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Ethics and the
Conduct of Business
Eighth Edition
John R. Boatright
Loyola University Chicago
Jeffery D. Smith
Seattle University
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Library of Congress Cataloging-in-Publication Data
Names: Boatright, John Raymond, 1941 author. | Smith, Jeffery David, 1971 author.
Title: Ethics and the conduct of business / John R. Boatright, Loyola
University Chicago, Jeffery D. Smith, Seattle University.
Description: Eighth edition. | Boston: Pearson, [2017]
Identifiers: LCCN 2015050453| ISBN 9780134167657 | ISBN 0134167651
Subjects: LCSH: Business ethics. | Social responsibility of business.
Classification: LCC HF5387 .B6 2017 | DDC 174/.4dc23 LC record available at
http://lccn.loc.gov/2015050453
ISBN-10: 0-13-416765-1
ISBN-13: 978-0-13-416765-7
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iii
9 Health and Safety 182
10 Marketing and Advertising 208
11 Ethics in Finance 239
12 Corporate Social Responsibility 268
13 Governance, Accountability,
and Compliance 297
14 International Business Ethics 325
References 357
Credits 380
Index 387
1 Ethics in the World of Business 1
2 Ethical Decision Making 21
3 Ethical Theories 46
4 Whistle-Blowing 65
5 Business Information and Conflict
of Interest 82
6 Privacy 106
7 Discrimination and Affirmative
Action 133
8 Employment Rights 156
Brief Contents
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v
3 Ethical Theories 46
Case: Big Brother at Procter & Gamble 46
3.1: Utilitarianism 48
3.1.1: Principle of Utility 48
3.1.2: CostBenefit Analysis 50
3.2: Kantian Ethics 52
3.2.1: Universalizability 52
3.2.2: Respect for Persons 53
3.3: Virtue Ethics 53
3.3.1: What Is Virtue? 54
3.3.2: Defending the Virtues 54
3.3.3: Virtue in Business 55
3.4: Rights 55
3.4.1: Meaning of Rights 55
3.4.2: Kinds of Rights 56
3.5: Justice 57
3.5.1: Nature and Value of Justice 57
3.5.2: Aristotle on Distributive Justice 58
3.5.3: Rawlss Egalitarian Theory 59
3.5.4: Nozicks Entitlement Theory 59
Conclusion: Ethical Theories 60
Case: Exporting Pollution
Case: Clean Hands in a Dirty Business
Case: Conflict of an Insurance Broker
Case: An Auditors Dilemma
4 Whistle-Blowing 65
Case: Times Persons of the Year 65
4.1: What Is Whistle-Blowing? 67
4.2: Justification of Whistle-Blowing 69
4.2.1: Loyal Agent Argument 69
4.2.2: Meaning of Loyalty 71
4.2.3: Conditions for Justification 71
4.3: Right to Blow the Whistle 73
4.3.1: Existing Legal Protection 73
4.3.2: Arguments against Protection 75
4.3.3: Arguments for Protection 75
4.4: Developing a Policy 76
4.4.1: Benefits and Dangers 76
4.4.2: Components of a Policy 76
Conclusion: Whistle-Blowing 77
Case: A Whistle-Blower Accepts a Deal
Case: A Whistle-Blowers Quandary
Case: Whos a Whistle-Blower?
Preface ix
About the Authors xi
1 Ethics in the World of Business 1
Case: Merck and the Marketing of Vioxx 1
1.1: Business Decision Making 4
1.1.1: Nature of Business 5
1.1.2: Levels of Decision Making 6
1.2: Ethics, Economics, and Law 7
1.2.1: Ethics and Economics 7
1.2.2: Ethics and Law 9
1.3: Ethics and Management 11
1.3.1: Ethical Management and Management
of Ethics 11
1.3.2: Ethics and the Managers Role 12
1.4: Ethics in Organizations 13
1.4.1: Individual Decision Making 14
1.4.2: Organizational Decision Making 15
Conclusion: Ethics in the World of Business 16
Case: A Sticky Situation
Case: Beech-Nuts Bogus Apple Juice
Case: Ethical Uncertainty at Bath Iron Works
Case: A Faked Rsum at Yahoo
2 Ethical Decision Making 21
Case: HP and the Smart Chip 21
2.1: Market Ethics 22
2.1.1: The Market System 22
2.1.2: Ethics in Markets 24
2.1.3: Breaches and Fraud 25
2.1.4: Wrongful Harm 26
2.1.5: Market Failure 27
2.1.6: Summary of Market Ethics 30
2.2: Roles, Relationships, and Firms 30
2.2.1: Agents and Principals 31
2.2.2: Fiduciaries and Professionals 31
2.2.3: Firms 32
2.2.4: Summary of Roles, Relationships,
and Firms 35
2.3: Ethical Reasoning 35
2.3.1: Philosophical Accounts 36
2.3.2: Psychological Accounts 37
2.3.3: Framework for Reasoning 38
Conclusion: Ethical Decision Making 41
Case: Lavish Pay at Harvard
Case: Broken Trust at Bankers Trust
Case: KPMGs Tax Shelter Business
Contents
vi Contents
Case: Privacy of Text Messages
Case: Plugging Leaks at HP
Case: Information Handling at ChoicePoint
7 Discrimination and
Affirmative Action 133
Case: Race Discrimination at Texaco 133
7.1: What Is Discrimination? 135
7.1.1: Civil Rights Act of 1964 135
7.1.2: Disparate Treatment/Impact 136
7.1.3: Forms of Discrimination 137
7.2: Sexual Harassment 138
7.2.1: Defining Sexual Harassment 138
7.2.2: Forms of Sexual Harassment 139
7.2.3: Further Issues 140
7.3: Objections to Discrimination 140
7.4: Preventing Discrimination 142
7.4.1: Analysis, Recruitment, and Assessment 142
7.4.2: Objective Tests 142
7.4.3: Subjective Evaluations 143
7.4.4: Sexual Harassment Programs 144
7.5: Affirmative Action 145
7.5.1: Affirmative Action Plans 146
7.5.2: Court Actions on Plans 146
7.5.3: Compensation Argument 147
7.5.4: Equality Arguments 149
7.5.5: Utilitarian Arguments 150
7.5.6: Problems with Affirmative Action 151
Conclusion: Discrimination and Affirmative Action 152
Case: Jacksonville Shipyards
Case: Sex Discrimination at Walmart
8 Employment Rights 156
Case: The Firing of Robert Greeley 156
8.1: Employment at Will 157
8.1.1: Property Rights Argument 158
8.1.2: Freedom of Contract Argument 159
8.1.3: Efficiency Argument 160
8.1.4: Exceptions 161
8.2: Right to Due Process 162
8.2.1: Support for Due Process 163
8.2.2: Law of Due Process 163
8.3: Freedom of Expression 164
8.3.1: Defining Freedom of Expression 165
8.3.2: Legal Protection for Expression 165
8.3.3: Arguments over Expression 166
8.4: Workplace Democracy 167
8.4.1: Participation and Democracy 167
8.4.2: Arguments for Democracy 168
8.5: Worker Compensation 169
8.5.1: Setting Wages 170
5 Business Information and Conflict
of Interest 82
Case: Barbie vs. the Bratz Girls 82
5.1: Confidential Information 84
5.1.1: Duty of Confidentiality 85
5.1.2: Competitive Employment 86
5.1.3: Impact of Restrictions 87
5.2: Proprietary Information 88
5.2.1: Intellectual Property 88
5.2.2: Defining Trade Secrets 89
5.2.3: Property Rights Argument 90
5.2.4: Fair Competition Argument 91
5.2.5: Competitor Intelligence 92
5.3: Conflict of Interest 93
5.3.1: Defining Conflict of Interest 95
5.3.2: Some Relevant Distinctions 95
5.3.3: Kinds of Conflict of Interest 96
5.3.4: Managing Conflict of Interest 98
Conclusion: Business Information and Conflict
of Interest 102
Case: The Aggressive Ad Agency
Case: Procter & Gamble Goes Dumpster Diving
Case: A Conflict-Laden Deal
6 Privacy 106
Case: Psychological Testing at
Dayton Hudson 106
6.1: Challenges to Privacy 108
6.1.1: Privacy in the Workplace 108
6.1.2: Privacy in the Marketplace 109
6.2: Meaning and Value of Privacy 110
6.2.1: History of the Concept 111
6.2.2: Defining Privacy 111
6.2.3: Utilitarian Arguments 112
6.2.4: Kantian Arguments 113
6.3: Privacy Away from Work 114
6.3.1: Justifying Monitoring 114
6.3.2: Limits to Monitoring 115
6.4: Privacy of Employee Records 116
6.4.1: Ethical Issues with Records 117
6.4.2: Justifying a Purpose 117
6.4.3: Disclosure to Outsiders 118
6.4.4: Gathering Information 119
6.4.5: Accuracy, Completeness, and Access 120
6.5: Big Data Analytics 120
6.5.1: Data Collection 121
6.5.2: Ethical Issues with Big Data 122
6.6: Using the Internet 123
6.6.1: Information Collection 123
6.6.2: Ethical Issues with Internet Use 124
6.6.3: Protecting Privacy 125
Conclusion: Privacy 128
Contents vii
10.6: Irrational Persuasion 224
10.6.1: Threats to Free Choice 225
10.6.2: Dependence Effect 225
10.7: Impact of Advertising 226
10.7.1: Impact on Persons 226
10.7.2: Impact on Society 228
10.8: Internet Advertising 229
10.8.1: Online Placement 229
10.8.2: Ethics of Placement 230
10.9: Social Advertising 232
Conclusion: Marketing and Advertising 233
Case: McCormicks Pricing Strategy
Case: Capital Ones Online Profiles
Case: Herbalife: A Pyramid Scheme?
11 Ethics in Finance 239
Case: Goldman Sachs and the Abacus Deal 239
11.1: Financial Services 241
11.1.1: Deception 242
11.1.2: Churning 243
11.1.3: Suitability 244
11.2: Financial Markets 245
11.2.1: Fairness in Markets 246
11.2.2: Derivatives and HFT 248
11.3: Insider Trading 251
11.3.1: Theories of Insider Trading 252
11.3.2: Evaluation of the Two Theories 253
11.3.3: Recent Insider Trading Cases 254
11.4: Hostile Takeovers 255
11.4.1: Market for Corporate Control 256
11.4.2: Takeover Tactics 257
11.4.3: Role of Directors 260
Conclusion: Ethics in Finance 261
Case: SCM Mutual Funds
Case: Merrill Lynch and the Nigerian Barge Deal
Case: Martha Stewart: Inside Trader?
Case: Oracles Hostile Bid for PeopleSoft
12 Corporate Social Responsibility 268
Case: Competing Visions at Malden Mills 268
12.1: The CSR Debate 270
12.1.1: Meaning of CSR 271
12.1.2: Examples of CSR 272
12.1.3: Related Concepts 273
12.2: Normative Case for CSR 274
12.2.1: Classical View 274
12.2.2: Friedman on CSR 276
12.3: Business Case for CSR 278
12.3.1: The Market for Virtue 278
12.3.2: Competitive Advantage 280
8.5.2: Market Outcomes 170
8.5.3: Minimum Wage 172
8.6: Executive Compensation 173
8.6.1: Criticism of CEO Pay 174
8.6.2: Justifying CEO Pay 174
8.6.3: Problems with Justification 175
Conclusion: Employment Rights 176
Case: Fired for Blogging at Google
Case: Worker Participation at Saturn
Case: Health Benefits at Walmart
9 Health and Safety 182
Case: The FordFirestone Brawl 182
9.1: Rights in the Workplace 184
9.1.1: Meaning of Health and Safety 184
9.1.2: Protecting Health and Safety 185
9.2: Hazardous Work 188
9.2.1: Justifying a Right to Refuse 189
9.2.2: Justifying a Right to Know 191
9.3: Reproductive Hazards 192
9.3.1: Scientific Background 193
9.3.2: Fetal Protection Policies 193
9.3.3: Charge of Discrimination 194
9.3.4: Defending against the Charge 195
9.3.5: Remaining Issues 195
9.4: Product Safety 196
9.4.1: Due Care Theory 196
9.4.2: Contractual Theory 198
9.4.3: Strict Liability Theory 200
Conclusion: Health and Safety 203
Case: Genetic Testing at Burlington Northern
Case: Johnson Controls, Inc.
Case: The Collapsing Crib
10 Marketing and Advertising 208
Case: Selling Hope 208
10.1: Marketing Ethics Framework 210
10.2: Sales Practices and Labeling 212
10.2.1: Deception and Manipulation 212
10.2.2: Information Disclosure 213
10.2.3: Labeling 214
10.3: Pricing and Distribution 215
10.3.1: Anticompetitive Pricing 215
10.3.2: Unfair Pricing 217
10.3.3: Distribution 218
10.4: Development and Research 219
10.4.1: Product Development 219
10.4.2: Marketing Research 220
10.5: Deceptive Advertising 222
10.5.1: Defining Deceptive Advertising 222
10.5.2: Applying the Definition 224
viii Contents
14 International Business Ethics 325
Case: Mattels Toy Woes 325
14.1: Different Standards 328
14.1.1: Relevant Differences 329
14.1.2: Variety of Outlooks 329
14.1.3: Right to Decide 330
14.1.4: Business Necessity 331
14.2: Guidelines for Multinationals 331
14.2.1: Rights 332
14.2.2: Welfare 333
14.2.3: Justice 333
14.2.4: International Codes 335
14.3: Wages and Working Conditions 336
14.3.1: Setting Wages 337
14.3.2: Working Conditions 339
14.4: Foreign Bribery 340
14.4.1: What Is Bribery? 341
14.4.2: Whats Wrong with Bribery? 342
14.4.3: Combating Bribery 343
14.5: Human Rights Abuses 346
14.5.1: Constructive Engagement 347
14.5.2: Liability for Abuses 348
Conclusion: International Business Ethics 349
Case: H. B. Fuller in Honduras
Case: Walmart in Mexico
Case: Google in China
References 357
Credits 380
Index 387
12.4: Implementing CSR 281
12.4.1: Program Selection and Design 281
12.4.2: Reporting and Accountability 283
12.5: Business with a Mission 285
12.5.1: Social Enterprise 286
12.5.2: Competing Successfully 287
12.5.3: Mission and Trust 289
Conclusion: Corporate Social Responsibility 290
Case: Starbucks and Fair Trade Coffee
Case: Timberland and Community Service
Case: Coca-Colas Water Use in India
13 Governance, Accountability,
and Compliance 297
Case: Fraud at WorldCom 297
13.1: Corporate Governance 299
13.1.1: Shareholder Control 300
13.1.2: The Shareholders Contract 303
13.1.3: Shareholders and Stakeholders 305
13.2: Corporate Accountability 307
13.2.1: Financial Reporting 307
13.2.2: Executives and Directors 310
13.2.3: Criminal Prosecution 312
13.3: Corporate Compliance 313
13.3.1: Program Components 314
13.3.2: Program Benefits 314
13.3.3: Federal Sentencing Guidelines 315
13.3.4: Codes of Ethics 317
Conclusion: Governance, Accountability,
and Compliance 319
Case: Sears Auto Centers
Case: Shareholder Rights at Cracker Barrel
Case: The Sale of Trans Union
ix
issues and the arguments for them are taken from a wide
variety of sources, including economics and the law. The
study of ethical issues in business is not confined to a sin-
gle academic discipline or even to the academic world. The
issues selected for discussion are widely debated by legis-
lators, judges, government regulators, business leaders,
journalists, and, indeed, virtually everyone with an inter-
est in business.
An underlying assumption of this course is that ethi-
cal theory is essential for a full understanding of the posi-
tions and arguments offered on the main issues in business
ethics. Fortunately, the amount of theory needed is rela-
tively small, and much of the discussion of these issues
can be understood apart from the theoretical foundation
provided here. The text also contains a substantial amount
of legal material, not only because the law addresses
many ethical issues but also because management deci-
sion making must take account of the relevant law. Many
examples are used throughout the text in order to explain
points and show the relevance of the discussion to real-life
business practice.
New to the Edition
Preparation of the eighth edition of Ethics and the Conduct
of Business has provided an opportunity to incorporate
new developments and to increase its value in the class-
room. The major changes from the previous edition are as
follows:
Chapter 5 on business information has been expanded
to provide greater coverage on confidential information
and the duty of confidentiality.
Chapter 6 on privacy has been expanded to include
more on the protection of both employee and consumer
privacy against intrusions, especially from advances in
technology.
The section on product safety has been moved from
Chapter 10 on marketing and advertising to the cover-
age of worker health and safety in Chapter 9. This
change has allowed expanded treatment in Chapter 10
of emerging issues in marketing and advertising, espe-
cially those related to the use of social media and data
analysis, which have been facilitated by the Internet.
Chapter 12 on corporate social responsibility includes
a new section on the recent development of for-profit
businesses, known as social enterprises, which operate
with a mission to deliver vital social services.
The eighth edition of Ethics and the Conduct of Busi-ness has reached two significant milestones. The first achievement, which is obvious to anyone read-
ing these words, is the transition to digital media. Through
Pearsons online platform REVEL, this text offers not only
a new mobile reading experienceon computers, tablets,
and even smartphonesbut also a new approach to learn-
ing, with many interactive features, videos, quizzes, and
other educational tools. REVEL creates a new frontier in
education for both students and instructors. It is exciting
for us, as authors, to be pioneer participants in this promis-
ing and innovative endeavor.
Users of previous editions will also note the appear-
ance of a coauthor, Jeffery D. Smith. His collaboration in
the eighth edition not only brings a fresh perspective to
what is now a joint venture but also prepares for the future
of this classic text, which first appeared more than 20 years
ago. Under Jefferys guidance, Ethics and the Conduct of
Business will hopefully continue to remain current and rel-
evant through many new editions.
The eight editions of Ethics and the Conduct of Business
have followed the development of the field of business
ethics, which has grown in recent decades into an interdis-
ciplinary area of study that has found a secure niche in
both liberal arts and business education. Credit for this
development belongs to many individualsboth philoso-
phers and business scholarswho have succeeded in
relating ethical theory to the various problems of ethics
that arise in business. They have shown not only that busi-
ness is a fruitful subject for philosophical exploration but
also that future managers in the world of business can ben-
efit from the results.
Ethics and the Conduct of Business, eighth edition, is a
comprehensive and up-to-date discussion of the most
prominent issues in the field of business ethics and the
major positions and arguments on these issues. It is
intended to be used as a text in business ethics courses on
either the undergraduate or M.B.A. level. The substantial
number of cases included provides ample opportunity for
a case-study approach or a combined lecturediscussion
format. There has been no attempt to develop a distinctive
ethical system or to argue for specific conclusions. The
field of business ethics is marked by reasonable disagree-
ment that should be reflected in any good text for a course.
The focus of Ethics and the Conduct of Business is pri-
marily on ethical issues that corporate decision makers
face in developing policies about employees, customers,
investors, and the general public. The positions on these
Preface
x Preface
have benefited from the support of the Banta Center for
Business, Ethics and Society and my colleagues at the Uni-
versity of Redlands. For everyone there I am grateful. My
thanks also go to DePauw Universitys Prindle Institute
for Ethics for hosting me as the Nancy Schaenen Visiting
Scholar while portions of the eighth edition were written.
And I also owe so much to my lovely wife, Rita, who pro-
vides support when I need it most and continues to keep
me grounded.
John R. Boatright
Jeffery D. Smith
I, John Boatright, would like to express my gratitude
for permission to use material from the following sources:
John R. Boatright, Ethics in Finance, 2nd ed. (Malden,
MA: Blackwell Publishers, 2008), copyright 1999,
2008 by John R. Boatright; Ethics in Finance, 3rd ed.
(Malden, MA: Wiley Blackwell, 2014), copyright 2014
by John Wiley & Sons, by permission of the publisher.
John R. Boatright, Financial Services, in Michael
Davis and Andrew Stark, eds., Conflict of Interest in the
Professions (New York: Oxford University Press, 1999),
copyright 1999 by John R. Boatright.
John R. Boatright, Corporate Governance, Ency-
clopedia of Applied Ethics, 2nd ed., Ruth Chadwick, ed.
(Amsterdam: Elsevier, 2011), by permission of the
publisher.
John R. Boatright, The Shareholder Model of
Corporate Governance, in Robert W. Kolb, ed., Ency-
clopedia of Business Ethics and Society (Thousand Oaks,
CA: Sage Publications, 2008), by permission of the
publisher.
The Chapter 13 section on corporate governance has been
completely rewritten for greater clarity and coherence.
The eighth edition contains 58 short cases, including 12
new ones on such subjects as a falsified rsum at
Yahoo, conflict of interest at Goldman Sachs, a firing at
Google for blogging, profiling of Internet visitors by a
major bank, variable pricing strategies in grocery stores,
Herbalifes unusual multilevel marketing scheme,
Coca-Colas water use in India, and bribery by Walmart
executives in Mexico.
Acknowledgments
I, John Boatright, am grateful for the support of Loyola
University Chicago and especially the Quinlan School of
Business. I have benefited from the resources of the Raymond
C. Baumhart, S.J., Chair in Business Ethics, which was
created to honor a former president of Loyola University
Chicago, who was also a pioneer in the field of business
ethics. To Ray Baumhart I owe a special debt of gratitude. I
am grateful as well to Jeffery Smith for graciously accept-
ing my offer to become a coauthor of this edition and my
ultimate successor in the preparation of future editions.
Finally, my deepest expression of appreciation goes to my
wife, Claudia, whose affection, patience, and support have
been essential for the preparation of the eighth edition, as
they were for the ones previous.
It goes without saying that I, Jeffery Smith, am excited
to work with John Boatright on this important project and
appreciate his generous offer to continue our collaboration
on future editions. I hope to maintain the clarity, depth,
and even-handedness that have made earlier editions so
valuable to students and instructors. For over a decade, I
xi
Jeffery D. Smith is the Boeing Frank Shrontz Chair of Pro-
fessional Ethics and Professor of Management in the
Albers School of Business and Economics at Seattle Uni-
versity, teaching ethics to management, accounting and
finance students. He currently serves on the executive
board of the Society for Business Ethics and the editorial
board of the international journal of the Society, Business
Ethics Quarterly. He is the editor of Normative Theory and
Business Ethics (2008) and has published in a variety of
business and philosophy journals. He received his Ph.D.
from the University of Minnesota.
John R. Boatright is the Raymond C. Baumhart, S.J., Pro-
fessor of Business Ethics in the Quinlan School of Business
at Loyola University Chicago. He has served as the Execu-
tive Director of the Society for Business Ethics, and is a
past president of the Society. He was recognized by the
Society in 2012 for a Career of Outstanding Service to the
Field of Business Ethics. He is the author of the book Eth-
ics in Finance, and has edited Finance Ethics: Critical Issues
in Theory and Practice. He serves on the editorial boards of
Business Ethics Quarterly, Journal of Business Ethics, and
Business and Society Review. He received his Ph.D. in phi-
losophy from the University of Chicago.
About the Authors
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1
Learning Objectives
1.1 Identify ethical issues created by diverse
business situations and relationships and
the level of decision making required to
address them
1.2 Recognize the role of ethics in the conduct
of business, with respect to economic
principles and the law
1.3 Distinguish between ethical management
and the management of ethics, and each of
the three main roles of a manager
1.4 Analyze how ethical business conduct is
challenged by decision making on
individual and organizational levels
Chapter 1
Ethics in the World of Business
Case: Merck and the
Marketing of Vioxx
On September 30, 2004, Merck & Co. announced the with-
drawal of Vioxx, its highly profitable pain reliever for arthritis
sufferers, from the market.1 This announcement came only
seven days after company researchers found in a clinical trial
that subjects who used Vioxx more than 18 months had a sub-
stantially higher incidence of heart attacks. Merck chairman
and CEO Raymond V. Gilmartin described the action as the
responsible thing to do. He explained, Its built into the prin-
ciples of the company to think in this fashion. Thats why the
management team came to such an easy conclusion.2 In the
lawsuits that followed, however, damaging documents
emerged casting doubt on Mercks claim that it had acted
responsibly by taking appropriate precautions in the develop-
ment and marketing of the drug.
Development of Vioxx
For decades, Mercks stellar reputation rested on the companys
emphasis on science-driven research and development. Merck
employed some of the worlds most talented and best-paid
researchers and led other pharmaceutical firms in the publica-
tion of scientific articles and the discovery of new medicines for
the treatment of serious conditions that lacked satisfactory ther-
apies. For seven consecutive years in the 1980s, Merck was
ranked by Fortune magazine as Americas most respected com-
pany. Merck received widespread accolades in particular for the
decision, made in 1978, to proceed with research on a drug for
preventing river blindness (onchocerciasis), which is a debilitat-
ing parasite infection that afflicts many in Africa, even though the
drug was unlikely to pay for itself. Eventually, Merck decided to
give away the drug, called Mectizan, for as long as necessary at
a cost of tens of millions of dollars per year. This kind of princi-
pled decision making was inspired by the words of George W.
Merck, the son of the companys founder: We try never to forget
that medicine is for the people. It is not for the profits. The profits
follow, and if we have remembered that, they have never failed
to appear. The better we have remembered it, the larger they
have been.
Vioxx is an example of Mercks innovative research. Devel-
oped as a treatment for the pain of arthritis, the drug acts as an
anti-inflammant by suppressing an enzyme responsible for ar-
thritis pain. Other drugs in the class of nonsteroidal anti-inflam-
matory drugs (NSAIDs) inhibit the production of two enzymes
COX-1 and COX-2. However, COX-1 is important for protecting
the stomach lining, and so ulcers and stomach bleeding are
potential side effects of these drugs. The distinctive benefit of
Vioxx over other NSAID pain relievers, such as ibuprofen (Advil)
and naproxen (Aleve), is that it inhibits the production of only the
COX-2 enzyme, and not COX-1. After approval by the Food and
Drug Administration (FDA) in May 1999, Vioxx quickly became
a popular best seller. More than 20 million people took Vioxx
between 1999 and 2004, and at the time of the withdrawal, with
2 million users, Merck was earning $2.5 billion annually or 11 per-
cent of the companys total revenues from the sale of the drug.
Competitive Environment
The success of Vioxx came at a critical time for Merck. Not only
were the patents on several profitable drugs due to expire, open-
ing the way for generic competition, but also the competitive
2 Chapter 1
More significant evidence that Vioxx might contribute to
heart attacks was produced by a study concluded in 2000 that
was designed to compare the gastrointestinal effects of Vioxx and
naproxen in order to improve the label of the Merck product by
proving that Vioxx was less harmful to the stomach lining. Although
the study, called VIGOR (for Vioxx Gastrointestinal Outcomes
Research), showed that Vioxx users had heart attacks at a rate
four to five times that of the naproxen group, researchers were
uncertain whether the difference was due to an adverse effect of
Vioxx in causing heart attacks or a beneficial effect of naproxen in
preventing them. The heart attacks in the trial occurred mainly in
the Vioxx subjects who were already at greatest risk of heart
attacks, and all subjects were prohibited from taking aspirin (which
is known to prevent heart attacks) in order to gain reliable results
from the study since aspirin affects the stomach. When the results
of the VIGOR study were published in the November 2000 issue of
the prestigious New England Journal of Medicine, the beneficial
effects of naproxen were emphasized in a way that implied that
Vioxx was safe for people without the risk factors for heart attacks.
After initially resisting pressure by the FDA to include a warning on
the Vioxx label, Merck finally agreed in April 2002 to add the evi-
dence of an increased incidence of heart attacks. However, the
language on the label emphasized, again, the uncertainty of the
cause and recommended that people at risk of heart attacks con-
tinue to use an anti-inflammant for protection.
In the meantime, Merck continued its aggressive market-
ing campaign. Between 1999 and 2004, Merck spent more than
$500 million on DTC television and print advertising. This
expenditure was intended to keep pace with the heavy spend-
ing by Pfizer for its competing COX-2 inhibiter Celebrex. Merck
also maintained a 3,000-person sales force to meet with doc-
tors for face-to-face conversations about Vioxx. To support this
effort, Merck developed materials that provided salespeople
with responses to questions from skeptical physicians.3 One
document, called an obstacle handling guide, advised that
questions about the risk of heart attacks be answered with the
evasive explanations that Vioxx would not be expected to
demonstrate reductions in heart attacks and was not a substi-
tute for aspirin. Another document titled Dodge Ball Vioxx
concluded with four pages that were blank ex
