The bidding war for Guidant Corporation came to an end this week when Boston Scientific Corp. caught the wedding bouquet after Johnson & Johnson elected not to counter Boston’s $27 billion bid.

     Yesterday, however, the legal liabilities that have dogged Guidant since last year reared their ugly head again. The Food and Drug Administration issued a warning letter about “systemic” quality control violations at three Boston Scientific plants. In response to the news Boston Scientific’s stock sank nearly 7% to $21.63.

     Unfortunately, the Guidant transaction continues to teach us lessons about the consequences of poor legal literacy:

• legal liabilities, whether the product recall costs associated with defective products or regulatory compliance failures, impact the bottom line,
• financial markets are ruthless about perceptions of value and don’t wait for due process (see further the recent Livedoor case),
• discounted legal risk leads to self-defeating math and decision making biases whose fragile construct collapses when contradictory evidence surfaces and reaches the top of mind. 

     It just goes to show how regulatory compliance issues and product liability go to the heart of a business model and its sustainability.  They should not be relegated to an ancillary housekeeping status.

     A new watchdog group plans on collecting information about spyware companies and being a clearinghouse of information about “badware and the bad actors who spread it.”  The Stop Badware Coalition describes themselves as a “Neighborhood Watch” campaign whose information will allow consumers to make educated choices about what programs they download on to their computers.  

     Led by the Harvard Law School Berkman Center for Internet & Society and the Oxford University Internet Institute, the groups also enjoys corporate support from the likes of Google, Lenovo, and Sun Microsystems.   

     The Washington Post also reports  that:

The group also will spotlight firms that make the software in an effort to shame them and will gather data that could lay the groundwork for class-action lawsuits against them.

     Keep an eye on this one.  It could be a good example of how intangible reputation risk translates into legal risk and very tangible legal costs.