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SCHOOL
OF LAW
LEGAL STUDIES RESEARCH PAPER SERIES PAPER #08-00136
MAY 2008
Business Ethics: Law As A Determinant Of
Business Conduct
VINCENT DI LORENZO
EMAIL COMMENTS TO: [email protected]
ST. JOHN’S UNIVERSITY SCHOOL OF LAW 8000 UTOPIA PARKWAY
QUEENS, NY 11439
This paper can be downloaded without charge at: The Social Science Research Network Electronic Paper Collection
http://ssrn.com/abstract=1134034
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Business Ethics: Law As A Determinant
of Business Conduct Vincent Di Lorenzo
ABSTRACT. The Principles of Corporate Governance
require that business conduct conform to the law. In
recent years, news reports of business misconduct have
cast doubt on a conclusion that conformity is the
prevalent practice. This article explores the influence of
law on business conduct by comparing the law’s
requirements and purposes with actual business conduct
in the market. Specifically, it explores whether certain
legal regimes are more effective than others in inducing
greater commitment to legal compliance by corporate
actors. The conclusion drawn is that the prevalent legal
regime – a vague common law or legislative mandate –
is typically associated with corporate conduct that
evades or ignores the law’s mandate or its underlying
purpose.
KEY WORDS: corporate behavior, Corporate Gover-
nance, ethical obligation to comply with law, legal
compliance, Organizational Theory
There is quite clearly no difficulty in explaining why
we are to comply with just laws enacted under a just
constitution. In this case the principles of natural
duty and the principle of fairness establish the req-
uisite duties and obligations.1
Introduction
Are corporations committed to compliance with the
law? Last year marked the tenth anniversary of the
release of the American Law Institute’s Principles of
Corporate Governance.2 The Principles of Corporate
Governance demand a corporate commitment to
compliance with law. The obligation exists even
when corporate profits are not maximized. Thus, the
Principles embrace Rawls’ view of legal obligations.
Do these Principles realistically reflect corporate
activity in the market?
Doubt regarding corporate commitment to
ethical obligations has always existed, particularly
when maximization of profits might be at risk.
However, despite such doubt two views have
singled hope. First, a view has persisted that cor-
porations at least feel compelled to comply with
law. At times violations of law might occur.
However, this was not thought to be the pattern
of behavior for corporations generally. Conscious
violation of law was not the behavior expected.
Second, a view has begun to be echoed that
business corporations are increasingly cognizant of
ethical obligations beyond literal compliance with
law, and increasingly feel compelled to act
accordingly.
This article tests these viewpoints by examining
evidence of actual market conduct. Two questions
are explored: (a) whether corporate conduct dem-
onstrates a commitment to legal compliance,
including a commitment to the law’s underlying
purpose, even when corporate profits are not max-
imized, and (b) whether different legal regimes in-
duce greater commitment to legal compliance. First,
the trappings of commitment to ethical conduct are
examined – e.g., corporate polices and administra-
tive structures. Second, corporate activities in the
market are examined. Four industries and their
Vincent Di Lorenzo is Professor of Law; Senior Fellow, Vin-
centian Center for Church and Society, St. John’s Uni-
versity; J.D. Columbia University (Harlan Fiske Stone
Scholar); Associate Articles Editor, Columbia Journal of Law
and Social Problems. Before joining the faculty at St. John’s
University School of Law, Professor Di Lorenzo was a
member of the faculty at The Wharton School, University of
Pennsylvania, and was associated with a major Wall Street
firm practicing in the real estate-banking department. He is a
member of the American Bar Association and the New York
State Bar Association. Professor Di Lorenzo has authored
many articles and books in the banking, legislation and real
estate areas.
Journal of Business Ethics (2007) 71:275–299 � Springer 2006DOI 10.1007/s10551-006-9139-9
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activities in recent years serve as case studies: the
securities industry, the automobile industry, the
pharmaceutical industry, and the mortgage banking
industry. The key finding of this study of corporate
conduct is that corporations are not committed to a
broad ethical obligation to comply with the law
including an obligation to serve the law’s purpose.
Legal mandates are narrowly construed and sought
to be evaded. Underlying public policies are typi-
cally ignored.
Part one – Perspectives on the influence
of law on business conduct
The principles of corporate goverance: Law
as a determinative factor
The American Law Institute’s Principles of Corporate
Governance, released in 1994, summarized, among
other things, the expectations regarding corporate
compliance with law. The Principles reflect the ‘‘...
common understanding of the key legal relationships
in the corporations ...’’3 Section 2.01 of the Principles
of Corporate Governance begin with the view that a
corporation’s primary objective is to enhance cor-
porate profit and shareholder gain. However, the
corporation is obliged to act within the boundaries set
by law even if corporate profit and shareholder gain
are not enhanced.4
The American Law Institute embraced the posi-
tion that the obligation to comply with law is not a
limited duty of literal compliance but should take
into consideration the purposes behind the laws in
question. It explained:
...the corporation, like all other citizens, is under an
obligation to act within the boundaries set by law. In
determining these boundaries the corporation should
not rest simply on past precedents or an unduly literal
reading of statutes and regulations, but should give
weight to all the considerations that the courts would
deem proper to take into account in their determi-
nations, including relevant principles, policies, and
legislative purposes.5
This is an ethical viewpoint that rejects very narrow
interpretations of legal requirements and therefore
rejects attempts to evade legal requirements. In cases
of uncertainty, conduct consistent with the law’s
purpose is the proper standard against which to judge
ethical conduct.
Organizational theory and corporate decisions
Studies have found that various influences play a role
in corporate decisions regarding corporate compli-
ance with law – influences in addition to the legal
mandate or the sanction imposed for violation.6 The
studies have called into question the influence of the
severity of sanctions on legal compliance,7 and
whether the perceived obligation to comply with a
legal mandate is the most important factor deter-
mining corporate conduct.8
Recognition that non-legal factors play an
important role in influencing corporate decisions,
has led some commentators to conclude that law is
unnecessary to induce ethical business conduct.9
However, the deficiency in this conclusion is that it
is an untested hypothesis. This article explores this
issue as well.
Theoretically, legal mandates can control out-
comes if corporations are broadly committed to
compliance with law, including the law’s underlying
purpose. In such a scenario, the legal mandate would
override all other influences on corporate behavior.
This is the assumption in the Principles of Corporate
Governance. This article examines recent corporate
conduct to test this assumption, and to examine
whether the type of legal mandate imposed makes a
difference.
Part two – A market-based study
of corporate conduct
Outward signs of corporate embrace of ethical duties
In recent years, signs of corporate commitment to
ethical obligations beyond literal compliance with
law have surfaced. This has generated hope that
this is emerging as a prevalent standard of conduct
for corporations. The view that corporations are
increasing cognizant of their ethical obligations,
beyond literal compliance with law, is fueled
by surveys of corporate executives and adminis-
trative activity within the corporations. Thus,
the American Management Association’s 2003
Corporate Governance Survey found that in 92%
276 Vincent Di Lorenzo
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of publicly traded companies and 67% of privately
held companies the CEO had communicated a
commitment to ethical behavior in the last year
(i.e., since passage of the Sarbanes–Oxley Act of
2002).10. An earlier survey of board of directors’
involvement in creating ethical standards for their
corporations found that such involvement has in-
creased dramatically between 1987 and 1999.11
Finally, the 2003 U.S. Chamber of Commerce
survey of its members, conducted by the Center
for Corporate Citizenship at Boston College, found
that operating with ethical business practices was
cited as ‘‘very important’’ by 87% of respondents
and ‘‘important’’ by an additional 11%.12
Evidence of corporate, administrative action
confirming an increasing recognition of ethical
obligations is also found in the creation of the
position of ethics officer in many corporations.
The Ethics Officer Association member survey,
last conducted in 2000, found only 4% of positions
created before 1986 and more than half created
between 1996 and 1999.13 Moreover, the impor-
tance of various motivations for creating the
positions has changed over time. The percentage
of respondents that cited either meeting best
practices standards or industry trends as a factor
having ‘‘a lot of influence’’ increased 10% and 9%,
respectively, between 1997 and 2000. Yet, the
percentage of respondents that cited either a
government investigation or improving the orga-
nization’s public image as a factor having ‘‘a lot of
influence’’ decreased 11% and 10%, respectively,
between 1997 and 2000.14
Yet, the viewpoint that mainstream corporations
are increasingly cognizant of their ethical obliga-
tions is not universally shared. A contrary view is
that corporate actions may not be consistent with
verbal commitments or administrative appearances
of commitment. A survey of ethics, human re-
sources and legal officers participating in the
Conference Board’s 2003 Ethics Conference found
that fewer than 8% of respondents reported that
companies fire ‘‘great performers’’ who do not live
up to their companies’ values, while nearly 5% of
respondents reported companies promote them,
more than 25% coach them and 22% tolerate
them.15 This article tests these competing view-
points by examining corporate actions in the
marketplace.
Corporate activities in the marketplace
This article examines whether corporate actions in
the market evidence commitment to the law,
including commitment to the law’s underlying
purpose. It also examines whether such commitment
varies depending upon the nature of the legal regime
to which a corporation is subject. Three types of
legal regimes are studied: (a) a vague mandate,
imposed at common law or in legislation, (b) a dis-
closure regime, and (c) a clear mandate, stipulating a
required course of action.
Studied below are the activities of corporations in
four sectors of the U.S. economy – the securities
industry, the automobile industry, pharmaceutical
industry, and the mortgage banking industry.
Industry activities are examined to ascertain corpo-
rate adherence to the letter of the law and its
underlying purpose. The types of legal regimes and
industries studied are:
I began my study by examining recent transgres-
sions of ethical conduct by corporate actors reported
in the news media. Various industries presented
themselves as examples of transgression by many, if
not most, members of the industry, as opposed to
isolated transgressions by one corporation in the
industry. Four of these industries are examined
below. This is admittedly a sample composed of
transgressors. Thus, it does not necessarily provide
Type of legal
regime
Case study
A vague legal
standard
Securities industry case study –
Disclosure of investment risks
Automobile industry case study –
Products liability standard
Pharmaceutical industry case study –
Disclosure of product risks
A disclosure
regime
Automobile industry case study –
Government disclosure of risks
A clear legal
standard
Automobile industry case study –
Proposed NHTSA regulations
Mortgage banking industry case study
– Stipulated disclosures under
TILA and RESPA, and
– Prohibited activities under
HOEPA
Law As A Determinant of Business Conduct 277
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data on how pervasive the problem is among all
corporations. Nonetheless, these are major industries
in the U.S. economy. In each of the four industries
studied, unethical practices occurred among many if
not most of the members of the industry, and the
unethical conduct often took place in a variety of
different types of business transactions in which
industry members were engaged.
In addition there are additional major industries
that similarly were found to engage in unethical
business practices that are not among the four case
studies contained in this article. The insurance
industry is an example. Members of the industry
have settled or are in settlement negotiations over
charges of writing financial contracts to assist other
corporations manipulate earnings and therefore
mislead investors,16 and racial discrimination via
overcharges in the sale of burial insurance policies.17
In addition many insurance companies are under
investigation for sales practices that cheated cus-
tomers out of the best prices for their insurance
policies.18 The commercial banking industry has
settled charges that it aided and abetted fraud by
other corporations such as Enron.19 Major retailers
and service industry members, such as Wal Mart,
face evidence of violations of state labor laws and
child–labor laws.20 The major tobacco companies
have settled accusations or have been found to have
violated their 1998 Master Settlement Agreement
that prohibited advertising that targets minors.21
Finally, numerous corporations in different indus-
tries have settled allegations of fraud through
manipulation of earnings or questionable accounting
practices.22 There are other, similar examples of
transgressions of law reported in the news media.
Thus, the case studies in this article shed light on the
question of whether corporate actors are generally
committed to compliance with legal mandates.
Behavior of corporate actions is explored in varied
contexts. The securities, pharmaceutical and mort-
gage banking industry case studies examine corpo-
rate behavior that harms individuals financially. The
automobile and pharmaceutical industry case studies
examine corporate behavior that harms individuals
physically. In addition, the case studies explore
whether law’s influence on corporate behavior varies
based on the type of legal regime imposed. Three
types of legal regimes are examined: (a) a vague legal
mandate, either in the form of a common law
mandate or a legislative mandate, (b) a disclosure
regime, composed of a disclosure of risks, and (c) a
clear legal mandate, namely one that stipulates the
required response of the corporate actor. Some legal
mandates call for disclosure but the type of disclo-
sures to be made and the circumstances in which
disclosure is required are not clear – i.e., the legal
mandate consists of a vague standard. These are
examined as part of corporate actions in light of a
vague duty, rather than corporate actions in response
to a disclosure obligation. By contrast, the disclosure
regime is one in which disclosure has been made. In
the automobile case study the disclosure is by gov-
ernment and consists of risk of rollovers. The case
study in this regime then examines corporate com-
mitment to other legal obligations, e.g., tort obli-
gations, when faced with such disclosures of risks.
Case study 123 – The securities industry
There are many unethical business practices that
have come to light in the securities industry in recent
years. These include illegal allocation of shares in
initial public offerings,24 trading abuses by mutual
fund companies,25 lack of due diligence by under-
writers leading to defrauding of investors,26 illegal
practices in sales of variable annuities including
market timing, violation of suitability rules, and
inadequate disclosure,27 and sex discrimination.28
This article focuses on misleading reports issued by
securities analysts.
The challenge
Securities analysts evaluate securities and estimate
their value as investments for potential investors.
They collect and review information about the
corporations that they are evaluating including
information found in company documents filed with
the SEC, materials sent to shareholders, trade pub-
lications, and information obtained in interviews
with company officers and employees and visits to
company sites.29 So-called sell-side analysts are
generally employed by brokerage firms and produce
reports and buy–sell recommendations for the firm’s
customers and other investors. The reports include
predictions of future earnings.30
The investors that might rely on the reports and
recommendations are not typically sophisticated
278 Vincent Di Lorenzo
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investment entities that regularly trade in securities,
such as mutual funds, hedge funds, insurance com-
panies, or retirement funds. Rather such entities
employ their own, so-called buy-side analysts who
generate reports solely for their employers and not
for the general public.31 In recent decades more and
more individuals have embraced the securities mar-
ket as a vehicle for channeling their savings and
other financial assets.32 Thus, individual investors
and, in many cases, unsophisticated individual
investors are increasingly the recipients of analysts’
reports and recommendations.
Analysts face conflicts of interest on several fronts.
First, they are employed by securities firms and
analysts’ recommendations generate brokerage
commission revenues for their employers.33 In a
related vein, the securities firms typically engage in
the investment banking business as well. Securities
analysts help to develop and maintain relationships
with investment banking clients of the firm, and
therefore generate investment banking fees for their
employers.34 Examples of the conflict of interest
faced by research analysts is provided by the New
York State and SEC investigations of industry
practices. At Merrill Lynch, the head of equity
research solicited information from analysts on their
involvement in investment banking so that their
compensation could be calculated. He said:
We are once against surveying your contributions to
investment banking during the year ... please complete
details on your involvement in the transaction, paying
particular attention to the degree your research cov-
erage played a role in origination, execution and fol-
low-up. Please note as well, your involvement in
advisory work on mergers or acquisitions, especially
where your coverage played a role in securing the
assignment and you made follow up marketing calls to
clients. Please indicate where your research coverage
was pivotal in securing participation in high yield
offerings.35
Similarly, at Morgan Stanley, research analysts were
compensated, in part, based on the degree to which
they helped to generate investment banking business
for the firm. In their annual performance evaluation,
analysts were asked to submit self-evaluations that
often included their involvement in investment
banking, including a description of specific transac-
tions and the fees generated. One analyst’s evaluation
stated ‘‘Bottom line, my highest and best use is to help
[Morgan Stanley] win the best Internet IPO mandates
....’’36
Second, analysts are paid by their employers
based, in large part, on their ability to generate
investment banking business and their reputation
among investors, as reflected in annual Institutional
Investor rankings.37 Curiously, stock picking and
earnings forecast ratings of analysts do not weigh
heavily in these rankings.38
Third, analysts, their employers, and other
employees of the firm commonly have ownership
interest in the companies that the analysts are cov-
ering.39 Thus, given these conflicts of interest, the
challenge is to issue fair, accurate research reports
and recommendations. From the standpoint of
assessing ethical behavior, in some cases inaccurate
reports and recommendations can violate legal pro-
hibitions aimed at protecting investors against
fraudulent practices.
The legal environment
As described below, members of the securities
industry have settled charges of violations of state
antifraud statutes, rules of the New York Stock
Exchange (NYSE) and National Association of
Securities Dealers (NASD), as well as violations of
the federal securities laws. This article examines the
federal securities law as the governing legal regime.
The regime consists of a vague statutory standard. In
that sense the legal regime is not different in form
than the state law40 and the rules of NASD and
NYSE41 that are alleged to be violated and are also
vague legal standards.
The governing statutory standard is found in the
antifraud provisions of the federal securities law. The
settlements reached were based on section 15(c) of the
Securities and Exchange Act of 1934, because the
particular securities in question were traded over-the-
counter. However, section 10(b) of the Act could
have been invoked for securities other than those
traded over-the-counter.42 These statutes prohibit
‘‘... any manipulative, deceptive or other fraudulent
device or contrivance’’ to induce or attempt to induce
the purchase or sale of any security.43
Law As A Determinant of Business Conduct 279
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The purpose behind these antifraud provisions is
to protect the average investor against overreaching.
As one leading commentator has explained:
The antifraud provisions are part of a statutory scheme
that resulted from a finding that securities are ‘‘intri-
cate merchandise’’ and a congressional determination
that the public interest demanded legislation that
would recognize the gross inequality of bargaining
power between the professional securities firm and the
average investor. ‘‘The essential objective of securities
legislation is to protect those who do not know
market conditions from the overreachings of those
who do.’’44
In a similar vein, the courts have explained that:
A fundamental purpose, common to these [federal
securities] statutes, was to substitute a philosophy of
full disclosure for the philosophy of caveat emptor and
thus to achieve a high standard of business ethics in the
securities industry.’’45
Thus, the ethical obligation to act in accordance
with the purpose behind the governing law would
require a commitment on the part of securities firms
to insure fair, accurate reports and recommenda-
tions on the part of securities analysts. Did the
securities industry’s actions reflect commitment to
compliance with the law, including its underlying
purpose?
The industry response
Through the late 1990s and thereafter the industry’s
response was to ignore the proscription against
deceptive statements and practices and instead boost
investment banking and brokerage earnings by
overstating predictions of corporate earnings,46 and
maintaining strong ‘‘buy’’ recommendations47 for
stocks despite analysts’ privately held views that the
recommendations were not justified. Also, the
response was frequently to boost personal fortunes
by issuing rosy forecasts for stocks in which the
analyst, the analyst’s employer, or other employees
had an equity stake that they could sell after a lock-
up period.48
Charges alleging such activities have been
brought and have been settled against 12 securities
firms.49 The practices uncovered have been char-
acterized as widespread and continuing for many
years as an industry practice.50 Some examples
illustrate the industry viewpoint that increased
profits was more important than a commitment to
fair and accurate reports and recommendations by
analysts.
At Merrill Lynch, analysts provided Infospace,
Inc. with the firm’s highest rating, but privately the
analysts labeled Infospace ‘‘a powder keg’’ and a
‘‘piece of junk.’’51 Similarly, Merrill Lynch was
urging customers to buy Lifeminders, Inc., while
Merrill Lynch analysts were privately referring to the
company ‘‘... as a ‘p.o.s.’. Let [us] simply say that
p.o.s. is a euphemism for an extremely poor
investment.’’52 At UBS Warburg, positive recom-
mendations were issued by an analyst on Interspeed,
which was one of the firm’s investment banking
clients, but privately the analyst stated that the stock
should be shorted.53 At Salomon Smith Barney,
analyst Grubman reiterated a ‘‘buy’’ recommenda-
tion in February 2001 on Focal, an investment
banking client, and a target price of $30 (twice the
stock price). The same day an institutional investor
e-mailed a research analyst who worked for Grub-
man ‘‘McLeod [McLeod U.S.A Inc.] and Focal are
pigs aren’t they?’’ and asked whether Focal was a
short. The analyst responded, ‘‘Focal definitely ...’’.
In April 2001 Grubman stated privately the need to
downgrade Focal, but nevertheless once again
advised investors to buy Focal.54 At Credit Suisse,
Digital Impact received a ‘‘buy’’ or ‘‘strong buy’’
rating from January 2000 to April 2001, even while
the stock price declined from $50 to less than $2. In
May–September 2001 a new analyst stated privately
he wanted to drop coverage on the company be-
cause of its difficult market environment. However,
he did not drop coverage due to pressure from
investment bankers, and left the buy rating
unchanged until October 2001.55 At Bear Stearns,
Micromuse, Inc. received a ‘‘buy’’ rating while an
analyst of the firm privately characterized the stock
as ‘‘dead money.’’56 At Lehman Brothers an analyst
who covered RSL Communications, Inc. stated
privately ‘‘I have attempted to downgrade RSLC
THREE times over the last year, but have been held
off for banking reasons each time.’’57 At Deutsche
Bank Securities an analyst issued positive recom-
mendations on Oracle, but privately expressed the
view to a large institutional investor that the stock
should be sold. Similarly, an analyst issued a ‘‘market
280 Vincent Di Lorenzo
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perform’’ rating on Eprise Corporation while pri-
vately referring to the company as ‘‘permanent
toast.’’58
The persistence of an industry-wide culture of
ignoring the federal antifraud law’s underlying pur-
pose is witnessed in reactions and responses to the
global settlement reached with the SEC. Statements
made soon after the settlement were to the effect
that the securities firms had done nothing that
should be of concern to their clients.59 This reaction
received a rebuke from the SEC.
Similarly, actions taken soon after the settlement
also evidence a culture of ignoring the law’s purposes,
and perhaps its literal requirements. The settlement
prohibited analysts from engaging in marketing or
selling efforts to investors with respect to investment
banking transactions. Yet, Bear Stearns distributed to
clients an Internet ‘‘roadshow’’ broadcast in which
one of its senior analysts glowingly touted iPayment
Inc., a company Bear Stearns was taking public. In
addition Bear Stearns, Citigroup, and other invest-
ment banks distributed analysts’ revenue and earnings
estimates for companies whose initial public offerings
they were underwriting.60 In the latter case, the firms
claimed analysts could, under the settlement, prepare
internal use memoranda and participate in efforts to
educate the sales force. Yet, the reports were being
distributed to investors, and the settlement also stated
that firms could not do indirectly what they are barred
from doing directly.61
Conclusion
A vague statutory standard was not determinative of
analyst conduct in the securities industry. The pur-
pose behind the legal standard was ignored and, at
times, the legal standard itself was violated by many
members of the industry.
Case study 2 – The automobile industry
This article focuses on the dangers posed by the
automobile industry’s design of sport utility vehicles
(SUVs), in particular the deaths and injuries resulting
from rollovers and the incompatibility of SUVs and
passenger automobiles. This is not the only unethical
business practices reported in the automobile
industry in recent years. Consumer finance affiliates
of automobile manufacturers, for example, have
been charged and some have settled suits alleging
racial bias.62 They have also settled claims of fraud-
ulent overcharges imposed on consumers in auto-
mobile leasing programs.63
The challenge in the automobile industry
Recent Congressional hearings, the announcement
of new federal rollover tests, and the first voluntary
industry-wide efforts to address safety concerns have
highlighted the concern with the danger to passen-
gers posed by SUVs and light-trucks. Two concerns
exist – the danger posed by rollovers and the dangers
posed by incompatibility of design.
Rollovers result in about 10,000 deaths and
31,000 serious injuries in the U.S. each year.64 This
has occurred largely in SUVs and other light-trucks
because they are much more likely than passenger
cars to roll over. In 2002, 61% of fatalities among
SUV occupants and 45% in pickups were due to
rollovers, compared with 23% in automobiles.65
Indeed, mid-size SUVs are nine times as likely as
passenger cars to be involved in fatal rollover cra-
shes.66
SUVs and other light-trucks are also more likely to
kill or injure occupants of automobiles when the two
are involved in an accident. This is referred to as the
compability issue. Mid-size SUVs are twice as likely to
kill the occupants of other vehicles in head-on cra-
shes,67 and light-trucks are three times as likely to kill
the occupants of other vehicles.68 Such rates increase
dramatically when SUVs or light-trucks strike the side
of an automobile. When an SUV strikes the side of an
automobile the likelihood of fatality in the car is three
times what it would be if struck by another automo-
bile, and five times what it would be when struck by a
pickup.69
The legal environment
The automobile industry’s response to the issue of
rollovers and incompatibility has occurred in a legal
environment. That environment has changed in re-
cent years, allowing study of the industry’s response in
three legal regimes. The first legal regime was one
characterized by a vague common law mandate. The
legal environment prior to adoption of the TREAD
Act in 200070 contained no legislative or administra-
tive mandate. Automobile manufacturers were not
required by legislation or administrative regulation
to address the rollover or the compability issue.71
Law As A Determinant of Business Conduct 281
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However, one legal mandate that did exist was found
at common law, namely products liability law. This
was a vague legal mandate. Liability would be imposed
only if a product was ‘‘defectively designed’’ or
‘‘unreasonably dangerous.’’72 This standard was ap-
plied by the courts so as to require either (a) that the
danger is beyond that contemplated by the ordinary
consumer who purchases the product,73 or (b) that an
alternative design would have made the product sig-
nificantly safer without prohibitive cost increases or
substantial lost utility.74
The purpose behind this products liability stan-
dard speaks of a concern regarding injuries to the
general public. The manufacturer ‘‘... by marketing
his product for use and consumption, has undertaken
and assumed a special responsibility toward any
member of the consuming public who may be
injured by it... [T]he consumer of such products is
entitled to the maximum of protection at the hands
of someone, and the proper person to afford it are
those who market the products.’’75
The TREAD Act altered the legal environment
on the rollover issue. It required development of
rollover tests by November 2002 and disclosure by
the government of the results of such tests.76 Thus,
the second legal environment was governmental
disclosure identifying risky products. The disclosure
was in a published list of vehicles with rollover rat-
ings, available on-line or from the National High-
way Traffic Safety Administration (NHTSA). It was
not accomplished via a sticker affixed to models in a
showroom.77 As a result, it is not certain how aware
consumers were of the rating for particular vehicles
they were considering purchasing. The TREAD Act
did not alter the legal environment on the compat-
ibility issue.
The legal environment was altered once again in
2003, although the alteration was only a proposed
one. In July 2002, the NHTSA began to study
mandatory regulations to be imposed on the auto
industry to address the rollover and compatibility
issue.78 It issued its final rulemaking priorities plan in
July 2003.79 The NHTSA planning document dis-
cussed both rollover and compatibility issues, among
other regulatory priorities. In its chronological listing
of regulatory ‘‘milestones’’ to address the rollover
issue it listed ejection mitigation and door upgrades
as priorities in the 2003–2004 period, and roof
crush protection requirements as a priority in the
2004–2005 period. Stability control systems were
also discussed but NHTSA stated that further
research was needed regarding which systems
achieved the highest benefits and were most effec-
tive. To address the compatibility issue, it listed side
impact protection and other vehicle crashworthiness
compatibility rulemaking efforts, including rigid
barrier and vehicle-to-vehicle testing, as regulatory
priorities in the 2004–2005 period.80 In other
words, there was a threat of a legal environment
characterized by mandatory and clear regulatory
obligations that would be consistently applied to all
manufacturers.
In summary, the automobile industry’s actions
occurred in the context of the following legal
regimes:
The industry response under a vague common law mandate
Given the purpose behind the common law’s man-
date – to offer the maximum of protection against
physical injury – the ethical response of the auto
industry would have been to make design changes
aimed at minimizing injuries and deaths. Yet, this
has not been the response of the automobile indus-
try. Instead the response has been denial – denial that
a safety problem exists, and if it does exist then denial
of responsibility. In the first legal environment – i.e.,
a vague common law mandate-the initial and long-
standing response of the auto industry was to do
nothing. Instead, the industry denied that a problem
exists.81 It denied the problem, if it existed, could be
• The SUV rollover issue:
Pre-2000 Vague common
law mandate
TREAD Act of 2000 Government disclosure
of risks of rollovers
2003 regulations NHTSA
(Proposed, with stability
controls subject to
further study)
Possible, future clear
legal mandate
• The SUV-passenger
automobile
compatibility issue:
Pre-2003 Vague common
law mandate
2003 Regulations
NHTSA (Proposed)
Likely, future clear
legal mandate
282 Vincent Di Lorenzo
Page 10
alleviated by the industry.82 Finally, it shifted
responsibility and blame to the consumer.83
In sum, the industry response has been inaction
and denial, including denial of responsibility. Under
the vague common law standard auto manufacturers
could always claim that they were complying with
their legal obligation because the vague standard was
not breached. This would be a very narrow inter-
pretation of the duty of legal compliance. This
response occurred in an environment. It occurred in
a business environment in which sales of SUVs and
light trucks accounted for an increasing percent of
market share for U.S. automakers and became their
most profitable products.84
One exception to the typical denial response was
Ford Motor Company, at least in recent years. In
February 2001 Ford rolled out its redesigned 2002
Explorer. Ford widened the distance between the
wheels, added independent rear suspension, and
added ceiling-mounted side air bags that enhanced
its safety.85 Yet, Ford, unlike other automakers, was
not reacting to a legal environment characterized by
a vague legal obligation that subjected it only to
potential liability. Rather it faced and was attempting
to settle about 200 product liability cases involving
rollovers by Ford Explorers after Firestone tires
failed.86 In other words, it faced not merely the
potential but the reality of hundreds of lawsuits each
claiming tens of millions of dollars in damages. Even
in this environment, the changes were not made on
all other SUVs manufactured by Ford. Indeed, the
changes were not even made on all models of Ford
Explorer. They were made only on the four-door
Explorer and not on the more dangerous two-door
Explorer.87 Two years later, the Ford Explorer Sport
Trac had the highest rollover risk of models tested by
the NHTSA for the 2004 model year, and the four-
door Explorer ranked among the five worst per-
forming SUVs tested based on rollover risk.88
Finally, corporate response even when faced with
hundreds of consumer lawsuits has not been wit-
nessed consistently. Some years earlier Ford decided
to make no design changes when faced with hun-
dreds of lawsuits due to the design of the Ford
Bronco.89
The response of the industry was different with
regard to the compability issue. Before 2003, com-
pability continued to be subject to a vague legal
mandate. Yet, in 2000 manufacturers made some
response. The response was primarily to lower the
steel rails on some models, namely three of the 2000
models and six of the 2001–2002 models.90
This was a response. However, it was a very
limited response. The compability issue arises due to
three problems: (a) difference in weight between the
vehicles in a crash, (b) difference in alignment of
bumpers and protective barriers, and (c) greater
stiffness of SUVs and light-trucks. The announced
changes addressed one of the three compability
concerns.91 Moreover, even on the one concern
addressed the changes were made to a small number
of the SUVs and light-trucks sold by the respective
manufacturers.92
Overall then, in the face of a vague legal mandate
the industry made no response for two decades, and
finally a very limited response beginning in 2000.
Industry response under a disclosure regime
In the second legal environment – disclosure of risks
of rollover in identified products – the response was
more varied. One response was to continue to deny
the problem and to deny responsibility.93 At the
same time, another response of some auto manufac-
turers was to make technology available to avoid
rollovers as a customer option.94 This response cost
the manufacturer nothing–nothing in lost profit
margin, since the option was paid for by the cus-
tomer, and nothing in price competitiveness since
comparison would be based on the initial sticker
price. A final response was to design new SUV
models that were able to muster a seemingly
‘‘acceptable’’ rollover rating. Manufacturers rarely
changed existing models, which would be more
costly. Rather, the improvements were made to new
models. Evidence of this response is found in the
published rollover ratings for model years 2001 and
2003. An analysis of such data reveals the following:
Rollover ratings one star to five star95
Number of SUVs
in 2001 ratings
Number of SUVs
in 2003 rating
One star 2 (3.3%) 2 (1.98%)
Two stars 25 (41.6%) 23 (22.77%)
Three stars 32 (53.3%) 71 (70.29%)
Four stars 1 (1.6%) 5 (4.95%)
Five stars 0 (0%) 0 (0%)
Law As A Determinant of Business Conduct 283
Page 11
The increased number of vehicles rated three stars
were almost exclusively new models.96 Moreover,
these results for SUVs contrast with rollover ratings
for heavy passenger cars and medium passenger cars
in 2001 and 2003. All such rated vehicles received a
rating of either four or five stars.97 The rollover
ratings for the 2005 model year continued this trend.
By 2005 two SUVs continued to be rated one star in
rollover ratings, and 23 continued to earn two stars.
However, there were now 24 that earned four stars
in the NHSTAs 2005 rollover ratings.98
In summary when the legal environment was
changed to include clear disclosure of rollover risks
that were specific to a particular manufacturer and
model, greater response was witnessed than in the
earlier, vague common law regime. However, the
response was still modest. Manufacturers did not
comprehensively address the rollover issue by
modifying existing models or seek four or five star
ratings for most SUV models.
Industry response to the threat of a clear stipulated
government mandate
In the final legal environment – the threat of clear
and mandatory regulatory obligations to address
incompatibility issues – the industry responded
quickly and more comprehensively. In February
2003 automakers announced creation of two
working groups to address the dangers posed by the
compatibility issue – one to minimize risks in head-
on collisions and the other to minimize risks in side-
impact collisions.99 This took place approximately
6 months after the government had first proposed its
rulemaking priorities plan.100 Before the end of the
year the auto manufacturers had already announced a
specific plan to reduce the dangers posed by
incompatibility by redesigning vehicles to reduce the
likelihood SUVs would override front bumpers of
automobiles and requiring all auto makers to make
side air bags standard on all vehicles by 2009.101 In
this legal regime the response was quick and far more
comprehensive than occurred under the earlier legal
regime.102 Later events revealed that the threat of
government regulation was a real threat. In May,
2004 the NHTSA proposed rules to upgrade the
agency’s side impact protection standard that would
likely require side head protection systems such as
head air bags or inflatable air curtains.103
Initially, the industry’s commitment was limited
to responding to the danger posed by the compati-
bility issue. The industry was slower to respond in a
comprehensive manner to the danger posed by the
rollover issue. The 2003 industry-wide commitment
did not address the rollover issue. Instead individual
industry members in recent years began to offer anti-
rollover systems as a standard feature on luxury
models, and as a customer option on some but not all
other models.104 However, the industry’s commit-
ment increased significantly in the 2005 and 2006
model year.105 This slower response can be
explained as a reaction to regulatory priorities.
Compatibility was a higher regulatory priority, as
evidenced by the NHTSA’s 2002 Statement on
Rulemaking Priorities and May 2004 proposed rule
on side impact protection. Addressing rollover
through stability control systems was a lower regu-
latory priority. Eventually, the industry has
responded to both.
Case study 3 – The pharmaceutical industry
This article focuses on charges of deceptive and
misleading direct to consumer advertising of pre-
scription drugs. This is not the only allegation of
unethical business practices on the part of the
pharmaceutical industry in recent years. The phar-
maceutical industry has been charged, and settled
some suits, for promoting prescription drugs for
unapproved uses,106 which is a crime under the
Food, Drug, and Consumer Act.107 It has also faced
suits by private parties and State Attorneys General
for hiding the health risks posed by highly profitable
drugs.108 The industry faces suits by consumer
groups, state, local, and federal authorities charging
that many members of the industry illegally manip-
ulated the Medicare and Medicaid reimbursement
program to overcharge consumers and government
agencies.109 Recently, industry members have faced
allegations, based on investigations by federal
investigators, of repeatedly overcharging public
hospitals and clinics for low-income patients in
violation of the Public Health Service Act.110
284 Vincent Di Lorenzo
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The challenge
One of the activities of the pharmaceutical industry
that has recently received attention in the news
media and raises questions about the ethical practices
in the industry has been direct advertising of pre-
scription drugs to consumers. Specifically, doubts
have been raised regarding the accuracy of the
advertisements. The danger posed by misleading
advertisements is a health risk as well as a financial
risk. The health risk is that products whose risks are
not accurately advertised may harm consumers be-
cause they are unaware of such risks.111 For example,
in marketing campaigns for OxyContin the risk of
addiction was not properly disclosed.112 In another
example, GlaxoSmithKline has been accused of
fraudulently suppressing research suggesting the drug
Paxil was ineffective and unsafe for children. At the
same time, the company was accused of false or
misleading advertising by trying to broaden the use
of Paxil beyond its approved use to target mundane
levels of anxiety and self-consciousness.113
Another risk is financial, namely that the drug will
be used instead of less expensive alternatives that, it is
later discovered, are also safer. The financial risk is
that consumers will demand more expensive
advertised products when less expensive alternatives
will serve them equally well.114 Vioxx is the recent
example of this scenario. Due to advertising the drug
became a blockbuster for Merck, with sales of $2.5
billion last year.115 However, it was found to double
patients’ risk of heart attack and strokes – risks that
Merck minimized in its promotional campaigns.116
Medical experts note that much cheaper over-the-
counter pain relievers provide about the same pain
relief as Vioxx without posing such risks.117 Another
example is Nexium, which has been one of the most
heavily promoted drugs based on consumer adver-
tising. It was approved by the FDA as a treatment for
severe acid reflux disease. It is now so commonly
prescribed for heartburn and indigestion that it is one
of the nation’s best selling drugs. Sales in 2003 in the
U.S. were $3.1 billion. Yet, medical experts say that
for most patients over-the-counter heartburn rem-
edies would work just as well.118 A related financial
risk is that consumers will seek drugs for conditions
that do not require medical intervention.119 Given
these risks, the ethical response would be to fully and
accurately disclose all risks and benefits, and to try to
ensure consumers understand the risks and benefits
(or limitations thereon).
The legal environment
The pharmaceutical industry experience with regard
to direct to consumer advertising allows study of
corporate response in a legal regime containing a
vague statutory standard that includes a disclosure
obligation, i.e., disclosure of risks, by members of
the industry. The governing statute requires disclo-
sure of information relating to a drug’s ‘‘side effects,
contraindications, and effectiveness as shall be
required in regulations ...’’ issued by the FDA.120
The regulations require the presentation of ‘‘a true
statement’’ of information relating to side effects,
contraindications and effectiveness.121 ‘‘True state-
ment’’ is defined in the governing regulations to
require advertisements that are not ‘‘false or mis-
leading,’’ do not omit ‘‘material’’ facts, and present a
‘‘fair balance’’ between the risks and the benefits.122
No prior approval by FDA is required for adver-
tisements.123 Since the legal standard is vague it al-
lows corporate actors to claim that their
advertisements are not misleading and are well bal-
anced.
The industry response
In this legal environment, what has been the industry
response? An ethical response would be to safeguard
consumers by being cautious in advertising – i.e.,
clearly disclosing all risks and limiting claims of ben-
efits. As noted above the pharmaceutical industry
might claim that they have been trying to comply
with the law but that their ‘‘wrongdoing’’ arose
inadvertently because of the law’s vagueness. How-
ever, the evidence indicates otherwise. It indicates an
exploitation of the law’s gray area – a desire to
minimize disclosed risks and maximize claims of
benefit. This conclusion comes from evidence of two
types of corporate activities. The first is numerous
violations by the same corporation across an array of
its products. The second is repeated violations by the
same corporation in advertisements for the same
product previously cited by FDA as misleading.
Thus the General Accounting Office Reported:
Since 1997, FDA has issued repeated regulatory letters
to several pharmaceutical companies including 14 to
Law As A Determinant of Business Conduct 285
Page 13
GlaxoSmithKline, 6 to Schering Corporation, and 5 to
Merck & Co. Some companies have received multiple
regulatory letters over time for new advertisements
promoting the same drug. For example, FDA issued
four separate regulatory letters, one of which was a
warning letter, to stop misleading advertisements for
the allergy drug Flonase marketed by Glaxo Wellcome
in 1999 and 2000. The untitled letters were for
unsubstantiated efficacy claims and for lack of fair
balance. The warning letter was for failure to provide
any risk information on the major side effects and
contraindications of the drug, failure to make adequate
provision for disseminating the product labeling, and
failure to submit the advertisement to FDA. In the past
4 years, FDA has issued four regulatory letters to Pfizer
regarding broadcast and print advertisements for its
cholesterol-lowering drug, Lipitor. Among other
infractions, FDA noted that the advertisements gave
the false impression that Lipitor can reduce heart dis-
ease and falsely claimed that Lipitor is safer than
competing products.124
A third type of activity that demonstrates a lack of
commitment in attempting to comply with the
law’s mandate is evidence of flagrant misrepresen-
tations in disseminated advertisements. For example,
Novartis Pharmaceuticals received a warning letter
from FDA in 1999 regarding Lescol, a cholesterol-
lowering drug, due to advertisements falsely stating
Lescol was as effective as other cholesterol-lowering
agents named in the ad and falsely stating Lescol was
less expensive than other named agents.125 Simi-
larly, the FDAs letter regarding Luxiq, a cream for
treatment of psoriasis and eczema, in 2001 noted
that ads claimed ‘‘highly effective relief in three out
of four patients,’’ and that it reduced symptoms
‘‘within days.’’ However, the clinical trials had
found Luxiq’s success at improving symptoms ran-
ged from 41% to 67% of participants, and the
clinical trial results – i.e., improvements in various
symptoms – were for patients who used it for
4 weeks.126 Another recent example of flagrant
misrepresentation is found in AstraZeneca’s adver-
tisements regarding the safety of Crestor. As was
reported in December 2004:
AstraZeneca’s recent full-page newspaper advertise-
ments defending the safety of its cholesterol-lowering
pill, Crestor, are ‘‘false and misleading,’’ in part be-
cause serious concerns remain about the safety of the
drug, federal drug regulators said Wednesday.
The advertisements stated that ‘‘the F.D.A. has con-
fidence in the safety and efficacy of Crestor’’ and that
the agency ‘‘as recently as last Friday publicly con-
firmed that Crestor is safe and effective.’’ Neither is
true, said a letter from the Food and Drug Adminis-
tration to AstraZeneca.
In fact, days before the advertisements ran, top agency
officials were widely quoted expressing concerns about
Crestor’s safety.127
How widespread is the pharmaceutical industry’s
practice of exploiting the law’s vagueness? This is
difficult to determine. One answer is found in an
evaluation by medical specialists of a sample of print
drug advertisements conducted by Consumers Union.
It found that fewer than half – about 40% – of the
advertisements were honest about efficacy and fairly
described the benefits and risks in the main text.128
Conclusion
The evidence from the pharmaceutical industry
confirms that a vague legal mandate, in this case a
statutory mandate, is ineffective in generating a
strong commitment to legal compliance. Evidence
of avoidance of responsibility is not as pervasive as in
the automobile industry experience under a vague
common law standard. This may be due to the
existence of a regulatory agency that monitors
activity and brings regulatory actions,129 in contrast
to a reliance on private parties to enforce common
law mandates. In addition, evidence of avoidance of
responsibility is not as pervasive as in the securities
industry experience under a vague statutory stan-
dard. This may be due to the nature of the adverse
consequences on the consumer – the danger of
financial loss in the securities industry case study as
opposed to the danger of not only financial loss
but also possible physical injury to the consumer in
the pharmaceutical industry case study. Nonetheless,
the commitment to the legal mandate generated by
the vague statutory standard is not strong.
Case study 4 – The mortgage banking industry
The challenge
The challenge in the mortgage banking industry is to
provide needed funds to borrowers without taking
286 Vincent Di Lorenzo
Page 14
advantage of their lack of bargaining power, or, at
times, lack of knowledge of or experience with the
credit process. Taking advantage of unsophisticated
borrowers would unfairly deprive them, individu-
ally, and the communities in which they reside of
their equity (equity stripping). The Center for
Responsible Lending, a unit of one of the nation’s
community development lenders, has estimated that
unfair lending practices strip U.S. borrowers of over
$9 billion per year.130
The legal environment
The legislative standard is primarily one of full dis-
closure – in this case full disclosure of the terms of
the transaction. The legal mandate requiring dis-
closure, including the items to be disclosed, is a clear
legal mandate. The current legislative environment
is best understood by first examining the Depository
Institutions Deregulation and Monetary Control Act
of 1980 (DIDMCA).131 Section 501 of the Act
preempted state law limiting the rate of interest and
other charges that may be imposed on first lien
residential mortgages.132 In other words, it pre-
empted clear statutory prohibitions against one form
of overreaching – excessive interest rates.
Thus, after enactment of the DIDMCA the leg-
islative environment was one characterized by dis-
closure. Lenders were required to disclose the terms
of proposed lending arrangements to borrowers. The
borrowers had to then examine, understand, and
assess the fairness of the transaction. This disclosure
regime existed by virtue of two statutes – the Real
Estate Settlement Procedures Act (RESPA)133 and
the Truth-in-Lending Act (TILA).134 RESPA
requires advance disclosure of all charges imposed on
a borrower in a residential real estate transaction
including charges in connection with a mortgage
loan.135 TILA requires prior disclosure of, among
other things, the finance charge, payment schedule,
and the existence of a prepayment penalty in con-
nection with consumer credit transactions including
loans secured by real estate primarily used for per-
sonal, family or household purposes.136
The purpose behind the RESPA disclosures is to
provide consumers with timely information, and to
protect them from ‘‘unnecessarily high settlement
charges caused by certain abusive practices that have
developed in some areas of the country.’’137
In 1994, this legal environment was altered with
enactment of the Home Ownership and Equity
Protection Act (HOEPA).138 HOEPA amended
TILA with respect to non-acquisition mortgages. It
contained additional disclosures, but also added
certain absolute prohibitions. The prohibitions
include prohibitions against (a) prepayment penal-
ties139 (b) lending without regard to borrower’s
ability to repay,140 and (c) refinancing within a one-
year period unless the refinancing is ‘‘in the bor-
rower’s interest.’’141 Such additional disclosure
requirements and prohibitions apply only to certain
high-cost loans, namely (a) loans in which the annual
percentage interest rate on the loan exceeds the yield
on Treasury securities having a comparable period of
maturity by more than 10 percentage points, or (b)
loans in which the points and fees paid by the
consumer exceeds 8% of the loan amount or $400,
whichever is greater.142
The purpose behind HOEPAs requirements and
prohibitions was to tackle the problem of ‘‘reverse
redlining,’’ namely targeting of residents of certain
communities ‘‘for credit on unfair terms.’’143 Spe-
cifically,
Evidence before the Committee indicates that some
high-rate lenders are using non-purchase money
mortgages to take advantage of unsophisticated, low-
income borrowers.144
Thus, the study of the activities of the home mort-
gage industry is a study of actions taken under a clear
legislative mandate – first, in the form of stipulated
disclosures of the terms of the transaction by industry
members, and second, after 1994, a clear prohibition
of certain abusive practices with regard to ‘‘high-
cost’’ loans.
Industry response under a clear legal mandate
One gauge to help us assess commitment to com-
pliance with the law is the number of federal agency
enforcement actions alleging violations of the legis-
lative mandates. The General Accounting Office
studied this question in 2003.145 It found that in the
period 1983–2003, the Federal Trade Commission
filed 19 complaints against mortgage lenders or
brokers alleging deceptive or other illegal prac-
tices.146 The federal bank regulatory agencies filed
one action.147 The Department of Housing and
Law As A Determinant of Business Conduct 287
Page 15
Urban Development’s Office of RESPA filed three
actions relating to abusive lending.148
Most of the actions filed by these various federal
agencies involved disclosure violations under TILA,
RESPA, or HOEPA.149 However, 7 of the 23
actions enumerated above involve violations of
specific HOEPA prohibitions, namely, the prohibi-
tion against asset based lending. In addition, the
three HUD actions involve violations of specific
RESPA prohibitions against kickbacks and referral
fees. In sum, there were relatively few actions – 24
in all – based on violation of clear legislative
mandates.
Overall, the clear mandates were associated with a
high degree of corporate commitment to compliance.
Overall summary of findings
The case studies presented in this article examine the
influence of various legal regimes on corporate
conduct as evidenced by corporate activity in the
market. The findings are that a vague common law
mandate (e.g., products liability law) appears to be
least effective in inducing corporate commitment to
legal compliance. It was typically associated with
corporate conduct that ignored the legal mandate. A
vague statutory standard (e.g., federal securities
antifraud law), in the context in which the conse-
quence was possible financial injury to the consumer
resulting from noncompliance, was also ineffective in
inducing commitment to legal compliance.
A clear disclosure of risks regime, combined
with a vague common law mandate, was next in
line in terms of effectiveness in inducing corporate
commitment to the applicable common law
mandate. However, disclosure did not significantly
alter the industries’ poor commitment to an
otherwise existing vague common law mandate.
Response was modest.
Not all vague standards exercised little or no
influence on corporate conduct. A vague statutory
standard when combined with regulatory enforce-
ment and a consequence of possible physical injury
resulting from noncompliance was somewhat more
effective in inducing commitment to legal compli-
ance. Nonetheless, it was not, very effective.
The legal regime associated with the greatest
degree of commitment to legal compliance was a
clear legal mandate, namely one that stipulated the
required course of conduct for corporate actors.
These findings contradict the assumption in the
Principles of Corporate Governance that the law deter-
mines corporate conduct. The case studies demon-
strate that the influence of the law can vary from an
important influence to a negligible influence, and
that in most of the legal regimes studied the influ-
ence of the law on corporate conduct was weak.
Conclusion and implications
The case studies in this article document that law is
not necessarily determinative of corporate conduct.
In a regime with a vague legal standard the influence
of law on corporate conduct is weakest. This is
revealing because this type of legal regime is pre-
valent. A legal regime with clear legal standards that
stipulate required action or course of conduct on the
part of members of the industry is the best approach
to generate greater corporate commitment to legal
compliance. This is because the required response is
not open to interpretation and because the legal
mandate directly serves its underlying purpose.
Additional commitment to compliance in such a
regime is generated when there are substantial
enforcement risks and substantial sanctions for non-
compliance with such a clear legal mandate. An
example is found in the proposed government
standards for compatibility between passenger auto-
mobiles and SUVs. The legal standards would stip-
ulate the required response – e.g., align all bumpers,
include side air bags in all automobiles, etc. – and
would serve the underlying purpose of avoiding
physical injury to others. Failure to comply would
lead to an inability to market an entire product line.
However, a clear legal mandate is frequently not
useful or appropriate for legislative or judicial pro-
nouncements. Legal standards in legislation or
common law judicial pronouncements are typically
in general (i.e., vague) terms so that they can be
applied to a variety of factual situations in the future.
In addition, at any point in time the precise corpo-
rate actions appropriate for various members of the
industry or various activities subject to the legal
mandate may not be identical. If so, a specific
requirement as opposed to a general standard is not
appropriate. These benefits of a general standard,
288 Vincent Di Lorenzo
Page 16
i.e., a vague standard, are, however, the culprit when
it comes to corporate commitment to compliance
with law and its underlying purpose.
Given these findings, what can be done to
increase law’s influence on corporate conduct, apart
from greater clarity and certainty in legal obligations?
The automobile industry case study suggests the
answer lies in greater use of market-based sanctions.
This is an issue for further study.
Notes
1 John Rawls, A Theory of Justice 308 (revised edition
1999).2 American Law Institute, Principles of Corporate
Governance (1994). The Principles were a 16-year pro-
ject of the American Law Institute. Richard B. Smith,
An Underview of the Principles of Corporate Governance, 48
Bus. Law 1297 (1993).3 American Law Institute, Principles of Corporate
Governance, Director’s Foreword (1994).4 Id. § 2.01 (b) (1).5 Id.6 Peter J. May, Compliance Motivations: Affirmative and
Negative Bases, 38 Law & Soc’Y Rev. 41 (2004) (summa-
rizing prior studies regarding the influence of various fac-
tors such as inspection frequency and consistency,
perceived legitimacy of regulations, reputation, and ability
to comply, including costs and competitive effects); Rob-
ert A. Kagan, Neil Cunningham and Dorothy Thornton,
Explaining Corporate Environmental Performance: How Does
Regulation Matter? 37 Law & Soc’Y Rev. 51, 67–69 (2003)
(finding firm-level economic differences and community
pressures as having significant effects on companies’ envi-
ronmental performance); Brent Fisse and John Braithwaite,
The Impact of Publicity on Corporate Offenders 227, 233,
and 243 (1983) (study of adverse publicity and corporate
reaction to it, finding many of the companies studied
introduced substantial reforms in the wake of their adverse
publicity crisis which, although perhaps in only a small
way, would reduce the probability of recurrence of the
offense or wrongdoing. In many cases thorough going re-
form was forsaken for piecemeal changes).7 Id. at 45 and 55–56 (studies are mixed with
respect to findings concerning the effect of level of
sanctions for compelling compliance, and this study
finds that fear of sanctions and fear of legal liability has
little effect); John Braithwaite and Toni Makkai, Test-
ing An Expected Utility Model Corporate Deterrence, 25
Law & Soc’Y Rev. 7, 8, and 24 (1991) (studies have
shown very little support for an effect of the perceived
severity of sanctions on compliance, and this study
confirms this conclusion for organizations). Contra Ste-
ven Klepper and Daniel Nagin, Tax Compliance and
Perceptions of the Risks of Detection and Criminal Prosecu-
tion 23 Law & Soc’y Rev. 209 (1989), and Harold G.
Grasmick and George J. Bryjack, The Deterrent Effect of
Perceived Severity of Punishment, 59 Soc Forces 471
(1980) (risk of criminal prosecution and perceived
severity of sanction does affect conduct).8 May, supra, note 6, at 55 (duty to comply with
legal requirements cited as an important motivation by
respondents, but less important than reputation as a
motivation for compliance, and almost equally impor-
tant to marketplace demands as a motivation).9 See Greg Ip, A Less-Visible Role For the Fed Chief:
Freeing Up Markets. Wall St. J. November 19, 2004 at A8
(quoting a view articulated in the 1960s by Alan Green-
span that it is in the self-interest of every business to
maintain their reputation – a reputation for honest deal-
ings and a quality product – and regulation undermines
this superlatively moral system). E.g., Victor P. Goldberg:
1988, ‘Accountable Accountants: Is Third-Party Liability
Necessary?’ 17 Journal of Legal Studies 295, and Ronald
Gilson and Reineer Kraakman: 1984, ‘The Mechanics of
Market Efficiency’, 70 Va. L. Rev. 549 both arguing that
reputation provides a sufficient incentive for auditors to
detect fraud and imposing is unnecessary.10 AMA 2003 Corporate Governance Survey (Amer-
ican Mgmt. Ass’n, 2003), at http://www.amanet.org/
research/pdfs/Corp_Governance_srvy03.pdf11 A 1999 Conference Board survey of 124 companies
in 22 countries found that in 1987 the board of directors
took part in creating the company’s code of ethics in 21%
of the cases. This rose to 41% in 1991 and 78% in 1998.
Amy Zipkin, ‘Getting Religion on Corporate Ethics’,
New York Times, October 18, 2000, at C1 and C1012 The State of Corporate Citizenship in the United States
10 (The Trustees of Boston College, July 2003), at http://
www.bc.edu/centers/ccc/Media/state_cc_results. pdf13 Year Ethics Officer Position Created The 2000
Member Survey Report II (Ethics Officer Ass’n, Feb.
2001), at http://www.eoa.org/EOA_Resources/Re-
ports/MS2000_(Public Version).pdf.
Before 1986 4%
1986–1987 4%
1988–1989 1%
1990–1991 6%
1992–1993 14%
1994–1995 18%
1996–1997 26%
1998–1999 27%
2000 1%
Law As A Determinant of Business Conduct 289
Page 17
14 Id. at 15.15 ‘Top Ethics Officers Say They Don’t Train Their
Boards in Ethics’, The Conference Board News (June 17,
2003), at http://www.conference-board.org/utilities/
press.cfm16 Gretchen Morgenson, ‘S.E.C. Wants A Monitor
To Examine A.I.G.’s Books’, New York Times, Novem-
ber 3, 2004, at C1 (American International Group seeks
a settlement; PNC Financial Services Group earlier was
subject of enforcement action); Joseph B. Treaster,
‘A.I.G. Agrees To Big Payment In U.S. Cases’, New
York Times, November 25, 2004, at C1 (AIG agreed to
pay $126 million and accept an independent monitor to
settle SEC and Justice Department investigations into
the sale of insurance used to inflate the appearance of
corporations’ financial strength).17 Jeff Down, ‘Burial Insurance; An Industry Taken
To Task For A Policy of Race Bias’, Newsday, October
10, 2004, at E02 (between 2000 and 2004, 16 major
cases settled involving 14.8 million policies sold by 90
insurance companies and required restitution of more
than $556 million); Carrie Mason-Draffen, ‘Metlife Ex-
pects $250 M Hit in Bias Suit’, Newsday, February 8,
2002, at A7; Joseph B. Treaster, ‘Insurer Agrees It
Overcharged Black Clients’, New York Times, June 22,
2000, at A1 (settlement reached with American General
for overcharges to more than two million black cus-
tomers).18 Andrew Caffrey, Mass. Launches Insurance Probes;
Attorney General, State Agency Look at Sales Practices, Bos-
ton Globe, October 22, 2004, at F1 (investigation
opened into sales practices at 21 Massachusetts-based
subsidiaries of 10 insurance companies regarding contin-
gency payments to brokers); Joseph B. Treaster, ‘Spitzer
Inquiry Expands to Employee-Benefits Insurance’,
New York Times June 12, 2004, at C2 (Aetna, Cegna,
Metlife, and Hartford receive subpoenas as part of
investigation of contingency fees paid to brokers).19 U.S. Securities and Exchange Commission, SEC
Settles Enforcement Proceedings Against J.P. Morgan
Chase and Citigroup, Press Release 2003–87 < http://
www.sec.gov/news/press/2003–87.htm > (both firms
helped Enron mislead investors by characterizing what
were essentially loan proceeds as cash from operating
activities. J.P. Morgan and Citigroup agree to pay $135
million and $120 million, respectively).20 Steven Greenhouse, ‘Lawsuits and Changes At
Wal-Mart’, N.Y. Times November 19, 2004, at A25
(Wal-Mart settled one case involving 69,000 workers in
Colorado for $50 million 4 years ago, and in Oregon a
federal jury found in 2002 that the company had re-
quired off-the-clock work); Steven Greenhouse,
‘Forced to Work Off the Clock, Some Fight Back’,
New York Times, November 19, 2004, at A1 (workers
interviewed say off-the-clock work took place in a vari-
ety of companies in addition to Wal-Mart, including
A&P and J.P. Morgan); Steven Greenhouse, ‘Suits Say
Wal-Mart Forces Workers to Toil off the Clock’, New
York Times June 25, 2002, at A1 (legal claims brought
by employees of Wal Mart in 28 states); Steven Green-
house, ‘In-House Audit Says Wal-Mart Violated Labor
Laws’, New York Times, January 13, 2004, at A16 (re-
cords at 128 Wal-Mart stores point to extensive viola-
tions of child–labor laws and state labor law
regulations); Constance L. Hays, ‘Wal-Mart Plans
Changes To Some Labor Practices’, New York Times,
June 5, 2004, at C2 (responding to a year of criticism,
Wal Mart established a compliance group to oversee
workers’ pay and hours); Steven Greenhouse, ‘Altering
of Worker Time Cards Spurs Growing Number of
Suits’, New York Times, April 4, 2004, at A1 (experts on
compensation say illegal doctoring of hourly employees’
time records is far more prevalent than most Americans
believe, and has led to a growing number of lawsuits
and settlements against a wide range of businesses.).21 Office of New York State Attorney General, Press
Release, Agreement Eliminates Tobacco Advertising
From School Editions of Major News Magazines,
November 10, 2003 < http://www.oag.state.us/press/
2003/nov/nov10a_03.html > (Philip Morris, R.J. Rey-
nolds, Brown and Williamson, and U.S. Smokers To-
bacco); Greg Winter, ‘Tobacco Company Reneged on
Youth Ads, Judge Rules’, New York Times, June 7,
2002, at A18 (California judge rules R.J. Reynolds vio-
lated 1998 tobacco settlement); Bob Egelko, High Court
Tosses Tobacco Firm Appeal, San Francisco Chronicle,
June 10, 2004, at B3 (State Supreme Court rejects R.J.
Reynold’s Appeal of 2002 judgment).22 E.g., Eric Dash, ‘Bristol-Myers Agrees to Settle
Accounting Case’, New York Times, August 5, 2004, at
C1 ($150 million settlement); Almar Latour and Chip
Cummins, ‘Oil Titan Agrees to Settle With U.S. U.K.
Authorities For Overstating Its Reserves’, Wall St. J.,
July 30, 2004, at A3 (Royal Dutch/Shell Group agree
to $150 million penalty); James Bandler, ‘Time Warner,
Expects to Settle AOL Inquires for $510 Million’, Wall
St. J. December 16, 2004, at B10 ($510 million to settle
securities fraud charges with U.S. regulators over
accounting in its America Online unit); ‘Two CA Ex-
Officials Settle SEC Charges’, Wall St. J., November 3,
2004, at B8 (Computer Associates executives agree to
fines to settle SEC charges); Eric Dash, ‘S.E.C. Names
8 in KMart Accounting Case’, New York Times,
December 3, 2004, at C5 (SEC brings accounting fraud
charges against former executives of KMart and suppli-
ers, including executives at PepsiCo., Kodak, and Coca
290 Vincent Di Lorenzo
Page 18
Cola. Similar charges led to settlements with Royal
Ahold, the large Dutch supermarket group).23 Case Study 1 was a part of a longer study of the
securities industry exploring decision-making heuristics
published in 11 Fordham Journal of Corporate &
Financial Law 765–805 (2006).24 35 BNA, Securities Regulations and L. Report
1642 (October 6, 2003) (settlements between SEC and
J.P. Morgan Chase, FleetBoston, and Credit Suisse First
Bank).25 Testimony of David M. Walker, Comptroller Gen-
eral of the United States, Before the Senate Committee
on Banking, Housing and Urban Affairs, GAO-04–533T
at 2 and 6 March 10, 2004, (as of March 1, 2004, SEC
had formally announced 7 enforcement actions involving
broker-dealers and other firms involved in late trading
schemes, and 12 cases involving market timing activities,
including five that also involved late trading); Christo-
pher Oster, ‘Settlements in Wake of Scandal Include
Payments That Extend Beyond Refund of Tainted Prof-
its’, Wall St. J., June 29, 2004, at D1 (mutual fund com-
panies have agreed to settlements totaling more than $2
billion, and this is sure to grow substantially as ten mu-
tual fund companies have yet to settle).26 E.g., Mitchell Pacelle, ‘Citigroup Will Pay $2.65
Billion To Settle WorldCom Investor Suit’, Wall St. J.,
May 11, 2004, at A1 (settlement with investors in suit
against 17 underwriters, including Citigroup, J.P. Mor-
gan Chase, Deutsche Bank and Bank of America); Kurt
Eichenwald, ‘Jury Convicts 5 Involved In Enron Deal
With Merrill’, New York Times, November 4, 2004, at
C1 (jury found that five defendants, including four for-
mer executives of Merrill Lynch, had conspired to help
Enron report bogus profits. The convicted defendants
include the former head of global investment banking at
Merrill Lynch, and the former head of the firm’s project
and lease finance group).27 Annuities Deal Criticized, Newsday, June 10, 2004,
at A53 (in the past 2 years the NASD had taken more
than 80 disciplinary actions against brokers and invest-
ment firms, including Prudential and American Express,
for abuses in sales of variable annuities); National Asso-
ciation of Securities Dealer, NASD Fines Prudential
$2 million; Orders $9.5 Million to Customers for
Annuity Sales in Violation of NY Insurance Regs, New
Release, January 29, 2004 < http://www.nasd.com >
(involving Prudential Equity Group, formerly known as
Prudential Securities, and Prudential Investment Man-
agement Services).28 Patrick McGeehan, ‘Morgan Stanley Settles Bias
Suit With $54 Million’, New York Times, July 13, 2004,
at A1 (settlement reached with Morgan Stanley; earlier
settlements with Merrill Lynch and Smith Barney
resulted in more than $200 million in payments);
Patrick McGeehan, ‘Merrill Lynch Ordered to Pay For
Sexual Bias’, New York Times, April 21, 2004, at A1.29 The role of securities analysts is summarized in Jill
E. Fisch and Hillary A. Sale: 2003, ‘ The Securities
Analyst As Agent: Rethinking the Regulation of
Analysts’, 88 Iowa L. Rev. 1035, 1040–1042; John L.
Orcutt: 2003, Investor Skepticism v. Investor Confidence:
Why the New Research Analyst Reforms Will Harm Inves-
tors, 81 Denv. U.L. Rev. 1, 7–9.30 Fisch and Sale, Id. at 1042; Orcutt, Id. at 8
(research reports are typically made available only to
clients of the brokerage firm although in recent years
many firms have begun to distribute reports to non-cli-
ents).31 Orcutt, supra note 29, at 8–9 (although buy-side
analysts do use sell-side research as a source of informa-
tion).32 Overall individual investor participation in the
stock market has risen from 30.2 million U.S. share-
owners in 1980 to 84.3 million in 2002. Securities
Industry Association. Key Trends in the Securities
Industry < http://www.sia.com/research/html/key_ind
ustry_trends_.html > (visited November 8, 2004). This
includes individual stock ownership, both inside and
outside employer-sponsored retirement plans, and own-
ership stock of mutual funds. Individual stock owner-
ship outside employer-sponsored retirement plans
extended to 31.5 million shareowners in 2002. Invest-
ment Company Institute and Securities Industry Associ-
ation, Equity Ownership in America 17 (2002).33 Orcutt, supra note 29, at 14–15 (research has
shown that analyst recommendations can have a
substantial impact on both stock prices and trading
volumes, and buy ratings are more likely to
encourage trading volumes); Fisch and Sale, supra
note 29, at 1045–1046 (in today’s world research
departments do not earn revenue; other departments
support them).34 Fisch and Sale, Id. at 1046–7 (analysts have been
used in marketing activities aimed at prospective pur-
chases of new issues of securities); Orcutt, Id. at 19–21
(after a company is taken public, investment banks
compete for additional stock and debt offerings and for
financial advisory work and sell-side analysts can play an
important role in securing fees generated from their
activities).35 Hearing on Corporate Governance, Before the Sub-
comm. On Consumer Affairs, Foreign Commerce and Tour-
ism of the Senate Comm. On Commerce, Science and
Technology, June 26, 2002 (testimony of New York
State Attorney General Eliot Spitzer) < http://
www.oag.state.ny.us/press/2002/jun/testimony7.pdf > .
Law As A Determinant of Business Conduct 291
Page 19
36 Securities and Exchange Commission, Litigation
Release No. 18117, April 28, 2003 < http://www.sec.-
gov/litigation/litreleases/lr18771.htm > (emphasis in
original).37 Orcutt, supra note 29, at 21–22 (analysts receive a
base salary plus a discretionary year-end bonus that typi-
cally can be 50% or more of the analyst’s base salary).
SECs on-site examinations of nine full service broker-
age firms discovered that in 7 of the nine firms in-
spected investment banking had input into analysts’
bonuses and the analyst hiring process. Testimony of
Laura S. Unger, Acting Chair, Securities and Exchange
Commission, Before the Subcomm. On Capital Mar-
kets, Insurance and Government Sponsored Enterprises,
House Committee on Financial Services, July 31, 2001
< http://www.sec.gov/news/testimony/073101ort-
slu.htm > . The staff inspections also reported ‘‘[i]nter-
views with former analysts revealed that it was well
understood by all of these analysts that they were not
permitted to issue negative opinions about investment
banking clients.’’ Id.38 Orcutt, supra note 29, at 22.39 Id. at 22–25; Fisch and Sale, supra note 29, at 1043–
1044. The SECs on-site inspections of nine full service
brokerage firms found that about one quarter of the ana-
lysts inspected own securities in the companies they cov-
er. Testimony of Laura S. Unger, supra note 37.40 New York’s Martin Act prohibits any ‘‘fraud,
deception, concealment,’’ any ‘‘promise or representa-
tion... which is beyond reasonable expectation or unwar-
ranted by existing circumstances’’ and any false
representation or statement made to induce or promote
the sale of securities. N.Y. Gen. Bus. Law § 352-c (1996).41 E.g., NASD Rules 2210(d)(1)(A) states:
All member communications with the public shall be
based on principles of fair dealing and good faith and
should provide a sound basis for evaluating the facts in
regard to any particular security or securities or type of
security, industry discussed, or service offered. No
material fact or qualification may be omitted if the
omission, in the light of the context of the material
presented, would cause the communications to be
misleading. NASD Rule 2210(d)(1)(B) prohibits
members from making ‘‘[e]xaggerated, unwarranted or
misleading statements or claims’’ in all public com-
munications and states that ‘‘no member shall, directly
or indirectly, publish, circulate or distribute any public
communication that the member knows or has reason
to know contains any untrue statement of a material
fact or is otherwise false or misleading.’’ NYSE Rule
472 provides that:
[n]o members or member organization shall utilize any
communication which contains (i) any untrue state-
ment or omission of a material fact or is otherwise false
or misleading; or (ii) promises of specific results, exag-
gerated or unwarranted claims; or (iii) opinions for
which there is no reasonable basis; or (iv) projections or
forecasts of future events which are not clearly labeled as
forecasts.
42 See Louis Loss and Joel Seligman, Fundamentals
of Securities Regulation 904–907 and 1060–61 (2004)
(broker dealers are subject to section 17(a) of the 1933
Act, Rule 10b-5, and over-the-counter broker dealers
are additionally subject to 15(c) of the 1934 Act).43 15 U.S.C. § 78o(1)(A). See also 15 U.S.C. 78j(b).44 Louis Loss and Joel Seligman, 7 Securities Regula-
tion 3418–9 (1989) (citations omitted)45 S.E.C. v. Capital Gains Research Bureau, Inc.,
375 U.S. 180, 186 (1963).46 Academic studies have confirmed that analysts
consistently overestimated earnings forecasts. Orcutt, su-
pra note 29, at 50. These studies do not isolate the
cause of the overestimates.47 Studies have confirmed overoptimism in buy rec-
ommendations. Orcutt, supra note 29, at 11–13. They
have also found analysts’ recommendations are consis-
tent with their employer’s incentives but not those of
the investing public, Fisch and Sale, supra note 29, at
1045–6, and that independent analysts behavior differ
substantially from analysts employed by securities firms.
Id. at 1051. These studies do not document the cause of
the overoptimism.48 SECs on-site examination of nine full secure bro-
kerage firms found that in 26 of 97 lock-ups reviewed,
research analysts may have issued ‘‘booster shot’’ re-
search reports. Testimony of Laura S. Unger, supra note
37. See generally Orcutt, supra note 29, at 25.49 Securities and Exchange Commission, Ten of Na-
tion’s Top Investment Firms Settle Enforcement Ac-
tions Involving Conflicts of Interest Between Research
and Investment Banking, April 28, 2003 < http://
www.sec.gov/news/press2003–54.htm > (Bear Stearns,
Credit Suisse, Goldman Sachs, Lehman Brothers, J.P.
Morgan, Merrill Lynch, Morgan Stanley, Salomon,
UBS Warburg, Piper Jaffray); Securities and Exchange
Commission, Deutsche Bank Securities Inc. and Tho-
mas Weisel Partners LLC Settle Enforcement Actions
Involving Conflicts of Interest Between Research and
Investment Banking < http://www.sec.gove/news/
press2004–120.htm > .50 E.g., Roel Campos, Commissioner, Securities and
Exchange Commission, Finan. Times, November 20,
292 Vincent Di Lorenzo
Page 20
2002 (recent disclosures suggest that for years analysts’
research has been improperly influenced by pressure to
issue positive research to attract underwriting and
investment banking business).51 Testimony of New York State Attorney General
Eliot Spitzer, Hearing on Corporate Governance Before
the Subcomm. On Consumer Affairs, Foreign Com-
merce and Tourism, Senate Committee on Commerce,
Science and Technology, June 26, 2002, < http://
www.org.state.ny.us/press/2002/jun/testimony7.pdf > .52 Id.53 Securities and Exchange Commission, Litigation
Release No. 18112, April 28, 2003 < http://www.sec.-
gov/litgation/litreleases/lr18112.htm > .54 Securities and Exchange Commission, Litigation
Release No. 18111, April 28, 2003 < http://www.sec.-
gov/litigation/litreleases/lr18111/htm > . In April 2001
Grubman expressed the need to downgrade six telecom
companies. Investment bankers pressured Grubman not
to downgrade the companies, and he did not. He con-
tinued to advise investors to buy the stocks.55 Securities and Exchange Commission, Litigation
Release No. 18110, April 28, 2003 < http://www.sec.-
gov/litigation/litreleases/lr18110/htm > .56 Securities and Exchange Commission, Litigation
Release No. 18109, April 28, 2003 < http://www.sec.-
gov/litigation/litreleases/lr18109/htm > .57 Securities and Exchange Commission, Litigation
Release No. 18116, April 28, 2003 < http://www.sec.-
gov/litigation/litreleases/lr18116/htm > .58 Securities and Exchange Commission, Litigation
Release No. 18854, April 26, 2003 < http://www.sec.-
gov/litigation/litreleases/lr18854/htm > .59 Morgan Stanley’s CEO stated ‘‘I don’t see any-
thing in the settlement that will concern the retail
investor about Morgan Stanley.’’ He received a strong
rebuke from SEC Chairman Donaldson and then apol-
ogized for the remark. BNA, Securities Regulation & Law
Report, May 12, 2003 at 789.60 Ann Davis and Randall Smith, ‘Deals & Deal
Makers: Investment Bankers Wrangle Over Gray Areas
In Pact On IPOs’, Wall St. J., May 23, 2003, at C5.61 Id.62 Lee Hawkins, Jr., ‘GM’s Finance Arm is Close To
Setting Racial-Bias Lawsuit’, Wall St. J., January 30,
2004, at 1 (both GMAC and Ford Credit are targets of
lawsuits; Nissan’s U.S. finance arm settled lawsuit last
year); Tim Incantalupo, ‘Does Color Matter?’ Newsday,
March 14, 2004, at E4 (Toyota Credit sued in class ac-
tion claiming African-Americans were routinely over-
charged for auto financing in violation of federal law
banning discrimination in lending).
63 National Association of Attorneys General, Settle-
ment: Thirty-Eight Attorneys General Announce Settle-
ment with Fort Motor Credit Company and Ford,
Lincoln Mercury Dealers over ‘‘Red Carpet’’ Lease
Plan, < http://www.naag.org/issues/20040610-settle-
ment-ford.php > (the settlement may affect more than
150,000 consumers nationwide).64 National Highway Traffic Safety Administration,
Notice of Proposed Rule Making: Consumer Informa-
tion Regulations; Federal Motor Vehicle Safety Stan-
dards; Rollover Resistance (2001)
< www.nhtsa.dot.gov/cars/rules/rulings/Rollover/
2001standards/RolloverResistance.htm > (based on the
2000 Fatality Analysis Reporting System and data from
the 1996–2000 National Automotive Sampling System
Crash worthiness Data System).65 Danny Hakim, ‘Gauging Rollovers on a Track,
and Not Just on Paper’, New York Times, October 8,
2003, at C3.66 ‘Safety of Some SUVs Questioned’, Newsday,
October 15, 2003 at A42 (study by the National High-
way Traffic Safety Administration of fatality data from
1995 to 2000).67 Id.68 Danny Hakim, ‘Rollovers Led the Rise in Traffic
Deaths Last Year’, New York Times, July 18, 2003 at C2.69 Danny Hakim, ‘Tough Questions On Safety for
Automakers at Hearing’, New York Times, February 27,
2003 at C5.70 Pub. L. 106–414.71 Federal regulations require that passenger car
bumpers be within a specified range. However, SUVs
and light-trucks are not defined as passenger cars and
therefore are not subject to these regulations. 49 C.F.R.
§581.72 Howard Latin and Bobby Kasolas, ‘Bad Designs,
Lethal Profits: The Duty to Protect Other Motorists
Against SUV Collision Risks’, 82 Boston University Law
Review 1161, 1184–1185 (2002).73 Restatement of Torts, Second § 402A,
comment i.74 Latin and Kasolas, supra note 72, at 1185–118675 Restatement of Torts, Second § 402A, comment
c. See also discussion of development of products liabil-
ity law in Cronin v. J.B.E. Olson Corporation, 8 Cal.
3d 121, 501 P. 2d 1153, 104 Cal. Rptr. 433 (Sup. Ct.
Cal. 1972), quoting Justice Traynor:
[Public] policy demands that responsibility be fixed
wherever it will most effectively reduce the hazards to
life and health inherent in defective products that reach
the market. Id. at 129.
Law As A Determinant of Business Conduct 293
Page 21
76 Pub. L. 106–414, Section 12.77 Consumer Information Regulations, Federal Mo-
tor Vehicle Safety Standards; Rollover Prevention, 65
Fed. Reg. 34998, Part VIII Rollover Information Dis-
semination through NCAP (2000).78 National Highway Traffic Safety Administration,
NHTSA Vehicle Safety Rulemaking Priorities: 2002–
2005, 67 Fed. Reg. 48, 599 (2002) (proposal).79 NHTSA Vehicle Rulemaking Priorities and Sup-
porting Research: 2003–2006 < http://www.nhtsa.-
dot.gov/cars/rules/rulings/PriorityPlan/Final/Veh/In-
dex.html > .80 The final rulemaking priorities plan document
was supplemented with a report on initiatives to ad-
dress vehicle compatibility. National Highway Traffic
Safety Administration, Vehicle Compatibility and Roll-
over Integration Project Team (IPT) Plans, 68 Fed.
Reg. 36, 534 (2003), which referenced a report enti-
tled National Highway Traffic Safety Administration,
Initiatives to Address Vehicle Compatibility, June
2003, http://www.nhtsa.dot.gov/people/iptre-
ports.html. The initiatives being studied included
changes in vehicle design to maximize protection
within a collision partner (struck) vehicle. The priori-
ties plan document was also supplemented with a re-
port on initiatives to address rollovers. National
Highway Traffic Safety Administration, Initiatives to
Address the Mitigation of Vehicle Rollover (June
2003), at http://www.nhtsa.dot.gov/people/iptre-
ports.html. The initiatives included a study of various
electronic stability controls and their benefits, an up-
grade of door latch integrity standards, and an upgrade
of roof crush standards.81 A gauge of the earlier industry response was pro-
vided by the surprise that was voiced when Ford finally
acknowledged in 2000 that SUVs may pose safety prob-
lems. See Keith Bradsher, ‘Ford is Conceding S.U.V.
Drawbacks’, New York Times, May 12, 2000, at A1; Keith
Bransher, ‘Ford’s Admission Perplexes the Neighbors in
Henry’s Hometown’, New York Times, May 13, 2000, at
C1 (Ford’s forthright stance took many surprise).82 ‘‘For years, industry executives refused even to
acknowledge a problem. In a 1997 interview, Alexander
Trotman, then chairman and chief executive of Ford,
likened a collision between a car and sport utility to
two rocks smashing together; the bigger rock would
come out ahead, he said, and little could be done.’’
Danny Hakim, ‘Automakers Agree To Work Together
For S.U.V. Safety’, New York Times, February 14, 2003,
at C2. Dr. Ricardo Martinez, head of the National
Highway Traffic Safety Administration noted back in
1998: I’m always amazed when people say, ‘‘It’s pure
physics, we can’t do anything about it,’’ because it’s
[designs changes that could reduce damage to automo-
biles] out there, it’s on the street.’’ Keith Bradsher,
‘Auto Makers Seek to Make Light Trucks Safer in Cra-
shes’, New York Times, May 22, 1998, at D1 (auto mak-
ers should follow the example of the new Mercedes–
Benz ML3 20 sport utility vehicle, which was designed
to inflict less damage on cars).83 ‘‘You ask the industry about rollover, and they say
‘People shouldn’t drink and people should wear their
seat belts. But these are beside-the-point points. There’s
no argument there. We need to ask manufacturers what
they can do in their design to make sure there wasn’t a
rollover to being with.’’ Danny Hakim, ‘The Nation:
By Numbers; S.U.V.s Take a Hit, as Traffic Deaths
Rise’, New York Times, April 27, 2003, Section 4 at 4
(statement of R. David Pittle, senior vice president of
technical policy for Consumers Union).84 Robert H. Frank, ‘Feeling Crash-Resistant in an
S.U.V’, New York Times, May 16, 2000, at A23 (SUVs
now account for some 20 percent of all vehicles sold by
Ford, up from 5% in 1990, and accounted for most of
its record profit of $7.2 billion last year); Danny Hakim,
‘Block That Grill; In the Debate on S.U.V.s, There’s a
New Casualty Count’, New York Times, March 2, 2003,
Section 4 at 5 (the future of G.M., Ford and Chrysler
now depends on SUVs and pickups).85 Keith Bradsher, ‘Changes in Ford Explorer Aim
At Protecting Other Motorists’, New York Times, Au-
gust 4, 2000 at C1; Royal Ford, Ford Lightens Up On
Explorer, For Safety’s Sake, The Boston Globe, Decem-
ber 16, 2000, at C1. See also PBS, Frontline: Rollover:
Unsafe On Any Tire: Chronology < http://
www.pbs.org/wgbh/pages/frontline/shows/rollover/
unsafe/cron.html > (yet CEO Jacques Nasser said none
of the changes were made for safety reasons).86 ‘Jury Rules in Ford’s Favor in Suit Over Sport
Utility’, New York Times, April 6, 2001, at C4; Milo
Geyelin, ‘Ford Will Try to Settle All Pending Rollover
Suits’, Wall Street Journal, January 4, 2001 (Ford trying
to settle all pending rollover suits).87 Anita, Kumar, ‘Ford Leaves 2-Door SUV Un-
changed’. New York Times, July 29, 2001, at 1A (deaths
in the 2 two-door Explorer model are five times higher
than other SUVs including the Ford four-door version).
In the 2002 model year ratings for rollovers, four Ex-
plorer models were rated. Three of the four received a
two star rating – 2 two-door models and 1 four-door
model. Only one, the Ford Explorer four-door 4� 4,
received a three star rating. < www.nhtsa.dot.gov/
NCAP/Cars/2002SUVs.html > .88 Danny Hakim, ‘U.S. Regulators Regulators
Release Vehicle Rollover Data’, New York Times, Au-
gust 10, 2004, at C1.
294 Vincent Di Lorenzo
Page 22
89 During a deposition in 1989 in a rollover suit
involving a Ford Explorer, Roger Simpson, project
manager for the Explorer, testified that widening the
prototype by 2 in would have made the vehicle more
stable, but Ford decided against the change because it
had already invested more that $500 million in the
existing prototype and delaying the vehicle would have
been too costly. PBS, Frontline: Rollover: Unsafe On
Any Tire: Chronology < http://www.pbs.org/wghh/
pages/frontline/hows/rollover/unsafe/cron.html > . See
also Latin and Kasolas, supra note 71, at 1197 (the Ex-
plorer prototypes failed Ford’s own safety tests, and
Ford’s engineer’s recommended safety improvements,
but the recommendations were ignored).90 Keith Bradsher, ‘Carmaker’s to Alter S.U.V.s to
Reduce Risks to Other Autos’, New York Times, March
21, 2000, at A1 (changes in other models by both U.S.
and foreign auto manufacturers over the 2000–2002
model years consisted of using car-like under bodies in
three models, adding an impact-absorbing bar in two
models, reinforcing the bumper in one model, redesign-
ing the front end to lower it in one model, and extend-
ing the bumper lower in two models). In all, changes
over the 2000–2002 period were announced for 16
models. Id.91 Keith Bradsher, ‘Changes in Ford Explorer Aim
At Protecting Other Motorists’, New York Times, Au-
gust 4, 2000, at C1 (the new Explorer, with a new op-
tional third row of seats, will be 200 pounds heavier).
See also Ford Motor Company, Corporate Citizenship
Reports, 2001 – Our Learning Journey 44
< www.ford.com > . Some SUVs began to be offered
with unit-body design, rather than a stiff pickup truck
frame, and lighter weights, but they were offered in few
models and largely not models of U.S. manufacturers.
SUVs: Safer Up Front? Consumer Reports June 2000 at
50 (BMW X5, Lexus RX300, Nissan Pathfinder, Toy-
ota RAV 4, Mazda Tribute, Ford Escape and Pontiac
Aztek). The average weight difference between passen-
ger cars and SUVs and other light-trucks has been
increasing over the years. In model year 1990, it was
830 pounds and by model year 2001 it had increased to
1130 pounds. Testimony of Jeffrey W. Runge, Admin-
istrator, National Highway Traffic Safety Administra-
tion, before the Senate Committee on Commerce,
Science and Transportation (February 26, 2003)
< www.nhtsa.dot.gov/nhtsa/announce/testimony/SUV-
testimony02–26–03.htm > .92 John O’Dell, ‘First Drive; A Bigger, Better, Safer
Ford Explorer; Best-Selling SUV and its Mercury
Twin Receive A Thorough Remake for 2002’, Los
Angeles Times, December 6, 2000, at G1 (43 models of
SUVs are sold in the U.S. today, and 40 more are
scheduled to enter the market in the next 4 years). In
fact, by 2003 there were 118 models of S.U.Vs for
sale. Jeff McDonald, Popularity of S.U.V.s Can’t Outrun
Controversy; Concerns over Safety, Efficiency Fuel Debate,
San Diego Union – Tribune, June 8, 2003, at A1. It
was estimated that the announced design features
would eventually save 100–300 of the 1000 unneces-
sary deaths that occur each year due to incompatibil-
ity. Keith Bradsher, ‘Carmakers to Alter S.U.V.s to
Reduce Risks to Other Autos’, New York Times,
March 21, 2000, at A1.93 See e.g., Danny Hakim, ‘G.M. Critical of Regula-
tor Questioning S.U.V. Safety’, New York Times, January
16, 2003 at C16 (G.M. repeats the statement that SUVs
are among the safest vehicles on the road, and blames
rollover deaths on occupants not wearing seat belts). See
also, General Motors, G.M. SUVs: Safety and Shared
Responsibility, November 8, 2003 (statement of Bob
Lange, Executive Director, Structure and Safety Integra-
tion < www.gm.com > .94 See e.g., G.M. Adding Anti-Roll System To More
SUVs, Toronto Star, May 18, 2002, at G10 (General
Motors is making a more sophisticated version of its Sta-
bilitrak system available on many of its SUVs this fall).95 2001 Sport Utility Vehicles and 2003 Sport Utility
Vehicles < www.nhtsa.dot.gov/ncap/cars/2001S
UVs.html and 2003SUVs.html > . The National High-
way Traffic Safety Administration explains the meaning
of these ratings as follows:
In a Single Vehicle Crash, a vehicle with a rating
of:
[5 stars] Has a risk of rollover of less than 10%
[4 stars] Has a risk of rollover between 10% and
20%
[3 stars] Has a risk of rollover between 20% and
30%
[2 stars] Has a risk of rollover between 30% and
40%
[1 star] Has a risk of rollover greater than 40%
National Highway Traffic Safety Administration,
Frequently Asked Questions < www.nhtsa.-
dot.gov/ncap/Info.html > .Dr. Jeffrey Runge,
head of the National Highway Traffic Safety
Administration, has said, ‘‘I wouldn’t buy my
kid a two-star rollover vehicle if it was the last
one on Earth.’’ Jeff McDonald, ‘Popularity of
SUVs Can’t Outrun Controversy; Concerns
Over Safety, Efficiency Fuel Debate’, New York
Times, June 8, 2003, at A1.
Law As A Determinant of Business Conduct 295
Page 23
96 Based on a comparison of reported vehicle ratings
in 2001 and 2003, only four vehicles rated two stars in
2001 were rated three stars in 2003. The rest continued
to receive a two star rating.97 National Highway Traffic Safety Administration,
NCAP Ratings < www.nhtsa.dot.gov/ncap/cars > .98 Jeff Plungis ‘Fed; SUVs Now Safer, Less Prone to
Roll Over’, The Detroit News, June 23, 2005, at 1C (no
SUV earned a five star rating).99 Danny Hakim, ‘Automakers Agree To Work To-
gether For S.U.V. Safety’, New York Times, February
14, 2003, at A1 (the changes would appear in the 2005
models at the earliest).100 National Highway Traffic Safety Administration,
NHTSA Vehicle Safety Rulemaking Priorities: 2002–
2005, 67 Fed. Reg. 48599 (July 19, 2002), referring to
the NHTSA planning document, NHTSA Vehicle Safety
Rulemaking Priorities and Supporting Research: 2003–
2006 < www.nhtsa.dot.gov/cars/rules/rulings/Priority-
Plan/FinalVeh/Index.html > . See also Danny Hakim,
‘Regulators Seek Ways to Make S.U.Vs Safer’, New York
Times, January 30, 2003, at C1. (federal auto regulators
may propose new safety standards aimed at dangers posed
to occupants of passenger cars in collisions with SUVs).101 Alliance of Automobile Manufacturers, Enhancing
Vehicle-to-Vehicle Crash Compatibility: A Set of Com-
mitments for Progress By Automobile Manufacturers
(December 2, 2003), < http://www.autoalliance.org/
safety/crash > . By September 1, 2007 at least 50% of
each manufacturer’s passenger cars and light trucks in-
tended for sale in the U.S. will satisfy front-to-side head
protection criteria and 100% would satisfy them by Sep-
tember 1, 2009. Similarly, by September 1, 2009 100% of
each manufacturer’s light-trucks intended for sale in the
U.S. will meet the front-to-front crash protection geo-
metric alignment criteria.102 Danny Hakim, ‘Automakers To Offer Plan To
Make SUVs Safer In Accidents’, New York Times,
December 2, 2003, at C5 (just under half of 2004 mod-
els offer side air bags, but many are not standard equip-
ment and some offer protection only to the chest area);
Danny Hakim, ‘S.U.Vs To Be Redesigned To Reduce
Risk To Cars’, New York Times, December 4, 2003, at
A1. About a quarter of 2004 models have side airbags as
standard equipment. Id. at C7, See also Jeff Plungis,
‘SUV Safety Fix To Cost Big 3; Pact Aims To Cut
Deaths In Crashes With Cars’, The Detroit News,
December 7, 2003, at 1B (few GM, Ford or Chrysler
models meet the announced guidelines). Royal Ford,
SUV Agreement Set, Auto Companies Promise Crash-Safety
Design Changes, Boston Globe, December 5, 2003, at
D1 (the lower stances could reduce fatalities in colli-
sions by 16 to 28% and side-impact bags could cut
deaths by as much as 45%).103 National Highway Traffic Safety Administration,
Federal Motor Vehicle Safety Standards; Side Impact
Protection; Side Impact Phase – in Reporting Require-
ments; Proposed Rule, 69 Fed. Reg. 27, 989 (2004).
The agency noted that the industry’s announced volun-
tary efforts would meet the proposed requirements be-
fore the new rule would become effective. It also noted
that the proposed regulation was a first step in improv-
ing side impact protection and reducing the risk of
ejection.104 Danny Hakim, ‘The 2 New ‘Must Haves’ of Auto
Safety’, New York Times, November 16, 2004 at C12
(overall stability control was standard on 21.6% of 2005
models and optional on 19.3 percent. At Daimler
Chrysler, it is standard equipment on its Mercedes divi-
sion models, but offered as an option on only three
Chrysler SUV models. Nissan offers stability control on
all its models, more often as an option than as a stan-
dard feature, while its luxury brand, Infiniti offers it as
standard equipment on all models).105 G.M., ‘Ford Target SUV Rollovers’, The Detroit
News, November 12, 2004, at 1A (until now automak-
ers offered stability control mostly as an option and the
spread of stability control has been slower in the U.S.
than in Europe or Japan. However, Toyota made stabil-
ity control equipment standard on all SUVs a year ago.
Honda pledged to make the equipment standard on all
vehicles in the end of 2006. GM announced it will
make the equipment standard on most large SUVs in
2005 and mid-size SUVs in 2006. Ford made the
equipment standard on the 2005 Explorer, Mercury
Mountaineer, Lincoln Aviator and Navigator SUVs);
Jeff Green, ‘Anti-rollover Systems Raise the SUV Stan-
dard’, Newsday, November 28, 2004, at H7 (Chrysler
will make electronic systems that limit rollovers standard
equipment on SUVs by 2006).106 E.g., Gardiner Harris, ‘Pfizer to Pay $430 Million
Over Promoting Drug to Doctors’, New York Times,
May 14, 2004, at C1; Brooke A. Masters, ‘Drug Com-
pany Unit May Face Indictment’, Washington Post, May
31, 2003 at E01 (Schering–Plough and Warner-Lambert
being investigated by federal prosecutors in Massachu-
setts for promoting drugs for uses not approved by the
FDA); Settlement: Fifty Attorneys General Announce
Settlement With Pfizer Over Improper Off-Label Drug
Marketing, < http://www.naag.org/issues/20040513-
settlement-pfizer.php > (Warner Lambert, a subsidiary
of Pfizer, will pay $430 million in settlements to state
and federal authorities for deceptive ‘‘off-label’’ market-
ing practices regarding its blockbuster drug Neurontin).
296 Vincent Di Lorenzo
Page 24
107 See Note, Another Use of Oxycontin: The Case for
Enhancing Liability for Off-Label Drug Marketing, 83
B.U.L. Rev. 429 (2003).108 E.g., Gardiner Harris, ‘Spitzer Sues A Drug Ma-
ker, Saying it Hid Negative Data’, New York Times,
June 3, 2004, at A1 (GlaxoSmithKline accused of fraud
in concealing negative information about its popular
antidepressant Paxil); Reed Abelson and Jonathan D.
Glater, ‘A Texas Jury Rules Against A Diet Drug’, New
York Times, April 28, 2004, at C1 (jury in Texas hands
down $1 billion verdict against Wyeth due to lung dis-
ease caused by its diet drug, fen-phen. Thousands of
claims have been made charging the drug caused heart
valve damage, and Wyeth has set aside $16 billion to
cover the cost of litigation).109 Consumer Groups Charge Industry – Wide Price
Manipulation, < http://www.prescription-drugs-law-
suits.com/pal-press-03.htm > (14 coalitions of consum-
ers in 11 states filed suit charging 28 U.S. drug
companies with manipulating the ‘‘average wholesale
price’’ of drugs covered by Medicare); Marc Santora,
‘City Sues Drug Companies, Claiming Medicaid Fraud’,
New York Times, August 6, 2004, at B4 (44 pharmaceu-
tical companies sued by New York City over claims
they inflated drug costs for Medicaid patients); Gardiner
Harris, ‘Drug Makers Settled 7 Suits By Whistle Blow-
ers, Group Says’, New York Times, November 6, 2003,
at C8 (drug companies Astra Zeneca, Bayer, Dey,
GlaxoSmithKline, Pfizer and TAP Pharmaceuticals have
paid $1.6 billion since 2001 to settle 7 suits accusing
them of marketing fraud and overbilling Medicare and
Medicaid); Gardiner Harris, ‘Guilty Plea Seen For Drug
Maker’, New York Times, July 16, 2004, at A1 (Scher-
ing-Plough has agreed to pay $350 million in fines and
plead guilty to criminal charges that it cheated the fed-
eral Medicaid program).110 Robert Pear, ‘Investigators Say Drug Makers
Repeatedly Overcharged’, New York Times, June 30,
2004, at A19 (investigators at the inspector general’s of-
fice in the Health and Human Services Department
found overcharges in 31% of the transactions examined).111 ‘‘I consider it a public heath hazard when people
are misled by false claims,’’ said FDA Commissioner
Mark McClellan. Bernadette Tansey, ‘FDA Slaps Drug-
makers for Misleading Claims’, San Francisco Chronicle,
August 9, at B1.An FDA survey of doctors found that
fully 70% of general practitioners believe drug advertis-
ing to consumers ‘‘confuses relative risks and benefits,’’
and 75% said it causes patients ‘‘to think drugs work
better than they really do.’’ Christopher Rowland, A
Dose of Reality: FDA to Rush Firms To Make AdsCclearer
About DrugRrisks, Boston Globe, September 23, 2003,
at D1. AstraZeneca, Pharmacia Corp., Abbott Laborato-
ries, ICN Pharmaceuticals, Eli Lilly & Co. and Icos
Corp. were all recently reprimanded by the FDA for
misleadings consumers and doctors in promoting their
drugs, by downplaying or failing to mention risks and
lacking balance in their promotions. ‘FDA Reprimands
4 Drug Makers for Misleading Promotions’, Los Angeles
Times, January 16, 2002, Part 3 at 3.112 The FDA warned Purdue Pharma LP about the
firm’s marketing campaign for the painkiller OxyContin
that dangerously downplayed the drug’s risks including
its addictive potential. Raja Mishra, OxyContin Ads to
Carry Prominent Warning of Risks, Boston Globe, January
24, 2003, at A1. Purdue Pharma’s advertisements were
primarily directed at doctors.113 David Firn, ‘US Regulators Tell GSK to Withdraw
TV Advert’, Financial Times, June 12, 2004, at 2. FDA has
recently required a black box warning that use of the
drug increases the risk of suicidal thoughts and behavior
among children. This warning applies to other antide-
pressants as well. Shankar Vendantam, ‘Depression Drugs
to Carry A Warning; FDA Orders Notice of Risks for
Youths’, Washington Post, Oct. 16, 2004, at A01.114 The General Accounting Office has documented
that drugs promoted to directly to consumers are often
the best-selling drugs and has estimated that in 2000
about 8.5 million consumers received a prescription
after viewing a [direct-to-consumer] advertisement ask-
ing their physician for the drug. General Accounting
Office, Prescription Drugs: FDA Oversight of Direct-
to-Consumer Advertising Has Limitations, GAO-03–
177 at 11–16 (October 2002) (hereafter referred to as
GAO Report). Ron Pollack, executive director of
Families U.S.A., a national organization of health-care
consumers, has concluded that direct-to-consumer ads
‘‘have been prepared for the purpose of promoting the
most expensive medications, and for the purpose of get-
ting patients to ask their physicians to prescribe those
most expensive drugs.’’ Aparna Jumar, ‘Doctors Split on
Usefulness of Drug Advertising; FDA Survey Highlights
Debate About Whether Feel-Good TV and Print No-
tices Raise Awareness or Sway Patients to Seek Care
They Don’t Need’, Los Angeles Times, January 14, 2003,
Part 1 at 12. In December 2004 Consumer Reports re-
viewed the benefits and costs of cholesterol-reducing
drugs, drugs for heartburn or acid-reflux drugs, and
drugs for arthritis. As for cholesterol-reducing drugs it
found costs of stations varied from 92 cents to more
than $4.50 per day and that the generic lovastatin, cost-
ing 92 cents to $1.31 per day, was the best choice for
reducing LDL by fewer than 40% when taking effec-
tiveness, safety, and cost into account. As for heartburn
and acid reflux disease, costs of drugs varied from 79
cents to more than $8 per day, and that omeprazole,
Law As A Determinant of Business Conduct 297
Page 25
costing 79 cents per day, was the best choice. It cost
one-fifth as much as the next least expensive drug and
was likely to be just as effective. As for arthritis drugs,
costs varied from $24 to $306 a month, and the best
choices were generic ibuprofen and salsalate, costing
approximately $24 a month. They were much less
expensive and as effective as other medications such as
Celebrex and Bextra. Consumer Reports, Best Buy
Drugs, < http://www.crbestbuydrugs.co > .115 Gina Kolata, ‘A Widely Used Arthritis Drug Is
Withdrawn’, New York Times, October 1, 2004, at A1.116 Barry Meier, ‘For Merck, Defense of a Drug
Crumbles at a Difficult Time’, New York Times, Octo-
ber 1, 2004, at C4.117 Gina Kolata, supra note 115, at C4. This claim is
also true of two other, similar top selling prescription
drugs, Celebrex and Bextra. Barry Meier, ‘Questions
Are Seen On Merck Stance on Pain Drug’s Use’, New
York Times, November 24, 2004, at C3 (Celebrex and
Bextra have not been proven to provide better protec-
tion for gastrointestinal problems. They often cost more
than $2.50 a pill, compared with pennies for older
painkillers that provide similar benefits).118 Stuart Elliott and Nat Ives, ‘Selling Prescription
Drugs to the Consumer’, New York Times, October 12,
2004, at C1.119 A Canadian study published last year in the British
Medical Journal found that patients who request a drug
are more likely to receive it, even though 40% of doc-
tors, when asked later about the treatment, said they
were ambivalent about prescribing a drug for the symp-
toms presented. Karen Palmer, ‘Marketing to the ‘‘Drug
Culture’’; Canny Advertising Boosts Sales’, Toronto Star,
August 31, 2003, at A1. For example, in 2001–2002
$60 million was spent to promote Paxil as a new anti-
shyness drug. Greg Critser, ‘One Nation Under Pills;
They Can Have Our Meds When They Pry Them Out
of Our Cold, Dead Hands’, Los Angels Times, Decem-
ber 15, 2002, Part M at 6.120 21 U.S.C. § 352 (n).121 21 CFR 202.1 (e)(1).122 21 CFR § 202.1 (e) (5). See summary of require-
ments for print and broadcast advertisements in GAO
Report supra note 69, at 7.123 GAO Report supra note 114, at 17.124 Id. at 21. See also ‘TAP Pharmaceutical Products:
FDA Finds Problems With Flashy TV Ads for Prev-
acid’, Chicago Tribune, September 6, 2002, Business sec-
tion at 2 (FDA issued warning letter regarding the acid
reflux medicine Prevacid because it felt TV ads were
deliberately filled with distractions such as strobe-light
graphics that prevented consumers form focusing on
crucial information. Regulators were upset because
TAP Pharmaceuticals, a joint venture between Abbott
Labs and Takeda Chemicals of Japan, had previously
been notified of objections to an earlier Prevacid ad for
similar reasons); Melody Petersen, ‘U.S. Warns Botox
Maker About Its Ads’, New York Times, June 24, 20003,
at C1 (FDA warns Allergen that its ads for Botox mini-
mized the drug’s risks and promoted it for unapproved
uses. Last fall the company had received a letter from
FDA that said it was misleading consumers by overstat-
ing its approved use).125 GAO Report, supra note 114, at 18.126 GAO Report, supra note 114, at 19.127 Gardiner Harris, ‘Federal Drug Agency Calls Ads
for the Cholesterol Pill Crestor ‘False and Misleading,’’
New York Times, December 23, 2004, at A16.128 ‘Drug Advertising: Is this Good Medicine?’ Con-
sumer Reports, June, 1996 at 62. See also FDA survey,
supra, note 111.129 See May, supra note 6, discussing frequency of
inspection as a factor inducing greater compliance.130 Eric Stein, Quantifying the Economic Cost of
Predatory Lending, A Report from the Coalition for
Responsible Lending, July 25, 2001, at http://www.re-
sponsiblelending.org/research/quantity.cfm.131 Pub. L. 96–221 (1980).132 12 U.S.C. § 173f–7a. States could override the
federal preemption during a 3-year period, ending
April, 1983, by adopting a statute explicitly stating that
the federal preemption contained in Section 501 of
DIDMCA did not apply in that state. Fourteen states
chose to override the federal preemption, although in
some states that override was later repealed, 6 Fed.
Banking L. Rep. (CCH) pp. 64–005.133 Pub. L. 93–533 (1974).134 Pub. L. 90–321, Title I (1968). This article does
not examine various legal standards imposed in state
legislation addressing predatory lending that has been
enacted in the last few years.135 12 U.S.C. §§ 2603 and 2602 (3) (defining ‘‘settle-
ment services’’). 24 C.F.R. 3507 (a) (lender must pro-
vide good faith estimate no later than three business
days after an application is received).136 15 U.S.C. § 1602 (f) and (h) (definition of credi-
tor: and ‘‘consumer); 12C.F.R.§ 226.18 (content of dis-
closures in closed-end credit).137 12 U.S.C. § 2601 (a) (Congressional findings and
purpose). See also discussion in S. Rep. No. 93–866
(1974), reprinted at 1974 U.S.C.C.A.N. 6546, 6554.138 Pub. L. 103–325, Title I, subtitle B (1994).139 15 U.S.C. § 1639 (c). However, certain loans
were exempt from this prohibition. Namely, transac-
tions in which the consumer’s total monthly payment
on all obligations does not exceed 50% of the con-
298 Vincent Di Lorenzo
Page 26
sumer’s monthly gross income as verified by financial
statements, a credit report, payment records, or verifica-
tion from an employer.140 15 U.S.C. 1639 (h). The prohibition is against
engaging in a pattern or practice of such activity.141 15 U.S.C. §1639 (l) (2) (the Board may prohibit
abusive lending practices or practices that are not in the
interest of the borrower), and 12 C.F.R. § 226.34 (a)
(3). This is aimed at avoiding charging of fees in refi-
nancings where the borrower receives no benefit.142 15 U.S.C. 1602 (a a) (1). The Federal Reserve
Board has, pursuant to regulatory authority granted in
the statute, lowered the interest rate trigger to 8% for
first-lien loans. 12 C.F.R. § 226.32.143 S. Rep. No. 103–169, at 21 (1993), reprinted in
1994 U.S.C.C.A.N. 1881, 1905.144 Id. at 22
145 United States General Accounting Office, Con-
sumer Protection: Federal and State Agencies Face
Challenges in Combating Predatory Lending, GAO-04–
280 (January, 2004).146 Id. at 37 (17 of the actions were filed since 1998).147 Id. at 43.148 Id. at 42.149 A complete list of FTC’s actions, including those
involving allegations of disclosure violations, is found in
Appendix I to the GAO Report.
V. Di Lorenzo
St. John’s University
8000 Utopia Parkway, Jamaica,
NY, 11439,
United States
Law As A Determinant of Business Conduct 299