2. Read and Analyze the 'Case Study", and answer following questions:

How should Baxendale respond to Graymatter? What other actions, if any, should Baxendale undertake? What should Graymatter do in response to Leader's "suggestion"? how should she handle the media? How should she respond to the Minister of Health?

Case Study

Medical Device Corporation ("MDC") manufactures and markets medical equipment. A relatively young company, MDC was privately held until recently when it made an initial public offering of its stock, which is now listed on a national stock exchange. Just prior to its public offering of its stock, it hired a new chief executive officer, John J. Leader, whose future compensation is greatly dependent upon the price of MDC's stock because of stock options granted to him. MDC employs approximately 1,000 people and although it is a relatively young company, has developed a reputation for treating its employees quite well.

MDC has recently developed and begun to market overseas a new type of kidney dialysis machine which not only performs its tasks in substantially less time than existing dialysis machines, but at a substantially reduced cost thereby enabling many more patients, especially in the third world, to receive its benefits. It has been the release of this machine that has enabled MDC to offer its stock publicly and the expectations of the company generally and its executives particularly are closely tied to the success of the sale of this particular product. In fact, it is expected that the sales from this product will enable MDC to develop several other promising medical treatment products that would be of great benefit not only to MDC, but to persons suffering certain blood disorders around the world.

It has come to the attention of Susan Q. Graymatter, Executive Vice-President of Research and Development for MDC that because of a possible defect in the dialysis machine, the machine may have a failure rate of 15% resulting in the probable death of certain patients. This fact has been informally reported to Graymatter by a high government official of the one country, Graftoria, wich is a third-world country, where the machine is presently being marketed. It should be noted that the introduction of this machine in Graftoria is expected to save thousands of lives because very few dialysis machines are available to the population because of the high cost of other machines. Therefore, even with a 15% failure rate, the machine is, in fact, saving the lives of affected persons in the population, who have no other viable alternative. In fact, on a recent visit to such country, CEO Leader met several patients and their families whose gratitude to him and MDC was genuine and moving.

The Minister of Health of Graftoria has notified Graymatter of the failure rate. He has also notified Graymatter that he has received written interrogatories (questions to be answered under oath) from the American attorneys of one of the first and few patients to receive dialysis from MDC's machine in the United States, who claim that their client, now deceased has died as a result of the use of this machine. The minister of Health has suggested to Graymatter that he might be disinclined to cooperate with the attorneys or to phrase his answers in a way that would not reveal any potential problems with the machine and further that, in his country, he has no legal obligation to keep a record of the failure rate. However, he has made it equally clear that he would take an entirely different position and even perhaps report such failure rate to the U.S. Food and Drug Administration, which regulates such machines in the United States, and also might allow no future use of the machine in Graftoria, unless he received a substantial "campaign contribution" for himself, and presumably, other high government officials. Graymatter believes that these types of payments are not unusual and may even be considered an accepted practice in Graftoria.

Upon learning this, Graymatter has met privately with CEO Leader and explained what she has learned. She advises him that MDC must disclose these results to the Food and Drug Administration and stop all sales and use of the machine until it can be determined exactly why the machine is, in certain instances, failing. She does not, at this time, know how much time will be required to determine the cause of the defect and modify the machine, but feels confident that six months to a year would not be an unreasonable time frame.

CEO Leader states that the sale of the machine allows MDC to do well and do good at the same time in that the sale of the machine not only will be profitable to MDC and its employees but is also savings lives. Leader relates, with great emotion, the stories of the people in the third-world country who have expressed their gratitude to MDC for providing this devise and further explains that if MDC cannot market the device for six months or a year, not only will the company's stock price become depressed, but the result will likely be MDC's bankruptcy since so much has been invested into the development of the machine. In fact, he states that at least several hundred of MDC's employees would be terminated, the survival of the company would be in question, and the research and development of several other promising devices which, Leader asserts, would also allow the company to do good and do well would also and thereby depriving both patients and MDC of their benefits. Further, Leader argues, assuming that some Graftorian patients may die after using the machine, in total, more lives will be saved since so few Graftorians would otherwise receive treatment at all. Additionally, it is not certain that at least some of those patients would have died anyway because of the poor state of available medical treatment and other factories in Graftoria. Leader then goes on to "suggest" to Graymatter that it would be in her best career interests to resolve the problems with the machine without disclosing the same to anyone outside MDC and then only to those in the company who have an absolute need to know. Moreover, he directs her to make the "campaign contribution" to Graftoria's Minister of Health. It is apparent to Graymatter that if she fails to follow Leader's suggestion, her job, her stock options, and possibly her reputation would certainly be jeopardized, not to mention the fortunes of the company as well as those of many of its employees.

Graymatter had a long standing close personal relationship with Hadley V. Baxendale, MDC's General Counsel. Not only has Baxendale been of great help to Graymatter in various company legal matters but has also provide her with personal legal advice on occasion. Graymatter and Baxendale and their respective spouses see each other socially, and in fact, Baxendale has even provided some minor legal services to Graymatter's husband, who is unemployed due to disability.

Graymatter visits Baxendale in his office and related the entire story to him. Of course, Baxendale is familiar with the interrogatories sent to the Graftoria Minister of Health because he is intimately involved with the product liability case brought against MDC. Baxendale also owns substantial stock options. Graymatter asks Baxendale for advice as to whether she is obligated to disclose the problems with the machines to FDA, whether she should follow Leader's "suggestion," which includes arranging for the payment to the Graftoria Minister of Health or whether she should take any other action to cause the recall of the machine until its problems can be resolved. She further explains that there is some urgency to the issue because, among other things, Graymatter and Leader are scheduled to meet with members of the financial, scientific, and general press in a few days to discuss MDC generally and this machine which promises to be a blockbuster product for MDC. CEO Leader expects that after this meeting with the press, the price of MDC's stock will increase dramatically.