Trade Secret?

• Has to be information that gives a commercial advantage

• Firm needs to make reasonable efforts to protect it and keep it secret

• Cannot be obvious- Engineers would come up with same solutions on their own

• Never had employees sign nondisclosure agreement

• No physical securing

Trade Secret (TS) for Markham on the following?

• Gas mixture

• Alumina tip

• Hexagonal nut

Was the licensing agreement valid?

○ Capacity- made under duress?

○ Consideration

○ Offer and acceptance

○ Legal purpose

 Anti-trust (if it furthers a monopoly, it’s illegal)

• Did the employees breach their employment contract?

○ What may employment contracts do?

• Protect confidential information

• Contain “reasonable” non-compete clause

• Cannot harm one’s ability to earn a living

○ Jury decided that the defendants did not violate their agreement because the
agreement was contrary to public interest

How could have Markham managed this problem better?

• Very clear set of policies

• “License to kill” – 2 guys felt they had no other option

• Raytheon(Markham) appeals, pays CVD ~ $400K

Harvey Losee vs. Buchanan (NYS, 1873)

 • Action brought to recover damages caused by the explosion of a steam boiler in Saratoga
County, NY

• Unless the person who places a boiler somewhere is found at fault or with negligence,
he/she is not liable for damages to their neighbor

• Innovation: Negligence

Hudson v. Swain (Georgia 2006)

Summary:

Pile up on the Atlanta connectors.

Order of cars: Swain – Warren – Corley – MW - Ross - Hudson

• Swain admitted hitting Warren’s car (directly in front of her), but that collision didn’t cause
any collision with the Hudson’s car, the 6th car in front of her

• Ken Hudson testified, “All [he knew] is that we were sitting still and next thing you know,
we got hit.”

• According to Hudsons, the affidavits and Swain’s guilty plea to following too closely show
that Swain’s failure to stop was the cause of their damages

• Hudsons point out, the essential elements of a cause of action in negligence are:

○ A legal duty to conform to a standard of conduct raised by the law for the protection
of others against unreasonable risks of harm

○ A breach of this standard

○ A legally attributable causal connection between the conduct and the resulting
injury

○ Some loss or damage flowing to the plaintiff’s legally protected interest as a result
of the alleged breach of the legal duty

• Assuming Swain’s guilty plea established she breached the duty of due care, doesn’t
establish her liability to Hudsons. “Negligence alone is insufficient to sustain recovery”

○ “no matter how negligent a party may be, if his act stands in no causal relation to
the injury it is not actionable”

○ Whether the Hudsons pointed to specific evidence giving rise to a triable issue on
whether Swain caused their damages (burden is on plaintiffs)

• Ken Hudson’s testimony was contradictory:

○ On motion for summary judgment a party’s self-conflicting testimony is to be

construed against him unless a reasonable explanation for the contradiction is
offered. No explanations were offered, so the trial court was required to eliminate
the favorable portions of the contradictory testimony, construe remaining testimony
 in favor of the Hudsons – not enough to create an issue of fact on causation. Trial
court was right in judging for Swain.

• Burden of evidence is on the plantiff by showing preponderance greater than 50%

• Duty one person owes to another is reasonable care.

Conclusion: “Therefore, even viewing all the facts and reasonable inferences from those facts
in a light most favorable to the Hudsons, as the nonmoving parties, the trial court did not err by
granting summary judgment to Swain.”

Judgment affirmed

Maybank v. S. S. Kresge Company, and G. T. E. Sylvania, Inc.

Summary:

• Exploding flash cube injures a woman.

• She won because it prove that it was not reasonable that flash cubes will explote

• A flashcube which does not work properly and explodes is not merchantable. A flashcube
that shatters might be merchantable

• Plaintiff proved injury to her person which is a compensable consequential damage for
breach of an implied warranty of merchantability

• Plaintiff’s evidence exceeds mere conjecture in proving defendant sold her a defective
product which proximately caused injury to her person

• Evidence was sufficient to carry the case to the jury on the claim of breach of an express
warranty, negligence and strict liability. Doctrine of strict liability applies only in cases
involving dangerous instrumentalities such as explosives (flashcube). Case hinges on
whether the plaintiff presented evidence sufficient to get to the jury on the existence of
implied warranty or merchantability which was breached by the seller. Plaintiff purchased
the package of flashcubes for $0.88 from defendant’s K-mart store

An action for breach of implied warranty or merchantability entitles a plaintiff to

recover without any proof of negligence on a defendant’s part where it is shown that:

• A merchant sold goods

• The goods were not “merchantable” at the time of sale

• The plaintiff (or his property) was injured by such goods

• The defect or other condition amounting to a breach of an implied warranty of

merchantability proximately caused by the injury
 • The plaintiff so injured gave timely notice to the seller

• Goods to be “merchantable” must be at least such as:

○ Pass without obligation in the trade under the contract description; and

○ In the case of fungible goods, are of fair average quality w/ the description; and

○ Are fit for the ordinary purposes for which the goods are used; and

○ Run, within the variations permitted by the agreement, of even kind, quality and
quantity within each unit and among all units involved; and

○ Are adequately contained, packaged, labeled as agreement may require; and

○ Conform to the promises of fact made on the container or label if any

MacPherson v. Buick Motor Car (New York, 1916)

• Judge Cardozo case – abandonment (not longer use the)of Privity Doctrine: you should
only suit the person you have a contract with- provides that a contract cannot confer
rights or impose obligations arising under it on any person or agent except the parties to
it.

• In NY there was a law that you can not sue the manufacturer unless you had a contractual
relationship with the company

• The law would not let McPherson sue the manufacturer due to no direct relationship.
Cardozo said that was enough and changed the ruling to allow consumers to bring
negligence claims to products.

STRICT LIABILITY for "Defective" Products

William B. Greenman v. Yuba Power Products, Inc. and The Hayseed

• Greenman is making a chalice and has a Shopsmithand fails while making a lathe. The
wood flies out and Greenman sues the Yuba.

• They go back to strick liability (you don’t have to prove except *)

• If they would have find Greenman negligible he will have lost, but he was not. In this case
they use strict liability.

• Plaintiff's suit based upon NEGLIGENCE and WARRANTY is eschewed in favor of STRICT
LIABILITY

○ Court announces a new test for liability*

 plaintiff is injured by product

 plaintiff was using product as intended

  plaintiff was not aware of "Defect" in design

 the "Defect" makes the good unsafe

• The concept of "Defect"

○ DEFECT can be evinced through:

 Mismanufacture

 Misdesign

 Warning Defects

• Greenman was TRUE Strict Products Liability

○ Manufacturer was liable despite the showing of "REASONABLE ACTIONS"

○ Liability was based purely on the showing of DEFECT

○ Of late, Negligence aspects have crept back into Strict Products Liability

• JUSTIFICATIONS FOR STRICT LIABILITY

○ Cost better borne by the Marketplace

○ Seller involved in a SPECIAL RELATIONSHIP with consumer

○ Consumer is unduly burdened in Negligence or Contract law

 special rules, requirements, burdens of proof

○ Fix deterrence at point of control

○ Society expects safe products

Beachnut
Main Idea:

Apple Juice Testing

Don’t try to hide the evidence

Do your due diligence

Summary:

The CEO of Beech-Nut Nutrition Corp. must decide what to do when he receives information that
the company's supply of apple juice concentrate may be adulterated. The concentrate is used in
many of the company's juice products. It appears that others in the company may have had
reason to doubt the authenticity of the concentrate for several years. The case illustrates the
importance of accurate information and open channels of communication to ensure sound
decision making by top management. Also illustrates how emphasis on financial objectives and
designated goals may obscure important ethical and legal considerations. May be used to
discuss organizational barriers to information flow, approaches to decision making, and the role
of the FDA and other U.S. regulatory officials in ensuring food purity.
 • Parties Involved:

• Peter Andersen: President/CEO of Beech-Nut Nutrition (appointed April, 1981)

• Robert Shore: VP, Finance

• Tom Storer: VP, Operations (Canajoharie native)

• N. Haskins: Director, R&D

• Bruce McIntosh: Director, QA (Johnny Appleseed ??); reports to Storer

Consequences for Beech-Nut

• Indicted by the Department of Justice on charges of the sale of adulterated and

misbranded product.

• Company pleads guilty due to the “collective knowledge” of the organization: $2 million
fine (largest ever paid by 6 times)

• $140,000 fees for FDA investigations

• Barred from federal contracting

• Also, $7.5 million settlement in class action suit against the firm

• Market share: dropped 20% 1987-88

• Record losses in 1987

• 1988 costs (est.) $25 million for the controversy (fines, legal, lost sales)

• 1988 financial results: $15 million loss on $130 million sales

• 1989: Nestle sells Beech-nut to Ralston-Purina for a bargain (est. $65-90 million)

• Anderson DID SAVE $3.5 million by avoiding the destruction of the original product

Consequences for Anderson:

• Indicted by the DOJ on charges of the sale of adulterated and misbranded product.

• First trial: guilty, sentenced to 1 year in prison plus $100K fine

• Dimissed

• Subsequent trial: pled guilty to 10 felony counts of misbranding- sentenced to 5 years

probation, 6 months community service, and $100K fine

Consequences for Storer:

 • Indicted by the DOJ on charges of the sale of adulterated and misbranded product.

• Guilty, sentenced to 1 year in prison plus $100K fine.

Beech Nut Nutrition (A-2)

• FDA visits Canajoharie plant, collects samples from 4 different production batches, all
made w/ concentrate supplied by Universal to be tested in new methodology in Buffalo

• Aug 11, NYS Dept of Agriculture and Markets informs McIntosh a jar of BN apple juice from
a retail store tested as adulterated

• Aug 12, BN ships 30,000 cases of apple and assorted juices to Secaucus, NJ

• Aug 20, FDA is of the opinion the 4 samples in Buffalo were adulterated

• Maltby advises to ship 20,000 cases from Secaucus, NJ to Puerto Rico to avoid seizure by
FDA; destroy the four batches the FDA samples came from

• Maltby also advised Andersen he could legally refuse to provide info to the FDA

Beech Nut Nutrition (A-3)

• Negotiated recall October, 1982; spring of 1983, FDA receives Johnny Appleseed letter

• BN’s efforts to dispose of juice made from Universal concentrate, shipment to Puerto Rican
distributor discounts made by Andersen, also to DR distributor, huge discounts, lacking
documentation; evidence Universal is making phony concentrate

The Constitution of the United States Article I Section 8

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the
debts and provide for the common defense and general welfare of the United States; but all
duties, imposts and excises shall be uniform throughout the United States; … To regulate
commerce with foreign nations, and among the several states, and with the Indian tribes; …To
make all laws which shall be necessary and proper for carrying into execution the foregoing
powers, and all other powers vested by this Constitution in the government of the United States,
or in any department or officer thereof.

Amendment 14 - Citizenship Rights. Ratified 7/9/1868.

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are
citizens of the United States and of the State wherein they reside. No State shall make or enforce
any law which shall abridge the privileges or immunities of citizens of the United States; nor shall
any State deprive any person of life, liberty, or property, without due process of law; nor deny to
any person within its jurisdiction the equal protection of the laws. …
Amendment 15 - Race No Bar to Vote. Ratified 2/3/1870.
1. The right of citizens of the United States to vote shall not be denied or abridged by the
United States or by any State on account of race, color, or previous condition of servitude.

2. The Congress shall have power to enforce this article by appropriate legislation

Heart of Atlanta Motel vs US (1964)

Enforce Civil Rights Act – raise question of how extensive is Commerce Clause
• Motel does not let African Americans stay there
• Congress relies on commerce clause to demand that it allow African Americans stay
because people are moving between the states to stay in the Motel: “Interstate
Commerce”
Conclusion: Congress have to say how they were going to fix it. “But this is a matter of policy
that rests entirely with the Congress not with the courts. How obstructions in commerce may be
removed--what means are to be employed--is within the sound and exclusive discretion of the
Congress. It is subject only to one caveat--that the means chosen by it must be reasonably
adapted to the end permitted by the Constitution. We cannot say that its choice here was not so
adapted. The Constitution requires no more.”

Affirmed

Gibbons vs Ogden (US 1824)

Fulton steamboats given monopoly power by state of NY from NY to NJ –
 Courts says yes – congress can come in and interrupt what NY did and
• Commerce Clause – Article 8 section 1 - Interstate means “between states” but not purely
internal to a state. “Regulate” means to “control to the utmost extent” – very expansive!

Ollie’s Barbeque – yes – this business engages in interstate commerce b/c its
suppliers are from out of state

US v Lopez (1995) – (cannot bring handgun within 20yards of elementary school)

Rehnquist court – sets limitation on commerce clause – not enough that
handguns/ammunition can be sourced out of state; Congress cannot criminalize
handguns by schools federally – must leave as state issue – not want to continue
centralizing government

Weiner v. McGraw Hill (NY 1982)

At trial, Weiner’s case was dismissed consistent with EAW.

Appeal: Grounds the employment relation in contract law—not tort. While EAW is the
presumption in employment, that presumption can be rebutted. Possible evidence:
promises, handbooks, signing ceremonies. Here, the contract was formed at hiring, and
there was consideration for the “just cause” provision.

Griggs vs. Duke Power (US, 1971)

Civil rights act went into effect and company installs tests that gives to all employees

• Trial court – says tests are not violation

• Supreme Court says – despite that tests don’t seem to be discriminatory, statistics show
the same results – current employees who didn’t pass tests. Also, the test should be
related with performance on the job.
• Disparate treatment – evidence that employer is treating different people differently –
against Civil Rights act
• Disparate impact – statistical showing, even if employer’s policy is neutral on its face –
also against Civil Rights Act (from this case)
• Defenses to disparate treatment (when statistics show that disparate proportion of
whites/blacks, etc things that are defenses to these claims)
○ Bona fide occupational qualifications
○ Seniority and merit systems – so long as not purposeful discrimination

Meritor Savings Bank vs. Vinson (US, 1986)

woman claims sexual harassment

• Trial court – denied relief , they said it was voluntary

• Supreme Court – qualifies under Title 7 – as hostile environment, so they send her back
to trial
• Quid pro quo violation – always a violation if offered to exchange job benefits for sexual
favors
• Hostile working atmosphere violations –
○ Epithets, slurs, negative stereotyping, intimidating acts, and/or graphic materials
that show hostility toward an individual or group
○ Other types of conduct that affect the work environment.
○ Must be pervasive – what does pervasive mean? – avoid it entirely!
• Supervisors are targets!
How can employee protect self

• Have reasonable policy and procedure that employees can use to complain –
• And employee must ACT on it!
• Person who is being harassed had to not avail themselves

Joe’s Stone Crab EEOC

Male waiters preferred in classy restaurants. Courts determined that this was discrimination
based on gender.
Result: “Judge Hurley also awarded damages in the amount of $154,205 (plus interest) to four
claimants who

attended past Roll Calls but were denied employment. The court's damages were based on the

difference in income from the women's actual work history compared to what it would have been
had

they worked at Joe's.”

Landgraf and Du Pont Merck

When Landgraf took over the leadership of DuPont Pharma and Imaging division in
1988, what challenges did he face in diversity?

• Merger

• Pay Inequalities

• Rapid growth- opportunity?

How serious was the situation? Did he need to respond?

Landraf did the following things:

• He tried to raise people’s pay

• Created task force

Summary:

December 1993, Kurt Landgraf just took over as CEO of DPM. Receives troubling letter, emails
from AA’s in R&D (claimed dept discriminated against them)

• Landgraf had planned to downsize by 15%: “Performance – No Excuses”; inclusive

workplace

• African Americans afraid they’ll be the first to be terminated

• Equal Employment Opportunity Commission (EEOC) contacted; threatened class action

• Joseph Mollica (former CEO) and David Martin (Exec VP of R&D) had retired and left

• Situation similar to one Landgraf faced in 1988 during a period of overhiring; “a manager’s
nightmare, inheriting someone else’s garbage”
 • Imperatives:

○ Resolve the equity issues inherent in the allegations of racial discrimination and the
possibility of a costly, time-consuming and damaging lawsuit

○ Meet the increased financial demands placed on DPM despite downsizing,

reorganization, and a rapidly changing business climate in the pharmaceutical
industry

Kurt Landgraf at DuPont:

• Moved through variety of sales and marketing positions at J&J and UpJohn; felt DP was
conservative, prejudiced, closed

• Headed pharmaceutical operations in Europe for 3 years; opened his eyes to the ways
distrust of “the other” can undermine teamwork and business success

• Became Mgr of Corporate Plans Dept (long-range strategic vision)

• Named Director of Pharmaceuticals and Imaging, 1991 his division was absorbed into the
JV

• Landgraf has no PhD, but “senior managers who are trained in the social sciences are far
better managers than those with technical, hard science, or engineering degrees,”
especially since “there is no right answer to lots of questions”

• Landgraf: graduate degrees in economics, business administration, sociology- best prep to

lead

Diversity in DuPont’s Pharmaceutical Division:

• 1988: $50M 1991: $500M reason:

○ Establishing a vision for the organization, set of principles (grew up Catholic)

○ 1991: philosophy was codified as the “DPM Corporate Behavioral Guidelines”

• 1986: DuPont acquires American Critical Care: worst acquisition in history of mankind

• 10/3/88: Landgraf receives unsigned letter to VP from “women and minority reps”; class
action

• Landgraf asks MaryAnn Kummert to head a task force to investigate; Regional Sales
Director

• Kummert given 3.5 months to come up with recommendations; anything reasonable:

implement

• Task force: 10 people= 5 white women, 1 black woman, 2 black men, 2 white men

○ Unearthed pay substantial inequalities

 ○ Landgraf brings salaries for similar jobs up to parity, imposed strict guidelines on
overt forms of harassment, mandated sensitivity trainings, institutionalized the task
force

○ In one day, Landgraf signed 188 pay changes to bring people to same pay
scale/grade

○ Kummert claimed more men were impacted (higher % of men than women in
company)

○ Company spent $250,000 on mandatory “sensitivity training” workshops

○ Fired one Senior Mgr, demoted another for breaking the rules

○ Hired consultant on diversity Kirson Herbert (AA, 20+ yrs exp, Kummert’s original
team)

○ Task Force met 3 times/year

○ Herbert: level the playing field, create awareness of cultural sensitivity, create
systems of accountability (especially critical); need to be financial disincentives to
not performing

○ Kummert’s team recommend Diversity Task Force be a company-wide effort

○ Recommendations: 360-degree evaluation, mirror the hiring goals w/ US population
(50% women, 25% minority); you only get what you measure

• Jerry Gaylord (head of pharma salesforce) saw increased changes (increase in women),
though he believed changes in the hiring pool would have resulted in a new gender mix
anyways; believes finding highly qualified minority candidates is harder

○ Goal was to develop “a population mixture to match that of our customers”

○ Growing managed-care industry required a team sales approach; no access to

“good-old-boys” network

○ Mike George, Director of Worldwide Marketing in 1989 was very receptive to

Landgraf’s changes; first off-site area sales mtg, women did way better than men

DuPont Merck Pharmaceutical Company:

• 1/1/91 – DuPont and Merck merger; 3rd largest chemical OEM + largest US pharma maker

○ 50-50 Co-owned with a six person board drawn equally from the two parents

 DP brought entire pharma, R&D, 1,500 scientists (400 PhD), 600 salespeople,
administrative staff; Merck brought 10 employees, European rights to
marketing several prescription medicines, marketing expertise, cash

 For an undisclosed period of time, all profits would go into the JV; Merck’s
products ~ 35% of sales, DP’s product ~65% of sales
The Changing Pharmaceutical Industry:

• Highly fragmented: no company had > 5% market share; top 25 OEM’s had 75% of market

• Clinton administration health care reforms: intense pricing pressure

• 1990s: profits grew < half of the annual average of the 1980s – companies started
shedding jobs

Kurt Landgraf as CEO: Going Forward at DPM:

• Monthly communication: outlined “strategies we intend to pursue to reach our vision”

• DuPont would be “fully functioning, but not fully integrated”

African-Americans at DuPont Merck:

• 2+ AA employees group, email network (all informal)

Class Action Suit:

• Wendell Wilkerson joined DuPont in 1979 w/ PhD in Chemistry; late 50s/60s, involved in
the Congress of Racial Equality (CORE), other civil rights causes; worked directly w/ MLK Jr

• Wasn’t interested in DuPont because it was “conservative and racist”, but believed if he
“worked his ass off, he could run the place”

• Started off with a great manager, than had a worthless one; 12-15 years of complaining
loudly – WW sent a letter outlining his concerns and threatening a class action suit

• 12/1/93: CORE writes to Landgraf w/ “many concerns about the mistreatment and lack of
promotional opportunities of AA within DuPont/Merck, especially in R&D”

Landgraf Responds:

• Immediate inclination was to setup a meeting with the letter’s authors; when he learned
through Herbert that WW’s Core Team was not a companywide group, he hesitated

• Landgraf instructed Herbert to work with Gloria Hammond (DPM Compliance officer) other
AA’s to organize a forum to discuss employment issues

The African-American Employees’ Forum:

• Duane Holland, DPM’s first AA VP of Workforce Development and Diversity, led the forum
(just promoted days before); only one of 13 managers who did not have a division
reporting to him

• Holland and Landgraf framed the Forum as a celebration of MLK’s values

 • No one on mgt committee able to respond to questions about employment for AA within
scientific divisions because a successor to Martin hadn’t been named, Pieter Timmermans
(SVP R&D) was absent, and Ken Kasses, President of Radiopharmaceuticals, arrived late

The African-American Scientist Program:

• 1992: Holland and David Grandison, Director of Worldwide Medical Affairs, formalized
Wilkerson’s efforts by creating the AA Scientist Program

• 1993: contacts recommended 14 AA’s: 3 were interviewed, none received job offers

The Bi-Modal Workplace:

• At the end of the Forum, that’s how Landgraf referred to DPM

• Donna Jones’ story illustrative of the bi-modality of DuPont/Merck environment

○ Moved from R&D< reorganized within marketing; in R&D, she was treated as a
novelty by those more receptive to her being there; ignored by those less receptive
to her there

○ “Ignorance and fear” made her very uncomfortable – she’d never go back to R&D

Barriers to Success:

• Landgraf expected Holland to pull together a task force, achieve results by EOQ

• Critics argued R&D was an elitist degree-driven division (Landgraf had no hard degrees)

• Scientists don’t look favorably on efforts that take them away from work, no quant results

• < 1% of all PhD’s awarded in the US/yr awarded to AA scientists – R&D had limited labor
pool

• Timmermans argued:

○ 1988: Landgraf could create gender equity through hiring, not the case now
○ Whenever there is “pressure and urgency to hire” the results were “disastrous”

○ DPM has a responsibility to hire the best scientists to assure medicines were
effective and safe and there would be no surprises 10-20 years down the road

• Timmermans was committed to a diverse workforce, but found himself “constantly

criticized because we cannot deliver quickly”

Arguments:
 • “Even in the toughest economic times… if you decrease the negatives, you end with a
powerful motivator. It’s simplicity that works; PhD’s can’t understand this simplicity”

• David Grandison (AA) believed there was “no insurmountable barrier” to hiring qualified
AA’s

• DPM should tied potentially good AA scientists to itself through educational support
programs

• R&D Managers “believed in [diversity], but didn’t really work on it in an ongoing process”

Landgraf’s Decision:

• Needed to make a swift decision

• Under pressure to meet financial growth schedule of the organization set by parent
companies

• Business success/failure rested on the success/failure of DPM’s R&D pipeline

• Needed to proceed with downsizing as equitably as possible

• Believed they shouldn’t “play the numbers game” yet supported numerical goals as
“short-term” answers until corporate culture made them unnecessary

• Landgraf had one AA in mind for Martin’s head R&D position and he would personally
review the employment records of every individual laid off during downsizing