What you’ll learn to do: explain how ethical dilemmas in business-to-business marketing differ from those in consumer marketing

In June 2013, Los Angeles United School District (LAUSD), the second largest school district in the U.S., announced that it had signed a $30 million contract with Apple to provide students with iPads that were preloaded with educational software from Pearson PLC. It was an ambitious education technology initiative that promised to give students new learning tools and technology literacy.

By the end of 2015 the superintendent would resign, the program would be canceled, Pearson’s philanthropic foundation would be closed, the companies would pay a $6.4 million settlement to the school district to prevent litigation, and the FBI would be involved in a criminal probe of the program. It would be hard to imagine a worse result for any of the parties involved.

Circumventing the Public Bid Process

California law requires that such large projects go to public bid, which this project did, but well before the bid process, the email record between LAUSD Superintendent John Deasy and then CEO of Pearson Marjorie Scardino suggested that deals were made to purchase Pearson curriculum and Apple hardware. In fact, Superintendent Deasy made the initial introduction between Scardino and Apple CEO. In an email to Scardino, Deasy writes:

I wanted to let you know I have [sic] an excellent meeting with Tim at Apple last Friday. The meeting went very well and he was fully committed to being a partner. He said he and his team will take 5 days to present a price plan and scope of partnership. He was very excited about being a partner with Pearson. I think it would be good for you to loop back with him at this point. I will reach out to you again in a week.^[1]

Deputy Superintendent Jaime Aquino was tasked to work with Pearson on the project in advance of the bid process. His email messages indicate that he was attempting to influence the bid process in Pearson’s favor. His email messages to Pearson executives include the following statements:

I am not sure if legally we can enter into an agreement when we have not reviewed the final product for each grade and if the materials have not been approved by the state.

I believe we would have to make sure that your bid is the lowest one.^[2]

Violating the Restriction on Nonprofit Philanthropy

Pearson’s non-profit philanthropy foundation was also involved in securing the deal, which violated certain federal restrictions. A Pearson Foundation vice president, Sherry King, was deeply involved in discussions with top officials at the Los Angeles Unified School District about selling the district the new Common Core digital curriculum in 2012 and 2013, well in advance of the formal bid process. The Pearson Foundation was providing education leadership grants to LAUSD as early as 2007.^[3]

The Pearson Foundation came under fire for another tactic. The New York Times reported:

In recent years, the Pearson Foundation has paid to send state education commissioners to meet with their international counterparts in London, Helsinki, Singapore and, just last week, Rio de Janeiro.

The commissioners stay in expensive hotels, like the Mandarin Oriental in Singapore. They spend several days meeting with educators in these places. They also meet with top executives from the commercial side of Pearson, which is one of the biggest education companies in the world, selling standardized tests, packaged curriculums and Prentice Hall textbooks.^[4]

The New York Times reported that Gavin Payne of California participated in an expense-paid trip to Singapore.

The Pearson Foundation was also fighting battles over its tactics in New York state, where the New York state attorney general won a $7.7 million judgment against the foundation. His written statement read:

The fact is that Pearson is a for-profit corporation, and they are prohibited by law from using charitable funds to promote and develop for-profit products. I’m pleased that this settlement will direct millions of dollars back to where they belong.

The Pearson Foundation board announced that it was closing the foundation in December 2013, after the New York judgment.

Poor Execution from All Players

Almost immediately after the district announced the deal, Apple unveiled new, updated iPads—in other words, from the get-go, students in the district would be receiving out-of-date devices. The cost the district was paying per iPad was actually higher than the regular consumer price. Many schools did not have the Wi-Fi infrastructure needed to support devices for all students. The district hadn’t created policies or plans for loss or theft. Students bypassed security protocols so they could install music and video apps. The iPads were supposed to come preloaded with Common Core–aligned curriculum, designed by the education behemoth Pearson. But the curriculum was incomplete. A report^[5] on the district’s iPad program revealed that only one teacher actually used the Pearson materials.^[6]

The Fallout

In October 2014, John Deasy resigned his role as superintendent.

In December 2015, with the help of a grand-jury subpoena, the FBI seized twenty boxes of documentation related to the procurement process. No charges have been made since the seizure.

Immediately after the subpoena and FBI seizure, Deasy’s successor canceled the contract with Apple (and therefore Pearson).

In September 2015, the vendors (Apple, Pearson, and hardware-provider Lenovo)collectively agreed to pay LAUSD a $6.4 million settlement. Pearson has agreed to pay the full $6.4 million.

When businesses engage in selling to other businesses or to government entities, the laws, policies, norms, and ethics change. Some challenges involved in marketing to consumers are minimized, or go away altogether, but other ones arise. In this module we will explore the unique ethical challenges and opportunities in business-to-business marketing.

The specific things you’ll learn in this section include:

• Explain how B2B marketing creates unique ethical risks and challenges
• Describe the risks associated with customer gifts and bribes

Learning Activities

The learning activities for this section include the following:

• Reading: Ethics in B2B Marketing
• Reading: Gifts and Bribes
• Self Check: B2B and B2C Marketer Dilemmas