Business Ethics

29 Jun

NO: 1


Although many people believe that the World Wide Web is anonymous and secure from censorship, the reality is very different.  Governments, law courts, and other officials who want to censor, examine, or trace a file of materials on the Web need merely go to the server (the online computer) where they think the file is stored.  Using their subpoena power, they can comb through the server’s drives to find the files they are looking for and the identify of the person who created the files.

On Friday June 30, 2000, however, researches at AT & T Labs announced the creation of Publius, a software program that enables Web users to encrypt (translate into a secret code) their files – text, pictures, or music – break them up like the pieces of a jigsaw puzzle, and store the encrypted pieces on many different servers scattered all over the globe on the World Wide Web.  As a result, any one wanting to examine or censor the files or wanting to trace the original transaction that produced the file would find it impossible to succeed because they  would  have to examine the contents of dozens of different servers all over the world, and the files in the servers would be encrypted and fragmented in a way that would make the pieces impossible to identify without the help of the person who created the file.  A person authorized to retrieve the file, however, would look through a directory of his files posted on a Publius – affiliated website, and the Publius network would reassemble the file for him at his request.  Researchers published a description of Publius at

Although many people welcomed the way that the new software would enhance freedom of speech on the Web, many others were dismayed.  Bruce Taylor, an antipornography activist for the National Law Center for Children and Families, stated : “It’s nice to be anonymous, but who wants to be more anonymous than criminals, terrorists, child molesters, child pornographers, hackers and e-mail virus punks.”  Aviel Rubin and Lorrie Cranor, the creators of Publius, however, hoped that their program would help people in countries where freedom of speech was repressed and individuals were punished for speaking out.  The ideal user of Publius, they stated, was “a person in China observing abuses of human rights on a day – to – day basis.”


1. Analyze the ethics of marketing Publius using utilitarianism, rights, justice, and caring. In your judgement, is it ethical to market Publius? Explain.

2. Are the creators of Publius in any way morally responsible for any criminal acts that criminals are able to carry out and keep secret by relying on Publius? Is AT & T in any way morally responsible for these? Explain your answers.

3. In your judgment, should governments allow the implementation of Publius? Why or why not?


 NO: 2


In July 1976, Kukeo Tanaka, former prime minister of Japan, was arrested on charges of taking bribes ($ 1.8 million) from Locjheed Aircraft Company to secure the purchase of several Lockheed jets.  Tanaka’s secretary and serial other government officials were arrested with him.  The Japanese public reacted with angry demands for a complete disclosure of Tanaka’s dealings. By the end of the year, they had ousted Tanaka’s successor, Takeo Miki, who was widely believed to have been trying to conceal Tanaka’s actions.

In Holland that same year, Prince Bernhard, husband of Queen Juliana, resigned from 300 hundred positions he held in government, military, and private organizations.  The reason : He was alleged to have accepted $ 1.1 million in bribes from Lockheed in connection with the sale of 138 F – 104 Starfighter jets.

In Italy, Giovani Leone, president in 1970, and Aldo Moro and Mariano Rumor, both prime ministers, were accused of accepting bribes from Lockheed in connection with the purchase of $ 100 million worth of aircraft in the late 1960s.  All were excluded from government.

Scandinavia, South Africa, Turkey, Greece, and Nigeria were also among the 15 countries in which Lockheed admitted to having handed out payments and at least $ 202 million in commissions since 1970.

Lockheed Aircraft’s involvement in the Japanese bribes was revealed to have begun in 1958 when Lockheed and Grumman Aircraft (also an American firm) were competing for a Japanese Air Force jet aircraft contract.  According to the testimony of Mr. William Findley, a partner in Arthur Young & Co. (auditors for Lockheed), in 1958 Lockheed engaged the services of Yoshio Kodama, an ultra right – wing war criminal and reputed underworld figure with strong political ties to officials in the ruling Liberal Democratic Party.  With Kodama’s help, Lockheed secured the Government contract.  Seventeen years later, it was revealed that the CIA had been informed at the time (by an American embassy employee) that Lockheed had made several bribes while negotiating the contract.

In 1972, Lockheed again hired Kodama as a consultant to help secure the sale of its aircraft in Japan.  Lockheed was desperate to sell planes to any major Japanese airline because it was scrambling to recover from a series of financial disasters.   Cost overruns on a government contract had pushed Lockheed to the brink of bankruptcy in 1970.  Only through a controversial emergency government loan guarantee of  $ 250 million in 1971 did the company narrowly avert disaster.  Mr. A. Carl Kotchian, president of Lockheed from 1967 to 1975, was especially anxious to make the sales because the company had been unable to get as many contracts in other parts of the world as it had wanted.

This bleak situation all but dictated a strong push for sales in the biggest     untapped market left-Japan.  This push, if successful, might well bring in           revenues upward of $ 400 million.  Such a cash inflow would go a long way     towards helping to restore Lockheed’s fiscal health, and it would, of          course, save the jobs of thousands of firm’s employees. (Statement of Carl Kotchian)

Kodama eventually succeeded in engineering a contract for Lockhed with All – Nippon Airways, even beating out McDonnell Douglas, which was actively competing with Lockheed for the same sales.  To ensure the sale, Kodama asked for and received from Lockheed about $9 million during the period from 1972 to 1975.  Much of money allegedly went to then – prime minister Kukeo Tanaka and other government officials, who were supposed to intercede with All – Nippon Airlines on behalf of Lockheed.

According to Mr. Carl Kotchian, “ I knew from the beginning that this money was going to the office of the Prime Minister.”   He was, however, persuaded that, by paying the money, he was sure to get the contract from All-Nippon Airways.  The negotiations eventually netted over $1.3 billion in contracts for Lockheed.

In addition to Kodama, Lockheed had also been advised by Toshiharu Okubo, an official of the private trading company, Marubeni, which acted as  Lockheed’s official representative.  Mr. A. Carl Kotchian later defended the payments, which he saw as one of many “Japanese business practices” that he had accepted on the advice of his local consultants.  The payments, the company was convinced, were in keeping with local “ business practices.”

Further, as I’ve noted, such disbursements did not violate American laws.              I should also like to stress that my decision to make such payments       stemmed from my judgment that the (contracts) …… would provided             Lockheed workers with jobs and thus redound to the benefit of their          dependents, their communities, and stockholders of the corporation.  I           should like to emphasize that the payments to the so-called “ high             Japanese government officials” were all requested y Okubo and were not   brought up from my side.  When he told me “ five hundred million yen is necessary for such sales,” from a purely ethical and moral standpoint I             would have declined such a request.  However, in that case, I would most certainly have sacrificed commercial success….. (If) Lockheed had not remained competitive by the rules of the game as then played, we would not have sold (our planes) ……… I knew that if we wanted our product to have a chance to win on its own merits, we had to follow the functioning       system.  (Statement of A. Carl Kotchian)

In August, 1975, investigations by the U.S. government led Lockheed to admit it had made  $ 22 million in secret payoffs.  Subsequent senate investigations in February 1976 made Lockheed’s involvement with Japanese government officials public.  Japan subsequently canceled their billion dollar contract with Lockheed.

In June 1979, Lockheed pleaded guilty to concealing the Japanese bribes from the government by falsely writing them off as “marketing costs”.  The Internal Revenue Code states, in part.  “ No deduction shall be allowed….. for any payment made, directly or indirectly, to an official or employee of any government …. If the payment constitutes an illegal bribe or kickback.’  Lockheed was not charged specifically with bribery because the U.S. law forbidding bribery was not enacted until 1978.  Lockheed pleaded guilty to four counts of fraud and four counts of making false statements to the government.  Mr. Kotchian was not indicated, but under pressure from the board of directors, he was forced to resign from Lockheed.  In Japan, Kodama was arrested along with Tanaka.


1. Fully explain the effects that payment like those which Lockheed made to the Japanese have on the structure of a market.

2. In your view, were Lockheed’s payments to the various Japanese parties “bribes” or “extortions”? Explain your response fully.

3. In your judgment, did Mr. A. Carl Kotchian act rightly from a moral point of view? (Your answer should take into account the effects of the payments on the welfare of the societies affected, on the right and duties of the various parties involved, and on the distribution of benefits and burdens among the groups involved.) In your judgment, was Mr. Kotchian morally responsible for his actions? Was he, in the end, treated fairly?

4. In its October 27, 1980, issue, Business Week argued that every corporation has a corporate culture – that is, values that set a pattern for its employee’s activities, opinions and actions and that are instilled in succeeding generations of employees (pp.148-60) Describe, if you can, the corporate culture of Lockheed and relate that culture to Mr. Kotchian’s actions. Describe some strategies for changing that culture in ways that might make foreign payments less likely.


NO: 3


In 1994, anxious to show off the benefits of a communist regime, the government of China invited leading auto manufacturers from around the world to submit plans for a car designed to meet the needs of its massive population.  A wave of rising affluence had suddenly created a large middle class of Chinese families with enough money to buy and maintain a private automobile.  China was now eager to enter joint ventures with foreign companies to construct and operate automobile manufacturing plants inside China.  The plants would not only manufacture cars to supply China’s new internal market, but could also make cars that could be exported for sale abroad and would be sure to generate thousands of new jobs.  The Chinese government specified that the new car had to be priced at less than $5000, be small enough to suit families with a  single child (couples in China are prohibited from having more than one child), rugged enough to endure the poorly maintained roads that criss-crossed the nation, generate a minimum of  pollution, be composed of parts that were predominantly made within China, and be manufactured through joint – venture agreements between Chinese and foreign companies.  Experts anticipated that the plants manufacturing the new cars would use a minimum of automation and wuld instead rely on labor – intensive technologies that could capitalize on China’s cheap labor.  China saw the development of a new auto industry as a key step in its drive to industrialize its economy.

The Chinese market was an irresistible opportunity for General Motors, Ford and Chrysler, as well as for the leading Japanese, European and Korean automobile companies.  With a population of 1.2 billion people and almost double digit annual economic growth rates, China estimated that in the next 40 years between 200 and 300 million of the new vehicles would be purchased by Chinese citizens.  Already cars had become a symbol of affluence for China’s new rising middle class, and a craze for cars had led more than 30 million Chinese to take driving lessons despite that the nation had only 10 million vehicles, most of them government – owned trucks.


Environmentalists, however, were opposed to the auto manufactures’  eager rush to respond to the call of the Chinese government.  The world market for energy, particularly oil, they pointed out, was based in part on the fact that China, with its large population, was using relatively low levels of energy.  In 1994, the per-person consumption of oil in China was only one sixth of Japan’s and only a quarter of Taiwan’s.  If China were to reach even the modes per person consumption level of South Korea, China would be consuming twice the amount of oil the United States currently uses.  At the present time, the United States consumes one forth of the world’s total annual oil supplies, about half of which it must import from foreign countries.

Critics pointed out that if China were to eventually have as many cars on the road per person as Germany does, the world would contain twice as many cars as it currently does.  No matter how “ pollution – free” the new car design was, the cumulative environmental effects of that many more automobiles in the world would be formidable.  Even clean cars would have to generate large amounts of carbon dioxide as they burned fuel, thus significantly worsening the greenhouse effect.  Engineers pointed out that it would be difficult, if not impossible, to build a clean car for under $5000.  Catalytic converters, which diminished pollution, alone cost over $200 per car to manufacture.  In addition, China’s oil refineries were designed to produce only gasoline with high levels of lead.  Upgrading all its refineries so they could make low-lead gasoline would require an investment China seemed unwilling to make.

Some of the car companies were considering submitting plans for an electric car because China had immense coal reserves which it could burn to produce electricity.  This would diminish the need for China to rely on oil, which it would have to import.  However, China did not have sufficient coal burning electric plants nor an electrical power distribution system that could provide adequate electrical power to a large number of vehicles.  Building such an electrical power system also would require a huge investment that the Chinese government did not seem particularly interested in making.  Moreover, because coal is a fossil fuel, switching from an oil – based auto to a coal – based electric auto would still result in adding substantial quantities of carbon dioxide to the atmosphere.

Many government officials were also worried by the political implications of having China become a major consumer of oil.  If China were to increase its oil consumption, would have to import all its oil from the same countries that other nations relied on, which would create large political, economic and military risks.  Although the United States imported some of its oil from Venezuela and Mexico, most of its imports came from the Middle East – an oil source that China would have to turn to also.  Rising demand for Middle East oil would push oil prices sharply upward, which would send major shocks reverberating through the economics of the United States and those of other nations that relied heavily on oil.  State Department officials worried that China would begin to trade weapons for oil with Iran or Iraq, heightening the risks of major military confrontations in the region.  If China were to become a major trading partner with Iran or Iraq, this would also create closer ties between these two major power centres of the non-Western world – a possibility that was also laden with risk.   Of course, China might also turn to tapping the large reserves of oil that were thought to be lying under Taiwan and other areas neighboring its coast.  However, this would bring it into competition with Japan, South Korea, Thailand, Singapore, Taiwan, the Phillippines, and other nations that were already drawing on these sources to supply their own booming economies.  Many of these nations, anticipating heightened tensions, were already puring money into their military forces, particularly their navies.  In short, because world supplies of oil were limited, increasing demand seemed likely to increase the potential for conflict.


1. In your judgment, is it wrong, from an ethical point of view, for the auto companies to submit plans for an automobile to China? Explain your answer?

2. Of the various approaches to environmental ethics outlined in this chapter, which approach sheds most light on the ethical issues raised by this case? Explain your answer.

3. Should the U.S. government intervene in any way in the negotiations between U.S. auto companies and the Chinese government? Explain.


NO: 4


Robert Hall Clothes, Inc., owned a chain of retail stores that specialized in clothing for the family.  One of the Chain’s stores was located in Wilmington, Delaware.  The Robert Hall store in Wilmington had a department for men’s and boy’s clothing and another department for women’s and girl’s clothing.  The departments were physically separated and were staffed by different personnel: Only men were allowed to work in the men’s department and only women in the women’s department.  The personnel of the store were sexually segregated because years of experience had taught the store’s managers that, unless clerks and customers were of the same sex, the frequent physical contact between clerks and customers would embarrass both and would inhibit sales.

The clothing in the men’s department was generally of a higher and more expensive quality than the clothing in the women’s department.  Competitive factors accounted for this : There were few other men’s stores in Wilmington so the store could stock expensive men’s clothes and still do a thriving business, whereas women’s clothing had to be lower priced to compete with the many other women’s stores in Wilmington.  Because of these differences in merchandise, the store’s profit margins on the men’s clothing was higher than its margins on the women’s clothing.  As a result, the men’s department consistently showed a larger dollar volume in gross sales and a greater gross profit, as is indicated in Table 7.11.

Because of the differences shown in Table 7.11 women personnel brought in lower sales and profits per hour.  In fact male salespersons brought in substantially more than the females did (see Tables 7.12 and 7.13)

Men’s Department Women’s Department






Gross Profit


Percent Profit





Gross Profit


Percent Profit


1963 210,639 85,328 40.5 177,742 58,547 32.9
1964 178,867 73,608 41.2 142,788 44,612 31.2
1965 206,472 89,930 43.6 148,252 49,608 33.5
1966 217,765 97,447 44.7 166,479 55,463 33.5
1967 244,922 111,498 45.5 206,680 69,190 33.5
1968 263,663 123,681 46.9 230,156 79,846 34.7
1969 316,242 248,001 46.8 254,379 91,687 36.4


TABLE 7. 12



Male Sales per Hour


Female Sales Per Hour


Excess M Over F (%)




























As a result of these differences in the income produced by the two departments, the management of Robert Hall paid their male salespersons more than their female personnel.  Management learned after a Supreme Court ruiling in their favor in 1973 that it was entirely legal for them to do this if they wanted.  Wages in the store were set on the basis of profits per hour per department, with some slight adjustments upward to ensure wages were comparable and competitive to what other stores in the area were paying.  Over the years, Robert Hall set the wages given in Table 7.14.  Although the wage differences between males and females were substantial, they were not as large as the percentage differences between male and female sales and profits.  The management of Robert Hall argued that their female clerks were paid less because the commodities they sold could not bear the same selling costs that the commodities sold in the men’s department could bear.  However, the female clerks argued, the skills, sales efforts, and responsibilities required of male and female clerks were “substantially” the same.

TABLE 7. 13



Male Gross Profits per Hour


Female Gross Profits Per Hour


Excess M Over F (%)





























TABLE 7. 14



Male Earnings per Hour


Female Earnings Per Hour


Excess M Over F (%)





























1. In your judgment, do the managers of the Robert Hall store have any ethical obligations to change their salary policies? If you do not think they should change, then explain why they have an obligation to change and describe the kinds of changes they should make. Would it make any difference to your analysis if, instead of two departments in the same store, it involved two different Robert Hall Stores, one for men and one for women? Would it make a difference if two stores (one for men and one for women) owned by different companies were involved? Explain each of your answers in terms of the relevant ethical principles upon which you are relying.

2. Suppose that there were very few males applying for clerks’ jobs in Wilmington while females were flooding the clerking job market. Would this competitive factor justify paying males more than females? Why? Suppose that 95 percent of the women in Wilmington who were applying for clerks’ jobs were single women with children who were on welfare while 95 percent of the men were single with no families to support. Would this need factor justify paying females more than males? Why? Suppose for the sake of argument that men were better at selling than women; would this justify different salaries?

3. If you think the managers of the Robert Hall store should pay their male and female clerks equal wages because they do “substantially the same work” then do you also think that ideally each worker’s salary should be pegged to the work he or she individually performs (such as by having each worker sell on commission)? Why? Would a commission system be preferable from a utilitarian point of view considering the substantial book keeping expenses it would involve? From the point of view of justice? What does the phrase substantially the same mean to you?


NO: 5


Eighteen – year old Shawn “NAPSTER” Fanning, then a freshman at Northeastern University, dropped out of school and founded Napster Inc. (website was at in San Mateo, California in May 1999.  Two months earlier, working in his college dorm room, he had developed both a website that let users locate other users who were willing to share whatever music files they had in MP3 format on the hard drives of their computers and a software program (called “Napster) that let users copy these music files from each other over the Internet.  When an early free version of the program he posted on received more than 300,000 hits and was named “Download of the week,” he decided to devote himself full time to developing his program and website.  The final version of his version of his program was officially released August 1999, and in May 2000, with more than 10 million people – most of them students on college campuses where Napster was especially popular – signed up at its website, Shawn’s company received $ 15 million of start – up funds from venture capital firms in California’s “Silicon Valley.”

Fanning grew up in Brockton, Massauchettes, the son of a nurse’s aid and the stepson of a truck driver, in a family of four half-brothers and half-sisters. He got the nickname “Napster” during a basketball game when a player commented on his closely cropped sweaty head of hair.  Fanning had taught himself programming and had held several summer programming jobs.

The company Shawn helped establish gave the Napster program away for free and charged users nothing to use its website to post the URL addresses where personal copies of music could be downloaded.  Nevertheless, a month later, Shawn found himself embroiled in a legal and ethical controversy when two record tables, two musicians (Metallica and Dr. Dre), and two industry trade groups of music companies (the National Music Publishers Association and the Recording Industry Association of America) filed suits against his young company claiming that Napster’s software was enabling other to make and distribute copies of copyrighted music that the musicians and companies owned.

On June 12, the two industry trade groups filed preliminary injunctions against the company demanding that it remove all the songs owned by their member companies from Napster’s song directories.  According to the two groups, a survey of 2555 college students showed a correlation between Napster use and decreased CD purchases.  College students were outraged, especially fans of Metallica and Dr. Dre. Supporters of Napster argued that Napster allowed people to hear music that they then went out and purchased, so Napster actually helped the music companies.  Music sales had increased by over $500 million a year since Napster had started to operate, but the music companies claimed that this was a result of a booming economy.  Supporters of Napster also argued that individuals had a moral and legal right to lend other individuals a copy of the music on the CDs that they had purchased.  After all, they argued, the law explicitly stated that an individual could make a copy of copyrighted music he or she had purchased to hear the music on another player.  Moreover, according to Fanning, Napster was not doing anything illegal, and the company was not responsible if other people used its software and website to copy music in violation of copyright law any more than a car company was responsible when its autos were used by thieves to rob banks.  Much of the music that was downloaded using Napster, they claimed, was in the public domain (i.e.not legally owned by anyone) and was being legally copied.  The music companies countered that an individual had no right to give multiple copies of their music to others even if the individual had paid for the original CD.  If everyone was allowed to copy music without paying for it, they charged, eventually the music companies would stop producing music and musicians would stop creating it.  Other musicians claimed, however, that Napster and the Web gave them a way to put their music before millions of potential fans without having to beg the music companies to sponser them.

In March 2000, the band Metallica hired consultant PDNet to electronically “evesdrop” on users who assumed they were anonymously accessing Napster’s website.  The following week the band’s lawyers handed Napster a list with the names of 300, 000 people that Metallica claimed had violated its copyrights using Napster’s service and that Metallica now wanted removed from Napster’s services.  Fanning complied with the demand of Metallica, whose drummer, Lars Ulrich, was one of his musical heros.  “If they want to steal our music,” said Ulrich, “ why don’t they just go down to Tower Records and grab them off the shelves ?”  Many young people protested that the bands should not be alienating their own fans in this way.  One fan posted a note on an MP3 chat room : “Give me a break !  I have been dropping 16 bucks an album for Metallica’s music since I was a teenager.  They made a fortune off us and now they accuse us of stealing from them.  What nerve !”  Howard King, a Los Angeles lawyer for Metallica and Dr. Dre, stated that “I don’t know Shawn Fanning but he seems to be a pretty good kid who came up with a sensational program.  But this sensational program has allowed people to take music without paying ………. Shawn probably had no idea of the legal ramifications of what he created.  I’m sure the though never crossed his mind.”

In August 2000, a federal judge in San Francisco, Marilyn Patel, responded to the suit against Napster.  Judge Patel called Shawn’s company a “monster” and charged that the only purpose of Napster was to copy pirated music without paying for it.  The judge ordered Napster to remove all URLS from its website that referenced material that was copyrighted.

Judge Patel’s ruling would have shut down the company’s website immediately.  But a few days later, an appeals court reversed Judge Patel and allowed the company to continue operating.  The reprieve was only temporary.  On Monday February 12, 2001, the Ninth Circuit Court of Appeals in San Francisco affirmed Judge Patel’s ruling.  The company attempted to circumvent the ruling by negotiating agreements with the music companies that would pay them certain annual fees in return for withdrawing the suit.

Napster was not the only software that allowed individuals to swap files from

One personal computer to another over the Internet.  The software program named “Gnutella”  let individuals swap any kind of files – music, text, or visuals – over the Internet, but Gnutella did not operate a centralized index like the website that Napster had established.  Observers predicated that if Napster was put out of business, numerous underground websites would be created providing the kind of listing service that the company had earlier provided on its website.  Already a website named provided free copies of Gnutella and many other Napster clones that users could download and use to share digital music files with each other.  Unlike Napster, these software products did not require a central website to connect users to each other, making it impossible for music companies to find and target single entity whom they could sue.  Many observers predicated that Napster was only the beginning of an upheaval that would revolutionize the music industry, forcing music companies to lower their prices, make their music easily available on the Internet, and completely change their business models.


1. What are the legal issues involved in this case, and what are the moral issues? How are the two different kinds of issues different from each other, and how are they related to each other? Identify and distinguish the “systemic, corporate and individual issues” involved in this case.

2. In your judgment, was it morally wrong for Shawn Fanning to develop and release his technology to the world given its possible consequences? Was it morally wrong for an individual to use Napster’s website and software to copy for free the copy righted music on another person’s hard drive? If you believe it was wrong, then explain exactly why it was wrong. If you believe it was not morally wrong, then how would you defend your views against t he claim that such copying is stealing? Assume that it was not I illegal for an individual to copy music using Napster. Would there be anything immoral with doing so? Explain?

3. Assume that it is morally wrong for a person to use Napster’s website and software to make a copy of copyrighted music. Who, then, would be morally responsible for this person’s wrong doing? Would only the person himself be morally responsible? Was Napster, the company, morally responsible? Wash shawn Fanning morally responsible? Was any employee of Napster, the company, morally responsible? Was the operator of the server or that portion of the Internet that the person used morally responsible? What if the person did not know that the music was copyrighted or did not think that it was illegal to copy copyrighted music?

4. Do the music companies share any of the moral responsibility for what has happened? How do you think technology like Napster is likely to change the music industry? In your judgment, are these changes ethically good or ethically bad?


 NO: 6


Eli Lilly, the discoverer of Erythromycin, Darvon, Ceclor, and Prozac, is a major pharmaceutical company that sold $6.8 billion of drugs all over the world in 1995, giving it profits of $2.3 billion.  Headquartered in Indianpolis, Minnesota, the company also provides food, housing, and compensation to numerous homeless alcoholics who perform short-term work for the company.  The work these street people perform, however, is a bit unusual.

Before approving the sale of a newly discovered drug, the U.S. Food and Drug Administration requires that the drug be put through three phases of tests after being tested on animals.  In phase I, the drug is taken by healthy human individuals to determine whether it has any dangerous side effects.  In Phase II, the drug is given to a small number of sick patients to determine dosage levels.  In Phase III, the drug is given to large numbers of sick patients by doctors and hospitals to determine its efficacy.

Phase I testing is often the most difficult to carry out because most healthy individuals are reluctant to take a new and untested medication that is not intended to cure them of anything and that may have potentially crippling or deadly side effects.  To secure test subjects, companies must advertise widely and offer to pay them as such as $250 a day.  Eli Lilly, however, does not advertise as widely and pays its volunteers only $85 a day plus free from and board, the lowest in the industry.  One of the reasons that Lily’s rates are so low is because, as a long time nurse at the Lily Clinic is reported to have indicated, “the majority  of its subjects are homeless alcoholics” recruited through word of mouth that is spread in soup kitchens, shelters, and prisons all over the United States.  Because they are alcoholics, they are fairly desperate for money.  Because they alcoholics, they are fairly desperate for money.  Because phase I testes can run several months, test subjects can make as $4500 – an enormous sum to people who are otherwise unemployable and surviving on handouts.  Interviews with several homeless men who have participated in Lily’s drug tests and who describe themselves as alcoholics who drink daily suggest that they are, by and large, quite happy to participate in an arrangement that provides them with “easy money”.  When asked, one homeless drinker hired to participate in a Phase I trail said he had no idea what kind of drug was being tested on him even though he had signed an informed – consent form.  An advantage for Lilly is that this kind of test subject is less likely to sue if severely injured by the drug.  The tests run on the homeless men, moreover, provide enormous benefits for society.  It has been suggested, in fact, that in light of the difficulty of securing test subjects, some tests might be delayed or not performed at all if it were not for the large pool of homeless men willing and eager to participate in the tests.

The Federal Drug Administration requires that people who agree to participate in Phase I tests must give their “informed consent” and must take a “ truly voluntary and a uncoerced decision.”  Some have questioned whether the desperate circumstances of alcoholic and homeless men allow them to make a truly voluntary and uncoerced decision when they agree to take an untested potentially dangerous drug for $ 85 a day.  Some doctors claim that alcoholics run a higher risk because they may carry diseases that are undetectable by standard blood screening and that make them vulnerable to being severely named by certain drugs.  One former test subject indicated in an interview that the drug he had been given in a test several years before had arrested his heart and “ they had to  put things on my chest to start my heart up again.”  The same thing happened to another subject in the same test.  Another man indicated that the drug he was given had made him unconscious for 2 days while others told of excruciating headaches.

In earlier years, drug companies used prisoners to test drugs in Phase I tests.  During the 1970s, drug companies stopped using prisoners when critics complained that their poverty and the promise of early parole in effect were coercing the prisoners into “Volunteering”.  When Lilly first turned to using homeless people during the 1980s, a doctor at the company is quoted as saying, “ We were constantly talking about whether we were exploiting the homeless.  But there were a lot of them who were willing to stay in the hospital for four weeks.”   Moreover, he adds.  “Providing them with a nice warm bed  and good medical care and sending them out drug – and alcohol – free was a positive thing to do.”

A homeless alcoholic indicated in an interview that when the test he was participating in was completed, he would rent a cheap motel room where I’ll get a case of Miller and an escort girl have sex.  The girl will cost me $ 200 an hour.”  He estimated that it would take him about two weeks to spend the $ 4650 Lily would pay him for his services.  The manager at another cheap motel said that when test subjects completed their stints at Lily, they generally arrived at his motel with about $ 2500 in cash : “ The guinea pigs  go to the lounge next door, get drunk and buy the house a round.  The idea is, they can party for a couple of weeks and go back to Lily and do the next one.”


1. Discuss this case from the perspective of utilitarianism, rights, justice and caring. What insight does virtue theory shed on the ethics of the events described in this case?

2. “In a free enterprise society all adults should be allowed to make their own decisions about how they choose to earn their living.” Discuss the statement in light of the Lily case.

3. In your judgment, is the policy of using homeless alcoholics for test subjects morally appropriate? Explain the reasons for your judgment. What does your judgment imply about the moral legitimacy of a free market in labor?

4. How should the managers of Lily handle this issue?

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