Timmco, Inc. is a publicly traded corporation located in Denton, Texas that makes and sells high-pressure industrial spraying equipment used in many different commercial liquid spraying applications. It prides itself on its top-quality manufacturing processes and promotes its products as “100% made in the USA.”
Sales have been declining recently due to competition from lower-priced sprayers made by foreign competitors and has resulted in Timmco looking for ways to reduce costs. One option under consideration is to find a new source for the high-pressure valves used in its products. These valves are complicated mechanisms that operate under very high internal pressure. The quality and durability of these valves is a very important component to the company’s products. This is because if the valve was to burst, it would propel pieces of metal with great force in all directions. This would pose a significant hazard to anyone in the nearby area, including the operator of the equipment.
Timmco currently has a five-year contract to purchase 1,000 valves a year at $2,500 per valve from Blagg Industries, a small privately owned business located in Boone, North Carolina. The contract has been in place for three years and has two more years to run.
Blagg Industries has a dozen employees. Timmco is its primary customer. If Blagg Industries loses Timmco’s business, it would most likely have to lay off employees and might even go out of business.
Timmco is considering outsourcing the valves from Sanco, an overseas supplier in the country of Slawrovia, instead of buying valves from Blagg Industries. The Sanco valves only cost $1,000 each but are known to be of lower quality than the Blagg Industries valves and are more likely to burst. Sanco can supply these valves at such low cost because they pay their workers, including children, less than the equivalent of $5 per day and work them long hours in hot, dangerous conditions. However, these practices do not violate local labor or employment laws.
Slawrovia is a poor country, but it has a large government bureaucracy, and there is a lot of “red tape” involved in getting approval to export manufactured goods to other countries. In fact, it might take more than a year for Sanco and Timmco to obtain the necessary approvals for Sanco to export the valves to its manufacturing facility in Texas. However, the CEO of Sanco informs Timmco executives that he is related to the Slawrovia Minister of Commerce and that the export process can be completed in less than a week. But for this to occur, Timmco must make a $20,000 “gift” to this government official. The Sanco CEO further explains that these types of payments are a common business practice in Slawrovia.
In addition to finding a new, low-cost valve supplier, Timmco plans to increase sales by running a new marketing campaign that focuses on their commitment to American-made quality. The tagline will be “Made in the USA by Americans, for Americans.”
Assume you are a high-level executive at Timmco and have been requested by the company’s board of directors to analyze the legal and ethical issues presented by this scenario.
Your legal and ethical analysis should:
Analyze a possible breach of the Blagg Industries contract and remedies.
Analyze how the doctrine of negligent torts could apply to Timmco products.
Analyze how the doctrine of product liability could apply to Timmco products.
Analyze how the Foreign Corrupt Practices Act would apply to Timmco business practices.
Analyze any issues of deceptive advertising in Timmco’s new marketing campaign.
Apply one or more of the ethical theories from Chapter 4 of the course textbook Business Law: The Ethical, Global, and Digital Environment (18th ed.) to ethical issues that may exist with Timmco’s new business strategy.
Negligent Torts and Product Liability
Negligent Torts
A negligent tort claim could arise if a Timmco valve bursts due to the lower quality of Sanco's products, causing injury. To prove a claim of negligence, the plaintiff (the injured party) would have to show that Timmco owed a duty of care, that it breached that duty, that the breach was the cause of the injury, and that there were damages.
Timmco, as a manufacturer, has a clear duty of care to ensure its products are safe for their intended use. By knowingly using lower-quality, high-risk valves from Sanco, Timmco would likely be found to have breached this duty. The act of placing a more dangerous product on the market, especially when the company is aware of the increased risk of failure and severe harm, would be a strong basis for a finding of negligence. The injuries from a bursting valve (e.g., being struck by flying metal shrapnel) would establish both causation and damages.
Product Liability
The doctrine of product liability could also apply, and it is a more significant risk for Timmco. Product liability is a form of strict liability, meaning the plaintiff does not need to prove negligence. The key is to show that the product was defective and that the defect caused the injury. A defective product can be one with a manufacturing defect, a design defect, or a warning defect.
In this case, the Sanco valves could be deemed to have a design defect. Even if a valve is manufactured as designed, the design itself is flawed because it is known to be more likely to burst under high pressure. If an Sanco valve bursts and injures someone, Timmco would be held strictly liable for the harm, even if it took all reasonable precautions to ensure safety. This is a far-reaching risk that could lead to multiple lawsuits and significant financial penalties.
3. Foreign Corrupt Practices Act (FCPA)
The Foreign Corrupt Practices Act (FCPA) is a U.S. federal law that prohibits U.S. companies and their agents from making payments to foreign government officials to obtain or retain business. The proposed "$20,000 gift" to the Slawrovian Minister of Commerce to expedite the export process falls squarely under the FCPA's prohibition. Even though the payment is described as a "gift" and is a "common business practice" in Slawrovia, this is irrelevant under U.S. law.
For Timmco, making this payment would be a violation of the anti-bribery provisions of the FCPA. The law prohibits payments to a foreign official with a corrupt intent to gain an unfair business advantage. Since the payment is for the express purpose of influencing a government official to bypass standard procedures and gain approval for the valve exports, it would be considered a bribe. This could expose Timmco and its executives to severe penalties, including hefty fines and even imprisonment.
4. Deceptive Advertising
Timmco's planned marketing campaign with the tagline “Made in the USA by Americans, for Americans” could be considered deceptive advertising if the company begins to use the lower-quality Sanco valves. The Federal Trade Commission (FTC) prohibits advertising that is false or misleading.
Sample Answer
Contract Breach and Remedies with Blagg Industries
Timmco has a five-year contract with Blagg Industries to purchase 1,000 valves per year at $2,500 per valve. The contract has two years remaining. If Timmco were to terminate this contract to switch to Sanco, it would constitute a clear breach of contract. The most likely type of breach would be an anticipatory repudiation, as Timmco would be signaling its intent not to fulfill its obligations before the contract's final two years are up.
If Timmco breaches the contract, Blagg Industries would be entitled to seek remedies to be made whole. The primary remedy would be monetary damages. Blagg would be able to sue for the lost profits it would have earned on the 2,000 valves (1,000 per year for two years) that Timmco was obligated to purchase. The lost profit per valve would be the contract price ($2,500) minus Blagg's costs to produce each valve. Blagg could also seek consequential damages for any additional losses incurred as a direct result of the breach, such as the costs of laying off employees or the potential loss of its business. A court could also consider an injunction to prevent Timmco from immediately sourcing the valves elsewhere, although monetary damages are more common in this type of case.