CASE – 1
GlaxoSmitbKine, Bristol – Myers Squibb, and AIDS in Africa 1
In 2004, the United Nations estimated that the previous year 5 million more people around the world had contracted the AIDS virus, 3 million had died, and a total of 40 million people were living with the infection. Seventy percent, or about 28 million of these, lived in sub – Saharan Africa, where the epidemic was at its worst. Sub – Saharan Africa consists of the 48 countries and 643 million people who reside south of the Saharan desert. In 16 of these countries, 10 percent are infected with the virus, in 6 other nation, 20 percent are infected. The UN predicted that in these 6 nations two – thirds of all 15 – year olds would eventually die of AIDS and in those where 10 percent were infected, half of all 15 – year – olds would die of AIDS.
For the entire sub –Saharan region, the average level of infection among adults was 8.8 percent of Botswana’s population was infected, 34 percent of Zimbabwe’s, 31 percent of Lesotho’s, and 33 percent of Swaziland’s. Family life had been destroyed by the deaths of hundreds of thousands of married couples, who left more than 11 million orphans to fend for themselves. Gangs and rebel armies forced thousands of orphans to join them. While crime and violence were rising, agriculture was in decline as orphaned farm children tried desperately to remember had to manage on their own. Labor productivity had been cut by 50 percent in the hardest – hit nations, school and hospital systems were decimated, and entire national economies were on the verge of collapse.
With its huge burden of AIDS illnesses, African nation desperately needed medicines, both antibiotics to treat the many opportunistic diseases that strike AIDS victims and HIV antiretrovirals that can indefinitely prolong the lives of people with AIDS. Unfortunately, the people of sub – Saharan Africa could not afford the prices that the major pharmaceutical drug companies charged for their drugs. The major drug companies, for example, charged $10,000 to $ 15,000 for a year’s supply the antiretrovirals they marketed in the United States. Yet the average per –person annual income in sub – Saharan Africa was $500. the AIDS crisis in sub – Saharan Africa posed a major moral problem for the drug companies of the developed world: How should they respond to the growing needs of this terribly destitute region of the world? These problems were especially urgent for the companies that held patents on several AIDS antiretrovirals, such as GlaxoSmithKline and Bristol- Myers Squibb.
GlaxoSmithKline, a British pharmaceutical company founded in 1873, with 2003 revenues of $38.2 billion and profits of $8 billion, held the patents to five antiretrovirals it had created. Formed from the merger of three large drug companies (Glaxo, Burroughs Wellcome, and SmithKline Beecham), it was one of the world ‘s largest and most profitable companies. Bristol – Myers Squibb, an American pharmaceutical company founded in 1858, was also the result of mergers (between Squibb and Bristol – Myers). It had 2003 profit of $$3.1 billion on revenues of $20.8 billion ad had created and now held the patents to two antiretrovirls.
Although AIDS was first noticed in the United State in 1981 when the CDC noted an alarming increase of a rare cancer among gay man, it is now known to have afflicted a Bantu male in 1959, and possibly jumped from monkeys to humans centuries earlier. In 1982, with 1,614 diagnosed cases in the United State, the disease was termed AIDS (for “acquired immune deficiency syndrome”), and the following year French scientists identified HIV (Human Immunodeficiency Virus) as its cause.
HIV is a virus that destroys the immune system that the body uses to fight off infections and diseases. If the immune system breaks down, the body is unable to fight off illnesses and becomes afflicted with various “opportunistic diseases “- infections and cancers. The virus, which can tack up to 10 year to break down a person’s immune system, is transmitted through the exchange of body fluids including blood, semen, vaginal fluids, and breast milk.
The main modes of infection are through unprotected sex, intravenous drug use, and child birth. In 1987, Burroughs Wellcome (now part of GlaxoSmithKline) developed AZT, the first FDA-approved antiretroviral, that is, a drug that attacks the HIV virus itself. When wellcome priced AZT at $10,000 for a year’s supply, it was accused of price gouging, forcing a price reducing of 20 percent the following year. In 1991, Bristol- Myers Squibb developed didanosine, a new class of antiretroviral drug called nucleoside reverse transcriptase inhibitors. In 1995, Roche developed saquinavir, a third new class of antiretroviral drug called a protease inhibitor, and the following year Roxane Laboratories announced nevirapine, another new class of antiretrovirals called nonnucleoside reverse transcriptase inhibitors . By the middle 1990s, drug companies had developed four distinct classes of antiretrovirals, as several drugs that attacked the opportunistic diseases that afflict AIDS patients.
In 1996, Dr. David Ho was honored for his discovery that by taking a combination- a “cocktail”- of three of than four classes of antiretroviral drags, it is possible to kill off virtually all of than HIV virus in a patient’s body, allowing the immune system to recover, and thereby effectively bringing the disease into remission. Costing upwards of $20,000 a year (the medicines had to be taken for the rest of the patient’s life), the new drug treatment enabled AIDS patients to once again live normal, healthy lives. By 1998, the large drug companies would have developed 12 different antiretroviral drugs that could be used in various combination to from the “cocktails” that could bring the disease into remission. The combination drug regimes, however, were complicated and had to be exactly adhered to. Several dozen pills had to be taken at various specific times during the day and night, every day, or the treatment would fail to work and the patient’s HIV virus could be come resistant to the drugs. If the patient then spread the disease to others, it would give rise to drug – resistant version of the disease. To ensure patients were carefully following the regimes, doctors or nurses carefully monitored their patients and made sure patients took the drugs on schedule. In 1998, as more U.S AIDS patients began the new combination drug treatment, the number of annual AIDS deaths dropped for the fist time in the United states.
Globally, however, the situation was not improving. By 2000, according to the United Nations, there were approximately 5 million people who were being newly infected with AIDS each year, bringing the worldwide total to about 34,300,000, more than the entire population of Australia. Approximately 3,000,000 adults and children died of AIDS each year.
The price of the new combination antiretroviral treatment limited the use of these drugs to the United States and other wealthy nation. Personal incomes in sub – Saharan Africa were too low to afford what the combination treatments cost at the point. Yet the countries of sub – Saharan Africa were emerging as the ones most desperately in need of the new treatment. Of the 5 million annual new cases of ADIS, 4 million -70 percent – were located in sub- Saharan countries.
Numerous global health and human rights groups – such as Oxfam – urged the large drug companies to lower the prices of their drugs to levels that patients in poor developing nations could afford. By 2001, a combination regime of three antiretroviral AIDS drugs still cost about $10,000 a year. Although the formulas for making the antiretroviral drugs were often easy to obtain, few poor countries had the ability to manufacture the drugs, and in most nations that had the capacity to manufacture drugs the large drug companies of the developed world had obtained “patents” that gave them the exclusive right to manufacture those drugs in effect making the drug formulas the private property of the large drug companies.
GlaxoSmithKline, Bristol – Myers Squibb, and the other big drug companies did not at this time want to lower their prices. First, they argued that it was better for poor countries to spend their limited resources on educational programs that might prevent new cases of AIDS than on expensive drugs that would merely extend life for the small number of patients that might receive the drugs. Second, they argued that the combination drug “cocktails” had to be administered by hospitals, clinics, doctors, or nurses who could monitor patients to make sure they were taking the drugs according to the prescribed regimes and to ensure that drug- resistant versions of the virus did not develop. But most AIDS patients in developing nations such as those in sub-Saharan Africa, the big drug companies argued, had limited access to medical personnel. Third, they argued, the development of new drugs was extremely expensive. The cost of the research, development, and testing required to bring a new drug to market, they claimed, was between $100 million. Besides the research involved, new drugs had to be tested in three phases: Phase I trials to test for initial safety: Phase II trials to test to make sure the drugs work: and Phase III trials that were wide-scale tests on hundreds of people to determine safety, efficacy, and dosage. If the big drug companies were to recover what they had invested in developing the drugs they marketed, and were to retain the capacity to fund new drug development in the future, they argued, they had to maintain their high prices. If they started giving away their drugs, they would stop making new drugs. Finally, the drug companies of the developed nations feared that any drugs they discounted or gave away in the developing world would be smuggled back and sold in the United States and other developed nations.
Critics of the drug companies were not convinced by these arguments. Doctors Without Borders- a group of thousands of doctors who contributed their services to poor patients in developing nations around the world- said that although prevention programs were important, never- the less hundreds of thousands of lives-even millions-could be saved if drug companies lowered their antiretroviral and opportunistic disease drug prices to levels poor nations could afford. Moreover, a September 2003 report by the International AIDS Society stated that studies in Brazil, Haiti, Thailand, and South Africa showed that patients in remote rural areas adhered exactly to their drug regimes with the help of low-skilled paramedics and that the development of resistance was not a major problem. In fact, in the United States 50 percent of AIDS patients had developed drug resistance but only 6.6 percent of AIDS patients studied in developing nations had developed resistance. By now, some of the antiretroviral combination treatments were being combined into blister packs that were easier to administer and monitor.
Other critics challenged the financial arguments of the drug companies. The cost estimates of new drug development used by the drug companies, they claimed, were inflated. For example, the figure of $500 million that drug companies often cited as the cost of developing a new drug was based on a study that inflated its cost estimates by doubling the actual out-of-pocket costs companies invested in a drug to account for so-called “opportunity” costs (what the money would have earned if it had been invested in some other way). Moreover, these cost estimates assumed that the drug was being developed from scratch, when in fact most of the new drugs marketed by companies were based on research for other drugs already on the market or on research conducted by universities, government, and other publicly funded laboratories. Critics also questioned whether companies would be driven to stop investing in new drugs if they lowered the pries of their AIDS drugs. Since 1988 the average return on equity of drug companies averaged an unusually high 30 percent a year. Public Citizen, in a report entitled “2002 Drug Industry Profits,” noted that the ten biggest drug companies had total profits in 2002 of $35.9 billion, equal to more than half of the $69.6 billion in profits netted by all other companies in the Fortune 500 list of companies (the 500 largest U.S. companies). The ten big drug companies made 17 cents for every dollar of revenue, while the median earnings for other Fortune 500 companies was 3.1 cents per dollar of revenue; the return on assets of the big companies was 14.1 percent while the median for other companies was 2.3 percent. During the 1990s, the big drug companies in the Fortune 500 had a return on revenues that was 4 times the median of all other industries, and in 2002 it was at almost 6 times the median. Finally, the report noted, while the big drug companies spent only 14 percent of their revenues on drug research, they plowed 17 percent of their revenues into profit and 31 percent into marketing and administration. GlxoSmithKline itself had a 2003 profit margin of 21 percent, a return on equity of 122 percent, and a return on assets of 26 percent; Bristol-Myers Squibb had a profit margin of 19 percent, return on equity of 36 percent, and return on assets of 14 percent. These figures, critics argued, showed that it was well within the capacity of the big drug companies to lower prices for AIDS drug to the developing nations, even if a small portion of these drug ended up being smuggled back into the United States.
GlaxoSmithkline, Bristol-Myers Squibb, and the other big drug companies, however, held their ground. Throughout the 1990s, they had lobbied hard to ensure that governments around the world in the medicines they had created. Before 1997, countries had different protection on so-called “intellectual property” (intellectual property consists of intangible property such as drug formulas, designs, plans, software, new inventions, etc.) some countries, like the United States, gave drug companies the exclusive right to keep anyone else from making their newly invented drug for a period of 15-20 year (this right was called a “patent”); other countries allowed companies fever year of protection for their patents, and many developing countries (where little research was done and where few things intellectual property as something that belonged to everyone and so something that should not be patented. Some countries, like India, offered patents that protected the process by which a drug was made but allowed others to make the same drug formula if they could figure out another process by which to make it.
Arguing that research and development would stop if new invention such as drug were not protected by strong laws enforcing their patents, GlxoSmithKline, Bristol- Meyers Squibb, and the other major drug companies intensely lobbied the World Trade Organization (WTO) to require all WTO members to provide uniform patent protections on all intellectual property. Pressured by the governments of the large drug companies (especially the United States), the WTO in 1997 adopted an agreement known as TRIPS, shorthand for Trade-Related aspects of Intellectual Property rights. Under the TRIPS agreement, all countries that were members of the WTO were required to give patent holders (such as drug companies) exclusive right to make and market their inventions for a period of 20 yea in their countries. Developing countries like India, Brazil, Thailand, Singapore, China, and the sub – Saharan nation-were give until 2006 before they had to implement the TRIPS agreement. Also, I a “national emergency” WTO developing countries could use “compulsory licensing” to force a company that owned a patent on a drug to license another company in the same developing country to make a copy of that drug. And in a national emergency WTO developing countries could also import drug from foreign companies even if the patent holder had not licensed those foreign companies to make the drug. The new TRIPS agreement was a victory for companies in developed nation, which held patents for most of the world’s new inventions, while it restricted developing nation whose own laws had earlier allowed them to copy these inventions freely. The big drug companies were not willing in 2000 to surrender their hard-won 1997 victory at the WTO.
Because the AIDS crisis was now a major global problem, the United Nation in 2000 launched the “Accelerated Access Program,” a program under which drug companies were encouraged to offer poor countries price discounts on their AIDS drug. GlaxoSmithKline and then Bristol-Myers Squibb joined the program, but the price discounts they were willing to make were insufficient to make their drug affordable to sub-Saharan nations, and only a few people in few countries received AIDS drug under the program.
Everything changed in February 2001 when Cipla, an Indian drug company, made a surprise announcement: It had copied three of the patented drug of three major pharmaceutical companies (Bristol-Myers Squibb, GlxoSmithKline, and Boehringer Ingelheim) and put them together into a combination antiretroviral course of therapy. Cipla said it would manufacture and sell a year’s supply of its copy of this antiretroviral “cocktail” for $350 to Doctors Without Borders. This was about 3 percent of the price the big drug companies who held the patents on the drugs were charging for the same drugs.
GlxosmithKline and Bristol-Myers Squibb objected that Cipla was stealing their property since it was copying the drug that they had spent million to create and on which they still held the patent. Cipla responded that its activities were legal since the TRIPS agreement did not take effect in India until 2006, and Indian patent low allowed it to make the drugs so long as it used a new “process.” Moreover, Cipla claimed, since AIDS was a national emergency in many developing countries, particularly the sub-Saharan nations, the TRIPS agreement allowed sub-Saharan nation to import Cipla ‘s AIDS drugs. In August 2001, Ranbaxy, another Indian drug company, announced that it, too, would start selling a copy of the same antiretroviral combination drug Cipla was selling but would price it at $295 for a year’s supply. In April 2002, Aurobindo, also an Indian company, announced it would sell a combination drug for $209. Hetero, likewise an Indian company, announced in March 2003 that it would sell a combination drug at $201. By 2004, the Indian company were producing versions of the four main drug combination recommended by the World Health Organization for the treatment of AIDS. All four combination contained copies of one or two of GlaxoSmithKline’s patented antiretroviral drugs and two of the combination contained copies of Bristol-Meyer Squibb’s patented drugs.
The CEO of GlaxoSmithKline branded the Indian companies as “pirates” and asserted that what they were doing was theft even if they broke no laws. Pressured by the discounted prices of the Indian companies and by world opinion, however, GlaxoSmithKline and Bristol-Myers Squibb now decided to further discount the AIDS drugs they owned. They did not, however, lower their prices down to the levels of the Indian companies; their lowest discounted prices in 2001 yielded a price of $931 for 1-year supply of the combination of AIDS drugs Cipla was selling for $350. In 2002 and 2003, new discounts brought the combination down to $727, still too high for most sub-Saharan AIDS victims and their government.
With little to impede its progress, the AIDS epidemic continued in 2994. Swaziland announced in 2003 that 38.6 percent of its adult population was now infected with AIDS. THE United Nation estimated that every day 14,000 people were newly infected with AIDS. The World Health Organization announced that only 300,000 people in developing countries were receiving antiretroviral drugs, and of the 4.1 million people who were infected in sub-Saharan Africa only about 50,000 had access to the drugs. The World Health Organization announced in 2003 that it would try to collect from governments the funds needed to bring antiretrovirals to at least 3 million people by the end of 2005.
1. Explain, in light of their theories, what Locke, Smith, Ricardo, and Marx would probably say about the events in this case.
2. Explain which view of property-Locke’s or Marx’s- lies behind the positions of the drug companies GlaxoSmithKline and Bristol-Myers Squibb and of the Indian companies such as Cipla. Which of the two group-GlaxoSmithKline and Bristol-Myers Squibb on the one hand, and the Indian companies on the other –do you think holds the correct view of property in this case? Explain your answer.
3. Evaluate the position of Cipla and of GlaxoSmithKline in terms of utilitarianism, right, justice, and caring. Which of these two positions do you think is correct from an ethical point of view?
CASE – 2
Playing Monopoly: Microsoft
On November 5, 1999, then the richest man in the world, learned that a federal judge, Thomas Jackson, had just issued “findings of fact” declaring that his company, Microsoft, “enjoys monopoly power” and that it had used its monopoly power to “harm consumers” and crush competitors to maintain its Windows monopoly and to establish a new monopoly in Web browsers by bundling its Internet Explorer with Windows. On the day the judgment was issued, Microsoft stock began its decline. The decline was hastened by an announcement in February 2000 that the European Commission, which enforces European Union lows on competition and monopolization, had been investigating Microsoft’ anticompetitive practices in server software since 1997 and was extending its investigation to look into Microsoft’s bundling of its Windows Media Player with Windows. Two months later, on April 3,2000,U.S. judge Thomas Jackson issued a second verdict, concluding on the basis of his earlier findings of fact that Microsoft had violated U.S. antitrust low and was subject to the penalties allowed by the low. The price of Microsoft stock plunged, bringing the entire stock market down with it. Two short months later, on June 7,2000, Judge Jackson ordered that Microsoft should be broken up into two separate companies-one devoted to operating systems and the other to applications such as word processing, spreadsheets, and Web browsers. With the price of Microsoft stock now skidding, Gates, who was no longer the richest man in the world, vowed that Microsoft would appeal this and any similar verdict and would never be broken apart.1
Bill Gates was born in 1955 in Bremerton, Washington. When he was 13 years old, his grammar school acquired a computer terminal, and by the end of the year he had written his first software program (for playing tictac-toe). During high school, he held a few entry-level programming jobs. Gates enrolled in Harvard University in 1974, but quickly lost interest in classes and quit to start a software business in Albuquerque, New Mexico, with a friend, Paul Allen, whom he had known since grammar school in Seattle. At the time, the first small but primitive personal computers were being manufactured as kits for hobbyists. These computers, like the Altair 8080 computer (which used Intel’s new 8080 microprocessor, had no keyboard, no screen, and only 256 bytes of memory), had no accompanying software and were extremely difficult to program because they had to use “machine code” (consisting entirely of sequences of zero and ones), which is virtually incomprehensible to humans. Gates and Allen together revised a program called BASIC (Beginner’s All – Purpose Symbolic Instruction Code, a program written several years earlier by two engineers who gave it away for free), which allowed users to write their own programs using an understandable set of English instructions, and they adapted it so that it would work on the Altair 8080. They sold the adaptation to the maker of the Altair 8080 for $3,000.
In 1977, Apply Computer marketed the first personal computer (PC) aimed at consumers, and by 1978, more than 300 dealers were selling the “Apply II.” That year, Gates and Allen began writing software programs for the Apply II, renamed their company Microsoft, and moved it to Seattle, where, with 13 employees, it ended the year with revenues of $1.4 million. In 1979, two hobbyists developed VisiCalc, the first spreadsheet program, for the Apply II, and Microsoft developed MS Word, a rudimentary word processor for the Apply II. With these new software “applications,” sales of the Apply II took off and the personal computer market was born. By 1980, Microsoft, which continued writing programs for the growing personal computer market, had earning of $8 million.
In 1980, IBM belatedly decided to enter the growing market for personal computers. By now many other companies had flocked into the PC market, including Radio Shack, Commodore, COMPAQ, AT&T, Xerox, DEC, Data General, and Wang. By 1984, some 350 companies around the world would be making PCs. Because IBM needed to enter the market quickly, it decided to assemble its computer from components that were readily available on the market. A key component that IBN needed for its computer was an operating system. An operating system is the software that allows application programs (like a world processor, spreadsheet, browser, or game) to run on a particular machine. Every computer must have an operating system or it cannot run any application programs. The operating system coordinates the various components of the computer (keyboard inputs, monitor, printer, ports, etc. and contains the application programming interface (API), which consists of the codes that application use to “command” the computer to carry out its function. Application programs, such as a games or world processors, are written so that they will run on a specific operating system by making use of that operating system’s API to make the computer carry out the program’s commands. Unfortunately, a program written for one operating system will not work on another operating system. Most of the companies making PCs had developed their own operating systems, although several made use of one called CP/M, which was written to work on many different computers, applications developed to run on CP/M. This meant that an application did not have to be rewritten for each different kind of computer, but could be written once for CP/M and would then on any computer using CP/M.
IBM needed an operating system quickly and approached the maker of CP/M for a license to use CP/M but was turned down. The somewhat desperate IBM representatives then met with Bill Gates to ask whether Microsoft had one available. Although Microsoft at the time did not own an operating system, Bill Gates told IBM that he could provide one to them. Immediately after the IBM meeting, Bill Gates went to a friend who he knew had written an operating system that was a “knock-off of CP/M” and that could work on the computer IBM was planning. Without telling his friend about the meeting with IBM, Gates offered to buy his friend’s operating system for $60,000. The friend agreed. After some tweaking, Microsoft licensed the system to IBM as MS-DOS, with the proviso that Microsoft could also license MS-DOS to other computer manufactures. When IBM started mass-producing its personal computer in 1981 (IBM’s share of the market went froe nothing in 1981, to 10 percent in 1983, and 40 percent in1987) and other computer makers began producing copies of IBM’s computer, MS-DOS become the standard operating system for personal computers built according to IBM’s standards. Bill Gates’s company was on its way to becoming a billion-dollar firm.
Because an application program has to be written to work on a specific operating system, and because so many personal computers were now using the MS-DOS operating system, software companies were much more willing to created programs for the large market of MS-DOS users than for the much smaller numbers of people using other competing operating system numbers of people using other competing operating systems. As thousands of new software programs were developed for MS-DOS-including Microsoft’s own spreadsheet, Multiplan, and its word processor, MS Word even more people adopted MS-DOS, initiating what economists call a network effect. A product creates a network effect when the value of the product to a buyer depends on how many other people have already bought the product. A standard example of a product that creates a network effect is a communication network like a telephone network. The more people that are connected to a telephone network, the more valuable it will be for a new subscriber to be connected to the network since he can communicate with more people. Many products besides communication networks can give rise to network effects, including, of course, operating systems. The more people that own an operating system, the more that software companies are willing to write programs for that operating system. The more software program they write for the operating system, the more people want to buy that operating system. Because of this network effect, the proportion of computers using MS-DOS quickly increased, and the proportion of computers using other operating systems (such as CP/M, Apply computer’s, or Atari’s or commodore’s) declined.
However, in 1984, Apple Computer developed an innovative new operating system for its own computers that used intuitive graphics or pictures that let users issue commands to the computer by selecting icons and pull-down manus on the screen using the mouse. The new operating system was tremendously popular, and Apple sales began to climb. In 1987, however, Microsoft began selling Windows, a new operating system for IBM-compatible computers that copied Apple’s operating system. Unlike MS-DOS, which had used obscure combinations of characters to issue commands to the computer, Windows used graphics that were similar to Apple’s, had virtually the same pull-down menus and icons, and the same usage of the same mouse. Apple sued Microsoft on the grounds that, in copying the “look and feel” of their operating system, Microsoft had stolen a key piece of their copyrighted property. Apple lost the suit and, with the loss of its key software advantage, its market share withered away.
Although early versions of Windows were not very good quality improved over the years. In 1995 Microsoft issued Windows 95, in 1998 it issued windows 98, in 2000 it issued the Millennium version of Windows, and two years later it issued Windows XP. The next version of Windows was code-named “Longhorn.” As the new millennium began, Microsoft controlled 90 percent of the personal computer operating system market-a virtual monopoly- and Bill Gates was fabulously rich. .
In the early 1990s, however, two threats to Microsoft’s monopoly had emerged.2 one was Netscape, an Internet browser, and the other was Java, a programming language. The Internet is a network through which digital information, pictures, sounds, text, and other digital data can be sent from one computer to another. To make these data usable, a user’s computer must be connected to the Internet and must have a software program called a browser. The browser takes the digital data that come through the Internet and transforms them into an intelligible picture or text that can be displayed on the user’s computer screen or into a sound that can be played on the computer’s speakers. However, a browser is not only capable of interpreting digital data that come over the Internet, it can also execute the instructions of software programs, whether those programs are sent over the Internet or reside in the user’s own computer. In this respect, a browser functions much like an operating system. Some people predicted that someday every computer might rely on a browser instead of an operating system to run software programs. Although the browser would still need some rudimentary operating system to run, this operating system did not have to be Windows. Windows could become obsolete. Netscape, a company that began selling a browser named Navigator on December 15, 1994, quickly captured 70 percent of the browser market. In May 1995, Bill Gates wrote an internal memo to his executives, warning:
A new competitor “born” on the Internet is Netscape. Their browser is dominant, with a 70% usage share, allowing them to determine which network extension will catch on. They are pursuing a multi-platform strategy where they move the key API [applications programming in derlying operating system.]
In addition to the browser threat, Microsoft was also worried about Java, a programming language that Sun Microsystems, a manufacture of computer hardware and software, had developed in May 1995. programs that are written in the Java language can operate on any computer equipped with java software, regardless of the operating system the computer used. In this respect, java software also could function like an operating system and also threatened to make Widows obsolete. In an internal memo, a Microsoft senior executive stated that Java was “our major threat,” and in September 1996, Bill Gates wrote an e-mail saying, “This scares the hell out of me,” and asked manager a to make it a top priority to neutralize Java.
To make matters worse, Java and Netscape joined forces. Netscape agreed to incorporate the Java software into its Navigator browser so that any programs written in Java would work on a computer that was using Netscape. This meant that short programs written in Java could be sent over the Internet and then run on the user’s computer through its Netscape browser. This also meant that Java programs did not need windows, but could run on any computer using any operating system so long as it was also using Netscape’s Navigator Browser. Because Java was now being distributed together with Netscape, the number of computers equipped with Java rapidly multiplied. A Microsoft had become the “major distribution vehicle” for Java.
According to the “findings of fact” accepted by the judge presiding over the” major distribution vehicle” for Java.
According to the “findings of fact” accepted by the judge presiding over the Microsoft antitrust trial, Microsoft quickly embarked on a campaign to undercut the threat that Netscape now posed to its monopoly. First, a team of Microsoft executives met with Netscape’s executives in June 1995. Microsoft’s people proposed that Microsoft should provide the browser for Windows computers while Netscape should provide browsers for all other computers essentially the 10 percent of computers that ran on Apple’s operating system, on OS/2, or on other relatively minor operating system. A memo written the next day by a Microsoft executive who was percent stated that a goal of the meeting was to “establish Microsoft ownership of the Internet client platform for Win95.” Netscape refused to go along with this plan to divide the browser market. Microsoft then refused to share the codes for Windows 95 so that Netscape would be unable to develop a browser for Windows 95. Netscape had to wait several months after Windows 95 was released before it finally got hold of its codes and was finally able to develop a new version of Navigator that would take advantage of the Windows 95 applications interface.
Microsoft also develop its own browser by borrowing a browser program it had earlier licensed from Spy-glass Inc, renaming it Interner Explorer, and copying many of Netscape’s features onto its. (The chairman of Spyglass later complained that “whenever you license technology to Microsoft, you have to understand it can someday build it itself, drop it into the operating system, and put you out of that business.” Unfortunately, when Microsoft tried to sell its browser in 1995, users felt it was inferior to Netscape and sales lagged. Microsoft continued working on its browser and its fourth version, Internet Explorer 4.0, released in late 1997, finally began to be compared favorably to Netscape’s browser. Still, few people were buying internet Explorer. Microsoft then decided to use its operating system monopoly to undercut Netscape. In February 1997, Christian Wildfeuer, a Microsoft executive, suggested in an internal memo that it would “be very hard to increase browser share on the merits’ of internet Explorer 4 alone. It will be more important to leverage our Operating System asset to make people use Internet Explorer instead of Netscape’s Navigator.” If Internet Explorer was bundled together with Windows, so that when Windows was installed on a computer Internet Explorer was also automatically installed, then users would tend to use Internet Explorer rather then go through the expense and trouble of purchasing and installing Netscape. Accordingly, Microsoft incorporated a copy of Internet Explorer into Windows 95 that automatically installed itself when Windows was installed. Windows 98 went farther by integrating Internet Explorer into the operating system so that it was extremely difficult for a user even to remove Internet Explorer. Moreover, when a user “uninstalled” Internet Explorer, it stayed in the computer and still appeared when Windows 98 was running certain commands. Although this integration made Windows 98 run more slowly and consumed resources on the user’s computer, it also made it much more difficult and risky for users to try to replace Internet Explorer with Netscape Navigator. Microsoft claimed that it was now giving Internet Explorer away “for free,” but skeptics pointed out that the costs of developing the browser had to be recovered from sales of Windows and so a portion of what the consumer paid for a copy of Windows went to pay for the costs of developing the browser.
Microsoft did more than bundle Internet Explorer with Windows. According to the court’s “findings of fact,” Microsoft required any computer maker that wanted Windows on its computers to agree that it would not remove Windows Explorer and would not promote Netscape’s browser. If a computer maker also agreed to not even give its customers a copy of Netscape, Microsoft discounted the price of Windows. Because Microsoft’s monopoly meant that computer manufacture either had to install Windows on their computers or make them virtually useless, manufactures had no choice but to sign the agreements that shut Netscape out of the market. Although users were still able to buy a copy of Netscape from a retailer, the number of users doing this declined. Not only would purchasing a copy of Netscape require paying extra for software that would do much of what their installed Internet Explorer could already do but also required that trick task of removing Internet Explorer from their computers and in selling Netscape in its place. Not surprisingly, Netscape’s share of the market rapidly dropped, and Internet Explorer’s rapidly rose- a successful outcome of Wildfeuer’s strategy “to leverage our Operating System asset to make people use Internet Explorer instead of Navigator.”
Microsoft dealt with its Java threat by asking Sun Microsystems for the right to license and distribute Java with its Windows system. Sun Microsystems gave Microsoft that right, not knowing that Microsoft was planning to change Java. The version of Java that Microsoft distributed was a version that incorporated several changes that would no longer allow regular Java programs to run on computers using Microsoft’s Java. Thus, there were now two versions of Java, and the version that most users were getting installed with their Windows computers was a version that was incompatible with the regular version of Java and that Microsoft now owned. Microsoft had apparently planned this move because an earlier internal Microsoft document stated that it was a “strategic objective” for Microsoft to “Kill cross-platform Java” by expanding the “polluted Java market”- a reference to Microsoft’s own “polluted” version of Java. Because all Windows-based computers now incorporated a copy of Microsoft’s Java, not Sun’s. Microsoft encouraged these developers by offering them special technical support and inducements. In effect, Microsoft had turned Java into a part of Windows so that there was now little threat that Windows would be rendered obsolete by Java.
But on May 18, 1998, the U.S. Department of Justice (DOJ), then headed by U.S. Attorney General Janet Reno (an appointee of Democratic President Bill Clinton), filed an antitrust suit Microsoft in Judge Jackson’s court, claiming that the company had violated the Sherman Antitrust Act by engaging in “a pattern of anticompetitive practices designed to thwart browser competition on the merits, to deprive customers of choice between alternative browsers, and to exclude Microsoft’s Internet browser competitors,” especially Netscape and java.3 the DOJ claimed that Microsoft had violated the antitrust act in four ways: (a) Microsoft had forced computer companies that used its Windows operating system to sing agreements that they would not license, distribute, or promote software products that competed with Microsoft’s own software products; (b) Microsoft “tied” its own browser, Internet Explorer, to its Windows operating system so that customers who purchased Windows also had to get Internet Explorer, although these were separate products and tying the two products together degraded the performance of Windows; (c) Microsoft had attempted to use its operating system monopoly to gain a new monopoly in the Internet browser market by forcing computer companies that used its Windows operating system to agree to leave Internet Explorer as the default browser and to preinstall or promote the browser of any other company; and (d) Microsoft had a monopoly in the market for PC operating system and had used anticompetitive and predatory tactics to maintain its monopoly power. As a penalty to ensure that Microsoft not engaged in such behaviors again, the DOJ recommended that that the part of the company devoted to cresting Windows should be spun off and separated from the part that developed browsers and other software applications.
On June 7, 2000, Judge Jackson found Microsoft guilty of counts b, c and d, and ordered that the company be broken up into two separate companies-one to develop and market operating systems and the other to develop and market all other Microsoft programs. Although the judge could have simply ordered Microsoft to cease engaging in the illegal practices, he feared that policing such an order would require so much government oversight that it was simply not practical. The judge also ruled that the two new companies would not be allowed to share any technical information with each other that they did not share with all their other customers. Not could Microsoft punish or threaten any computer manufacturers for distributing or promoting the products or services of its competitors. Finally, Judge Jackson ordered that Microsoft had to let computer manufactures remove any Microsoft applications from its Windows operating system.4 the Judge ruled, however, that Microsoft would not have to implement his orders until it had time to appeal his decision. In a defensive “white paper,” Microsoft stated:
Antitrust policy seeks to promote low prices, high output, and rapid innovation. On all three measures, the personal computer software industry generally-and Microsoft in particular-is a model of competitiveness…. Market share numbers do not reflect the highly dynamic nature of the software industry, where entire business segment can disappear virtually overnight as new technologies are developed.
Microsoft claimed that it was responsible for much of the innovation that characterized the software industry. In addition, it claimed that its actions, including its decision to bundle Internet Explorer with Windows and its decision to “improve” Java by changing it, were all done to help consumers and give them more value for their money.
Microsoft appealed the judge’s verdict, and on June 28, 2001, a federal appeals court reversed Judge Jack-son’s breakup penalty. The federal appeals court held that, based on interviews he gave to the news media during the case, Jackson appeared to be biased against Microsoft, and this bias might have affected the severity of the penalty he had imposed on the company. Although Jackson’s findings of fact were to remain in place, the appeals court held that a new penalty would have to be devised for the company.
The previous year, however, George W. Bush had been inaugurated president and his administration had as signed a new person, John Ashcroft, as the new attorney general to head up the Department of Justice. According to Edward Roeder, an expert on corporate political contributions, in the previous 5 year Microsoft had begun contributing heavily to the Republican Party’s election campaigns, contributing about 75 percent of its $6million-dollar-a-year 2000 political contributions to Republicans, creating “an unprecedented campaign to influence the new Administration’s antitrust policy,” and to “escape from the trial with its monopoly intact.”5 on September 6,2001, the new Republican-appointed head of the DOJ announced that it would no longer seek the breakup of Microsoft but would, instead, seek a lesser penalty. Two months later, on November 2,2001, the DOJ announced that it had reached a settlement with Microsoft. According to the agreement, Microsoft would share its application programming interface with other rival software companies who wanted to write applications (such as word processing programs or games) that could run on Windows; it would have to give computer makers and users the ability to hide icons for Windows applications, such as the icon for Internet Explorer or for Microsoft’s digital media player; it could not prevent competing programs from being installed on a Windows computer; it could not retaliate against computer makers who used competing software. A three-person panel would be given complete access to Microsoft’s records and source code for the next 5 years to ensure that Microsoft complied with the agreement. Microsoft; however, would not be prevented from bundling whatever software programs it wanted with its Windows operating system. The new judge appointed to case, Judge Colleen Kollar-Kotelly, reviewed the settlement and on November 1,2003, she handed down a decision essentially ratifying the settlement between Microsoft and the DOJ. The state of Massachusetts and two computer trade groups, however, who objected to the settlement as a mere slap on the wrist, filed an appeal, arguing that Microsoft’s monopolistic behaviors drserved tougher sanctions. That appeal came to an end on June 30, 2004, when a federal appeals court ruled that the 2001 settlement satisfied the legal requirements for addressing Microsoft’s violations of antitrust laws. By that time,, when a federal appeals court ruled that the 2001 settlement satisfied the legal requirements for addressing Microsoft’s violations of antitrust laws. By that time,, when a federal appeals court ruled that the 2001 settlement satisfied the legal requirements for addressing Microsoft’s violations of antitrust laws. By that time, Microsoft had settled several suits with other states and companies and had paid a total of $1.5 billion to these parties.
Microsoft’s monopoly woes were not quite over, however. In 1997, the European Union’s “Competition Commissioner” had announced that the European Union was investigating allegations that Microsoft had illegally used its Windows monopoly power to try to establish a new monopoly in the server market by refusing to share its Windows application programming interface with companies making software for servers (servers are computers that connect several other computers together). If other companies are not given the Windows application programming interfaces, they cannot write server programs that can smoothly connect computers running Windows. Since only Microsoft had full access to its Windows application programming interface, only Microsoft would be able to write server programs for Windows computers, thereby giving it a new monopoly in the server market.
In 2000, the European Commission expanded its investigation to look into how Microsoft had bundled its Windows Media Player together with the company’s new Widows 2000 operating system. Because all buyers of Windows 2000already had Microsoft’s Digital Media Player installed on their computers, they were not likely to buy a competitor’s digital media player. In this way, suggested the commission, Microsoft would gain a new monopoly in the market for digital media players.
In April 2004, the European Commission issued its final ruling on its investigations. It concluded that “Microsoft Corporation broke European Union competition law by leveraging its near monopoly in the market for PC operating systems onto the markets….for servers…and for media players.” The commission fined Microsoft 497 million euros (equivalent to about $613 million) and ordered it (1) to disclose to competitors the interface required for their server software to work with Windows computers and (2) to offer a version of Windows without Microsoft’s own Digital Media Player.
Microsoft immediately appealed this ruling to the European Court of First Instance. In addition, it asked that the second order be suspended until the European Court of First instance had ruled on its appeal. In June 2004, the European Commission agreed that until the court ruled on the appeal, Microsoft did not have to offer a version of Windows without its Digital Media Player. Experts on European law said the appeal could take several years.
Meanwhile, some government had stopped purchasing Windows and had instead adopted Linux, a free “open source” operating system. Among these were Italy, Germany, Great Britain, France, India, South Korea, China, Brazil and South Africa. Several Companies, including Amazon.com, FedEx, and Google, had moved to Linux. A study by Forrester Research found that 72 percent of companies it surveyed were increasing their use of Linux, and over half of them were planning to replace Windows with Linux.
1. Identify the behaviors that you think are ethically questionable in the history of Microsoft. Evaluate the ethics of these behaviors.
2. What characteristics of the market for operating systems do you think created the monopoly market that Microsoft’s operating system enjoyed? Evaluate this market in terms of utilitarianism, rights, and justice (your analysis should make use of the textbook’s discussion of the effects of monopoly markets on the utility of participants in the market, on the moral rights of participants in the market, and on the distribution of benefits and burdens among participants in the market), giving explicit examples from the operating systems industry to illustrate your points.
3. In your view, should the government have sued Microsoft for violation of the antitrust laws? In your view, was Judge Jackson’s order that Microsoft be broken into two companies fair to Microsoft? Was Judge Kollar-Kotelly’s November 1, 2004 decision fair? Was the April 2004 decision of the European Commission fair to Microsoft? Explain your answers.
4. Who, if anyone, is harmed by the kind of market that Microsoft’s operating system has enjoyed? Explain your answer. What kind of public policies, if any, should we have to deal with industries like the operating system industry?
CASE – 3
Gas or Grouse?
The Pinedale Mesa (sometime called the Pinedale Anticline) is a 40-mile-long mesa extending north and south along the eastern side of Wyoming’s Green River Basin, an area that is famous as the gateway to the hunting, fishing, and hiking treasures of the Bridger-Teton wilderness. The city of Pinedale sits below the mesa, a short distance from its northern end, surrounded by hundreds of recently drilled wells ceaselessly pumping natural gas from the vast pockets that are buried underneath the long mesa. Questar Corporation, an energy company with assets valued at about $4 billion, is the main developer of the gas wells around the city and up on the mesa overlooking the city. Occasionally elk, mule deer, pronghorn antelope, and other wildlife, including the imperiled greater sage grouse, descend from their habitats atop the mesa and gingerly make their way around and between the Questar wells around Pinedale. Not surprisingly, environmentalists are at war with Questar, whose expanding operations are increasingly encroaching on the wildlife habitat that lies atop the mesa. Yet the mesa is a desperately needed resource that provides the nation with a clean and cheap source of energy.
Headquartered in Salt Like City, Questar corporation drilled its first successful test well on the pinedale Mesa in 1998. Extracting the gas under the mesa was not feasible earlier because the gas was trapped in tightly packed sandstone that prevented it from flowing to the wills and no one knew how to get it out. it was not until the mid-1990s that the industry developed techniques for fracturing the sandstone and freeing the gas. Full-scale drilling had to await the completion of an environmental impact statement, which the Bureau of Land Management (BLM) finished in mid-2000 when it approved drilling up to 900 wells on federal lands sitting on top of the Pinedale Mesa. By the beginning of 2004, Questar had drilled 76 wells on the 14,800 acres it leased from the federal government and the Wyoming state government and had plans to eventually drill at least 400 more wells. Energy experts welcome the new supply of natural gas, which, because of its simple molecular structure (CH4), burns much more cleanly than any other fossil fuel such as coal, diesel oil, or gasoline. Moreover, because natural gas in extracted in the United States, its use reduced U.S. reliance on foreign energy supplies. Businesses in and around Pinedale also welcomed the drilling activity, which brought numerous benefits, including jobs, increased tax revenues, and a booming local economy. Wyoming’s state government likewise supported the activity since 60 percent of the state budget is based on royalties the state receives from coal, gas, and oil operations.
Questar’s wells on the mesa averaged 13,000 feet deep and cost $3.6 million each, depending on the amount of fracturing that had to be done.1 Drilling a well typically required clearing and leveling a 2- to 4- acre “pad” to support the drilling rig and other equipment. One or two wells could be drilled at each pad. Access road had to be run to the pad, and the well had to be connected to a network of pipes that drew the gas from the wells and carried it to where it could be stored and distributed. Each well produced waste liquids that had to be stored in tanks at the pad and periodically hauled away on tanker trucks.
The BLM, however, imposed several restrictions on Questar’s operations on the mesa. Large areas of the mesa provide habitat for mule deer, pronghorn sheep, sage grouse, and other species, and the BLM imposed drilling rules that were designed to protect the wildlife species living on the mesa. Chief among these was the sage grouse.
The sage grouse is a colorful bird that today survives only in scattered pocket in 11 states. The grouse, which lives at elevations of 4,000 to 9,000 feet and is dependent on increasingly rare old-growth sagebrush for food and to screen itself from predators, is extremely sensitive to human activity. Houses, telephone poles, or fences can draw hawks and ravens, which prey on the ground-nesting grouse. It is estimated that 200 years ago the birds-known for their distinctive spring “strutting” mating dance-numbered 2 million and were common across the western United States. By the 1970s, their numbers had fallen to about 400,000. a study completed in June 2004 by the Western Association of Fish and Wildlife Agencies concluded that there were only between 140,000 and 250,000 of the birds left and that “we are not optimistic about the future.” The dramatic decline on their number was blamed primarily on the destruction of 50 percent of their sage brush nesting and mating grounds (called leks), which in turn was blamed on livestock grazing, new home construction, fires, and the expanding acreage being given over to gas drilling and other mining activities. Biologists believe that if its sagebrush habitats are not protected, the bird will be so reduced in number by 2050 that it will never recover. According to Pat Deibert, a U.S. Fish and Wildlife Service biologist, “they need large stands of unbroken sagebrush” and anything that breaks up those stands such as roads, pipelines, or houses, effects them.2
In order to protect the sage grouse, whose last robust population had nested for thousands of years on the ideal sagebrush fields up on the mesa, the BLM required that Questar’s roads, wells, and other structures had to be located a quarter mile or more from grouse breeding grounds, and at least 2 miles from nesting areas during breeding season. Some studies, however, conclude that these protections were not sufficient to arrest the decline in the grouse population. As wells proliferated in the area, they were increasingly taking up land on which the grouse foraged and nested and were disturbing the sensitive birds. Conservationists said that the BLM should increase the quarter-mile buffer area around the grouse breeding grounds to at least 2-mile buffers.
In May 2004, the U.S. Fish and Wildlife Service announced that it would being the process of studying whether the sage grouse should be categorized as an endangered species, which would bring it under the protection of the Endangered Species Act, something conservationists had been urging the Fish and Wildlife Service to do since 2000. Questar and other gas, oil, and mining companies adamantly opposed having the grouse listed as an endangered species because once this was done, large areas of federal land would be off-limits to drilling, miming, and development. Since 80 percent of Wyoming is considered sage grouse habitat, including much of the Pinedale Mesa, Questar’s drilling plans would be severely compromised.
Questar and other companies formed a coalition-the Partnership for the West-to lobby the Bush administration to keep the grouse off the endangered species list. Led by Jim Sims, a former communication director for President George W. Bush’s energy Task Force, the coalition established a website where they called on members to lobby “key administration players in Washington” and to “unleash grass-roots opposition to a listing, thus providing some cover to the political leadership at Department of Interior and throughout the administration.” The coalition also suggested “funding scientific studies” designed to show that the sage grouse was not endangered. According to Sims, the attempt to categorize the grouse as endangered species was spearheaded by “environmental extremists who have converged on the American west in an effort to stop virtually all economic growth and development. They want to restrict business and industry at every turn. They want to put our Western lands of –limits to all of us.”3 Dru Bower, vice president of the petroleum Association of Wyoming, said,”[endangered species] listings are not good for the oil and gas industry, so anything we can do to prevent a species from being listed is good for the industry. If the sage grouse is listed, it would have a dramatic effect on oil and gas development in the state of Wyoming.”4
The sage grouse was not the only species affected by Questar’s drilling operations. The gas fields to which Questar held drilling rights was an area 8 miles long and 3 miles wide, located on the northern end of the mesa. This property was located in the middle of the winter range used by mule deer, elk, moose, and pronghorn antelope, some of which migrate to the mesa area from as far away as the Grand Teton National Park 170 miles to the north.Migration studies conducted between 1998 and 2001reveled that the pronghorn antelope herds make one of the longest annual migration among North American big game animals.the area around pinedale is laced with migration corridors used by thousand of mule deer and pronghorn every fall as they make their way south to their way south to their winter grounds on the mesa and the Green River Basin. Traffic on highway 191 which cuts across some of the migration corridors sometimes has to be stopped to let bunched-up pronghorn herds pass.5 Environmentalists feared that if the animals were prevented from reaching their winter ranges or if the winter ranges became inhospitable, the large herds would wither and die off.
Unfortunately, drilling operations create a great deal of noise and require the constant movement of many truck and other large machines, all of which can severely impact animals during the winter when they are already physically stressed and vulnerable due to their low calorie intake. Some studies had suggested that even the mere presence of humans disturbed the animals and led them to avoid an area. Consequently, the BLM required Questar to cease all drilling operations on the mesa each winter from November 15 to May 1. in fact, to protect the animals the led them to avoid an area. Consequently , the BLM required Questar to cease all drilling operation on the mesa each winter from November 15 to May 1. In fact, to protect the animals the BLM prohibited all persons, whether on foot or on automobile, from venturing into the area during winter. The BLM, however, made an exception for Questar truck and personnel who had to continue to haul off liquid wastes from wells that had already been drilled and that continued to operate during the winter (the winter moratorium prohibited only drilling operations, and completed wells were allowed to continue to pump gas throughout the year).
Being forced to stop drilling operations during the winter months was extremely frustrating and costly to Questar. Drilling crew had to be laid off at the beginning of winter, and new crews had to be hired and retrained every spring. Every fall the company had to pack up several tons of equipment, drilling rigs, and trucks and move them down from the mesa. Because of seasonal interruption in its drilling schedule, the full development of its oil fields was projected to take 18 years, much longer than it wanted. In 2004, Questar submitted a proposal to the Bureau of Land Management. Questar proposed to invest in a new kind of drilling rig that allowed up to 16wells to be dug from a single pad, instead of the traditional 1or2. the new technology (called directional drilling) aimed the drill underground at a slanted angel away from the pad-like the outstretched tentacles on an octopus-multiple distant locations could be tapped by several wells branching out from a single pad. This minimized the land occupied by the wells: while traditional drilling required 16 separate 2-4 acre pads to support 16 wells, the new “directional drilling” technology allowed a single pad to hold 16 wells. The technology also reduced the number of required road ways and distribution pipes since a single access road and pipe could now service the same number of wells that traditionally required 16 different road and 16 different pipes. Questar also proposed that instead of carrying liquid wastes away from operating wells on noisy tanker trucks, the company would build a second pipe system that would pump liquid wastes away automatically. These innovations, Questar pointed out, would substantially reduce any harmful impact that drilling and pumping had on the wildlife inhabiting the mesa. Using the new technology for the 400 additional wells the company planned to drill would require 61 pads instead of 150, and the pads would occupy 533 acres instead of 1,474.
The new directional drilling technology added about $500,000 to the cost of each well and required investing in several new drilling rigs. The added cost for the 400 additional wells Questar noted, however, that “the company anticipates that it can justify the extra cost if it can drill and complete all the wells on a pad in one continuous operation” that continued through the winter.6 if the company was allowed to drill continuously through the winter, it would be able to finish drilling all its wells in 9 years instead of 18, thereby almost doubling the company’s revenues from the project over those 9 years. This acceleration in its revenues, coupled with other saving resulting from putting 16 wells on each pad, would enable it to justify the added costs of directional drilling. In short, the company would invest in the new technology that reduced the impact on wildlife, but only if it was allowed to drill on the mesa during the winter months.
Although environmentalists welcomed the company’s willingness to invest in directional drilling, the y strongly opposed allowing the company to operate on the mesa during the winter when mule deer and antelope were there foraging for food and struggling to survive. The Upper Green River Valley Coalition of environmental group, issued a statement that read: “The company should be lauded for using directional drilling, but technological improvement should not come at the sacrifice of important safeguards for Wyomings’s wildlife heritage.” To allow the company to test the feasibility of directional drilling and to study its effects on wintering deer herds, the Bureau of Land Management allowed Questar to drill wells at a single pad through the winter of 2002-2003 and again through the winter of 2003-2004. the 5-year study would continue until 2007, and Questar hoped to be permitted limited drilling on the mesa during winter until then. In a preliminary report on the study, the Bureau of Land Management said there was “no conclusive data to indicate quantifiable, adverse effects to deer” from the drilling. The Upper Green River Vslley Coslition, however, sued the bureau for failing to adhere to its own rules when it allowed Questar and other companies to drill on mule deer range on the mesa during winter and for failing to conduct an analysis of the potential impact before granting the permits, as required by the National Environmental Policy Act. As of this writing, the suit has not been resolved.
1. What are the systemic, corporate, and individual issues raised in this case?
2. How should wildlife species like grouse or deer be valued, and how should that value be balanced against the economic interests of the of company like Questar?
3. In light of the U.S. economy’s dependence on oil, and in light of the environmental impact of Questar drilling operation, is Questar morally obligated to cease its drilling operation on the Pinedale Mesa? Explain
4. What, if anything, should Questar be doing differently?
5. In your view, have the environmental interest groups identified in the case behaved ethically?
CASE – 4
Becton Dickinson and Needle Sticks
During the 1990s, the AIDS epidemic posed peculiarly acute dilemmas for health workers. After routinely removing an intravenous system, drawing blood, or delivering an injection to an AIDS patient, nurses could easily stick themselves with the needle they were using. “Rarely a day goes by in any large hospital where a needle stick incident is not reported. “ In fact, needlestick injuries accounted for about 80 percent of reported occupational exposure to the AIDS virus among health care workers.2 It was conservatively estimated in 1991 that about 64 health care workers were infected with the AIDS virus each year as a result of needlestick injuries.3
AIDS was not the only risk posed by needlestick injuries. Hepatitis C, and other lethal diseases were also being contracted through accidental needlesticks. In 1990, the Center for Disease Control (CDC) estimated that at least 12,000 health care workers were annually exposed to blood contaminated with the hepatitis B virus, and of these 250 died as a consequence.4 Because the hepatitis C virus had been identified only in 1988, estimates for infection rates of health care workers were still guesswork but were estimated by some observers to be around 9,600 per year. In addition to AIDS hepatitis B, and hepatitis C, needlestick injuries can also transmit numerous viral, bacterial, fungal, and parasitic infection, as well as toxic drugs or other agents that are delivered through a syringe and needle. The cost of all such injuries was estimated at $400 million to $1 billion a year.5
Several agencies stepped in to set guidelines for nurses, including the Occupational Safety and Health Administration (OSHA). On December 6, 1991, OSHA required hospitals and other employers of health workers to (a) make sharps containers (safe needle containers) available to workers, (b) prohibit the practice of recapping needle by holding the cap in one hand inserting the needle with the other, and (c) provide information and training on needlestick prevention and training on needlestick prevention to employees.6
The usefulness of these guidelines was disputed.7 Nurses worked in high-stress emergency situations requiring quick action, and they were often pressed for time both because of the large number of patients they cared for and the highly variable needs and demands of these patients. In such workplace environments, it was difficult to adhere to the guidelines recommended by the agencies. For example, a high-risk source of needlesticks is the technique of replacing the cap on a needle (after it has been used) by holding the cap in one hand and inserting the needle into the cap with the other hand. OSHA guidelines warned against this tow-handed technique of recapping and recommended instead that the cap be placed on a surface and the nurse use a one-handed “spearing” technique to replace the cap. However, nurses were often pressed for time and, knowing that carrying an exposed contaminated needle is extremely dangerous, yet seeing no ready surface on which to place the needle cap, they would recap the needle using the two-handed technique.
Several analysts suggested that the nurse’s work environment made it unlikely that needlesticks would be prevented through mere guidelines. Dr. Janine Jaegger, an expert on needlestick injuries, argued that “trying to teach health care workers to use a hazardous device safely is the equivalent of trying to teach someone how to drive a defective automobile safely…. Until now the focus has been on the health care worker, with finger wagging at mistakes, rather than focusing on the hazardous product design…. We need a whole new array of devices in which safety is an integral part of the design.”8 The Department of Labor and Department of Health and Human Services in a joint advisory agreed that “engineering controls should be used as the primary method to reduce worker exposure to harmful substances.”9
The risk of contracting life-threatening diseases by the use of needles and syringes in health care setting had been well documented since the early 1980s. articles in medical journals in 1980 and 1981, for example, reported on the “problem” of “needle stick and puncture wounds” among health care workers.10 Several articles in 1983 reported on the growing risk of injuries hospital workers were sustaining from needles and sharp objects.11 Articles in 1984 and 1985 were sounding higher-pitched alarms on the growing number of hepatitis Band AIDS cases resulting from needlesticks.
About 70 percent of all the needles and syringes used by U.S. health care workers were manufactured by Becton Dickinson. Despite the emerging crisis, Becton Dickinson decided not to change the design of its needles and syringes during the early 1980s. To offer a new design would not only require major engineering, retooling, and marketing investments but would mean offering a new product that would compete with its flagship product, the standard syringe. According to Robert Stathopulos, who was an engineer at Becton Dickinson from 1972 to 1986, the company wanted “to minimize the capital outlay” on any new device.12 During most of the 1980s, therefore, Becton Dickinson opted to do no more than include in each box of needles syringes an insert warning of the danger of needlesticks and of the dangers of two-handed recapping.
On December 23, 1986, the U.S. Patent office issued patent number 4,631,057 to Norma Sampson, a nurse, and Charles B. Mitchell, an engineer, for a syringe with a tube surrounding the body of the syringe that could be pulled down to cover and protect the needle on the syringe. It was Sampson and Mitchell’s assessment that their invention was the most effective, easily usable, and easily manufactured device capable of protecting users from needlesticks, particularly in “emergency periods or other time of high stress”13 Unlike other syringe designs, theirs was shaped and sized like a standard syringe so nurses already familiar with standard syringe designs would have little difficulty adapting to it.
The year after Sampson and Mitchell patented their syringe, Becton Dickinson purchased from them an exclusive license to manufacture it. A few months later, Becton Dickinson began filed tests of earl models of the syringe using a 3-cc model. Nurses and hospital personnel were enthusiastic when show the product. However they warned that if the company priced the product too high, hospital, with pressures on their budgets rising, could not buy the safety. With concerns about AIDS rising, the company decided to market the product.
In 1988, with the filed test completed, Becton Dickinson had to decide which syringe would be market with the protective sleeves. Sleeves could be put on all of the major syringe sizes, including 1-cc, 3-cc, 5-cc, and 10-cc syringes. However, the company decided to market only a 3-cc version of the protective sleeve. The 3-cc syringes accounted for about half of all syringes used, although the larger size-5-cc and 10-cc syringes-were preferred by nurses when drawing blood.
This 3-cc syringe was marketed in 1988 under the trademarked name Safety-Lok Syringe and sold to hospitals and doctors’ offices for between 50 and 75 cent, a price that Becton Dickinson characterized as a “premium” price. By 1991, the company had dropped the price to 26 cents a unit. At the time, a regular syringe without any protective device was priced at 8 cents a unit and cost 4 cents to make. Information about the cost of manufacturing the new safety syringe was proprietary, but an educated estimate would put the costs of manufacturing each Safety-Lok syringe in 1991 at 13 to 20 cents. 14
The difference between the price of a standard syringe and the “premium” price of the safety syringe was an obstacle for hospital buyers. To switch to the new safety syringe would increase the hospital’s costs for 3-cc syringes by a factor of 3to 7. An equally important impediment to adoption was the fact that the syringe was available in only one 3-cc size, and so, as one study suggested, it had “limited applications.”15 Hospitals are reluctant to adopt, and adapt to, a product that is not available for the whole range of applications the hospital must confront. In particular, hospitals often needed the larger 5-cc and 10-cc sizes to draw blood, and Becton Dickinson had not made these available with a sleeve.
In 1992, a nurse, Maryann Rockwood (her name is disguised to protect her privacy), was working in a San Diego, California, clinic that served AIDS patients. That day she used a Becton Dickinson standard 5-cc syringe and needle to draw blood from a patient known to be infected with AIDS. After drawing the blood, she transferred the AIDS-contaminated blood to a sterile test tube called a Vacutainer tub by sticking the through the rubber stopper of the test tube, which she was holding with her other hand. She accidently pricked her finger with the contaminated needle. A short time later, she was diagnosed as HIV positive.
Maryann Rockwood sued Becton Dickinson, alleging that, because it alone had an exclusive right to Sampson and Mitchell’s patented design, the company had a duty to provide the safety syringe in all size and that by withholding other size from the market it had contributed to her injury. Another contributing factor, she claimed, was the premium price Becton Dickinson had put on its product, which prevented employers like hers from purchasing even those size that Becton Dickinson did make. Becton Dickinson quietly settled this and several other, similar cases out of court for undisclosed sums.
By 1992, OSHA had finally required that hospitals and clinics give their workers free hepatitis B vaccines and provide safe needle disposal boxes, protective clothing, gloves, and masks. The Food and Drug Administration (FDA) also was considering requiring that employers phase in the use of safety needles to prevent needlesticks, such as the new self-sheathing syringes that Becton Dickinson was now providing. If the FDA or OSHA required safety syringes and needles, however, this would hurt the U.S. market for Becton Dickinson’s standard syringes and needles, forcing in to invest heavily in new manufacturing equipment and a new technology. Becton Dickinson, therefore, sent its marketing director, Gary Cohen, and two other top executives to Washington, D.C., to convey privately to government officials that the company strongly opposed a safety needle requirement and that the matter should be left to “the market.” The FDA subsequently decided not to require hospitals to buy safety needles.16
The following year, a major competitor of Becton Dickinson announced that it was planning to market a safety syringe based on a new patent that was remarkably like Becton Dickinson’s. Unlike Becton Dickinson, however, the competitor indicated that it would market its safety device in all sizes and that it would be priced well below what Becton Dickinson had been charging. Shortly after the announcement, Becton Dickinson declared that it, too, had decided to provide its Safety-Lok syringe in the full range of common syringe sizes. Becton Dickinson now proclaimed itself the “leader” in the safety syringe market.
However, in 1994, the most trusted evaluator of medical devices, a nonprofit group named ECIR, issued a report stating that after testing it had determined that although Becton Dickinson’s safety-Lok syringe was safe that Becton Dickinson’s own standard syringe, nevertheless the safety-Lok “offers poor needlesticks protection.” The following year this low evaluation of the safety –Lok syringe was reinforced by the U.S. veteran’s Administration, which ranked the Safety – Lok Syringe below the safety products of other manufacturers.
The technology for safety needles took a giant step forward in 1998 when Retractable Technologies,
Inc., unveiled a new safety syringe that rendered needlesticks a virtual impossibility. The new safety, invented by Thomas Shaw, a passionate engineer and founder of Retractable Technologies, featured a syringe with a needle attached to an internal spring that automatically pulled the needle into the barrel of the syringe after it was used. When the plunger of the syringe was pushed all the way in, the needle snapped back into the syringe faster then the eye could see. Called the vanishpoint syringe, the new safety syringe required only one hand to operate and was acclaimed by nursing groups and doctors. Unfortunately, it was difficult for Retractable to sell its new automatic syringe because of a new phenomenon that hand emerged in the medical industry.
During the 1990s, hospitals and clinics had attempted to cut costs by reorganizing themselves around a few large distributors called Group Purchasing Organizations or GPOs. A GPO is an agent that negotiates prices for medical supplies on behalf of its member hospitals. Hospitals became members of the GPO by agreeing to buy 85 percent to 95 percent of their medical supplies from the manufacturers designated by the GPO, and their pooled buying power then enabled the GPO to negotiate lower prices for them. The two largest GPOs were Premier, a GPO with 1,700 member hospitals, and Novation, a GPO with 650 member hospitals. GPOs were accused, however, of being prey to “conflicts of interest” because they were paid not by the hospitals for whom they worked, but by the manufacturers with whom they negotiated prices (the GPO received from each manufacturer a negotiated percentage of the total purchases its member companies made from that manufacturer). Critics claimed that manufacturers of medical products in effect were paying off GPOs to get access to the GPO member hospitals. In fact, critics alleged, GPOs such as Premier and Novation no longer tried to bring their member hospitals the best medical products nor the lowest-priced products. Instead, critics alleged, GPOs chose manufacturers for their members based on how much a manufacturer was willing to pay the GPO. The more money (the higher percentage of sales) a manufacturer gave the GPO, the more willing the GPO was to put that manufacturer on the list of manufacturers from which its member hospitals had to buy their medical supplies. 17
When Retractable tried to sell its new syringe, which was recognized as the best safety syringe on the market and as the only safety syringe capable of completely eliminating all needlesticks in a nursing environment, it found itself blocked from doing so. In 1996, Becton Dickinson had gotten Premier GPO to sign an exclusive, 7 ½-year, $1.8 billion deal that required Premier’s member hospitals to buy at least 90 percent of their syringes and needles from Becton Dickinson. Around the same time, Becton Dickinson had signed a similar deal with Novation that required its member hospitals to buy at least 95 percent of their syringes and needles from Becton Dickinson. Because hospitals were now locked into buying their syringes and needles from Becton Dickinson, or suffer substantial financial penalties, they turned away Retractable’s salespeople, even when their own nursing recommended Retractable’s safety product better as and more cost-effective than Becton Dickinson’s.
Although Retractable’s safety syringe was almost double the cost of Becton Dickinson’s, hospitals that adopted Retractable’s syringe would save money over the long run because they would not have to pay any of the substantial costs associated with having their workers suffer frequent needlesticks and needlestick infections. The Center for Disease Control (CDC) estimated that each needlestick in which the worker was not infected by any disease cost a hospital as much as $2,000 for testing, treatment, counseling, medical costs, and lost wages, plus unmeasurable emotional trauma, anxiety, and abstention from sexual intercourse for up to a year. Those needlesticks in which the victim was infected by HIV, hepatitis B or C, or some other, potentially lethal infection, cost a hospital between $500,000 to more than $1 million and cost the victim anxiety, sickness from drug therapy, and, potentially, life itself. Retractable’s syringe completely eliminated all of these costs. Because all of the other syringes then on the market, including Becton Dickinson’s Safety-Lok, still allowed some needlesticks to occur, they could not completely eliminate all the costs associated with needlesticks and so were not as cost-effective. (A CDC study found that Becton Dickinson’s Safety-Lok, when tested by hospital health workers in three cities from 1993 to 1995, had cut needle-stick injuries only from 4 per 100,000 injections down to 3.1 per 100,000 injections, a reduction of only 23 percent, the worst performance of all the safety devices tested.) An econometric study commissioned by Retractable proved that its safety syringe was the most cost effective syringe on the market.
In October 1999, ECRI, the nation’s most respected laboratory for testing medical products, rated Becton Dickinson’s Safety-Lok syringe “unacceptable” as a safety syringe, saying it might actually cause an increase in needlesticks because it required two hands to use it and one hand might accidentally touch the needle. It simultaneously gave Retractable’s Vanishpoint syringe its highest rating as a safety syringe, the only safety syringe to achieve this highest level. Becton Dickinson objected strenuously to the low rating of its own syringe, and in 2001, the testing lab raised the rating for the safety-Lok a notch to “not recommended.” Retractable’s Vanishpoint syringe, however, continued to receive the highest rating. In spite of being recognized as the best and most cost-effective technology for protecting health care workers from being infacted through needlesticks, Retractable still found itself blocked out of the market by the long-term deals that Becton Dickinson had negotiated with the major GPOs.18
In1999, California became the first state to require its hospitals to provide safety syringes to its workers. Then, in November 2000, the Needlestick safety and Prevention Act was signed into low. The act required the use of safety syringes in hospitals and doctor’s offices. In 2001, OSHA incorporated the provisions of the Needlestick Safety and Prevention Act, finally requiring hospitals and employers to use safety syringes and significantly expanding the market for safety syringes, a development that is expected to bring lower prices. None of this legislation required a specific type or brand of syringe and Becton Dickinson’s safety devices were stocked by most GPO member hospitals.
Continuing to find itself locked out of the market by Becton Dickinson’s contracts with Premier and Novation, Retractable sued Premier, Novation and Becton Dickinson in federal court alleging that they violated antitrust laws and harmed consumers and numerous health care workers by using the GPO system to monopolize the safety needle market.19 In 2003, Premier and Novation settled with Retractable out of court, agreeing to henceforth allow its member hospitals to purchase Retractable’s safety syringes when they wanted. In 2004, Becton Dickinson also settled out of court, agreeing to pay Retractable $ 100 million in compensation for the damage Becton Dickinson inflicted on Retractable. During the 6 years that Becton Dickinson’s contracts prevented Retractable and other manufacturers from selling their safety needles to hospitals and clinics, thousands of health workers continued to be infected by needlesticks each year.
1. In your judgment, did Becton Dickinson have an obligation to provide the safety syringe in all its sizes in 1991? Explain your position, using the materials from this chapter and the principles of utilitarianism, rights, justice, and caring.
2. Should manufacturers be held liable for failing to market all the products for which they hold exclusive patents when someone’s injury would have been avoided if they had marketed those products? Explain your answer.
3. In your judgment, who was morally responsible for Maryann Rockwood’s accidental needlestick: Maryann Rockwood? The clinic that employed her? The government agencies that merely issued guidelines? Becton Dickinson?
4. Evaluate the ethics of Becton Dickinson’s use of the GPO system in the late 1990s. Are the GPO’s monopolies? Are they ethical? Explain.