1. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 1 The Legal Environment: Business Law and Government Regulation

2. Elements of a Valid Contract Agreement Agreement  Offer  Acceptance Consideration Consideration Contractual capacity Contractual capacity Legality Legality Contract Plus Two Supplemental Requirements: Genuineness of Assent Genuineness of Assent Form Form Chapter 22 Business Law and Government Regulation Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 2

3. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 3 Agreement Governed by the objective theory of contracts, which states that a party’s intent to enter into a contract is measured by outward facts – words, conduct, and circumstances - rather than by subjective intentions Governed by the objective theory of contracts, which states that a party’s intent to enter into a contract is measured by outward facts – words, conduct, and circumstances - rather than by subjective intentions Comprised of an offer and an acceptance Comprised of an offer and an acceptance

4. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 4 Offer A promise to do or to refrain from doing something in the future A promise to do or to refrain from doing something in the future For a valid offer to exist, there must be: For a valid offer to exist, there must be:  Serious objective intent  Reasonably certain terms  Communication of the offer

5. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 5 Offer Generally, an offeror can revoke an offer at any time before the offeree accepts it Generally, an offeror can revoke an offer at any time before the offeree accepts it Two exceptions: Two exceptions:  Option contract – A separate contract in which a potential buyer purchases the right to keep an offer open for a specific time period  Merchant’s firm offer – Under the UCC, a merchant who makes an offer in a signed writing to sell goods cannot revoke that offer for the stated period, which cannot exceed 3 months

6. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 6 Acceptance Mirror image rule - Common law requires the offeree’s acceptance to exactly match the offeror’s offer Mirror image rule - Common law requires the offeree’s acceptance to exactly match the offeror’s offer If offeree changes the terms in the offeror’s offer, he or she is making a counteroffer, which is a rejection of the original offer If offeree changes the terms in the offeror’s offer, he or she is making a counteroffer, which is a rejection of the original offer Generally, silence by an offeree does not indicate acceptance Generally, silence by an offeree does not indicate acceptance

7. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 7 Consideration Something of legal value, bargained for, and given in exchange for an act or a promise Something of legal value, bargained for, and given in exchange for an act or a promise Consideration does not have to have any economic value – just legal value Consideration does not have to have any economic value – just legal value Exception: Promissory estoppel: Exception: Promissory estoppel:  Promise must be likely to induce reliance  Justifiable reliance on the promise  Justice is better served by enforcing the promise

8. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 8 Contractual Capacity The ability to enter into a contract The ability to enter into a contract Three groups: Three groups: 1. Minors – Most contracts that minors (those under the age of 18) create are voidable at the minor’s option 2. Intoxicated people – If a person’s reason and judgment were so impaired by alcohol or drugs at the time of creating a contract that he cannot understand its consequences, the contract is voidable

9. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 9 Contractual Capacity The ability to enter into a contract The ability to enter into a contract Three groups: Three groups: 3. People with mental incapacities – Depending on the mental state of the person, a contract can be void, voidable, or valid  A person who is insane cannot create a valid contract; these contracts are void

10. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 10 Legality The purpose of the parties’ contract must be legal The purpose of the parties’ contract must be legal Laws vary from one state to another, but issues include: Laws vary from one state to another, but issues include:  Contracts that violate usury laws  Sabbath (Blue) laws  Gambling contracts

11. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 11 Genuineness of Assent Verifies that the parties’ agreement is genuine Verifies that the parties’ agreement is genuine  Mistakes  Misrepresentation  Fraud  Duress  Undue influence

12. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 12 Form Writing requirement – “statute of frauds” Writing requirement – “statute of frauds” Contracts required to be in writing: Contracts required to be in writing:  Sale of land  Other interests in land  Contracts that cannot be performed within one year of their formation  Collateral contracts  Administrator of an estate to pay a debt of the deceased  Sale of goods priced at $500 or more

13. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 13 Contract Principles A written contract is preferred to an oral contract; however, most oral contracts are just as enforceable as written ones A written contract is preferred to an oral contract; however, most oral contracts are just as enforceable as written ones Oral agreements should be followed up by written confirmations Oral agreements should be followed up by written confirmations A contract for the sale of goods priced at $500 or more must be in writing A contract for the sale of goods priced at $500 or more must be in writing Contract terms should be clear and specific Contract terms should be clear and specific Any handwritten changes to a written contract should be initialed by both parties Any handwritten changes to a written contract should be initialed by both parties

14. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 14 A complete contract covers all material items to be enforced A complete contract covers all material items to be enforced Past contractual practices have legal weight in a contract dispute Past contractual practices have legal weight in a contract dispute As a buyer, you can reject goods that do not meet specifications or are defective As a buyer, you can reject goods that do not meet specifications or are defective As a seller, you are entitled to prompt notification of shipment acceptance or rejection As a seller, you are entitled to prompt notification of shipment acceptance or rejection Courts will likely interpret unclear terms against the party who wrote the contract Courts will likely interpret unclear terms against the party who wrote the contract Contract Principles

15. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 15 The Uniform Commercial Code (UCC) A comprehensive document drafted in the 1940s that assembled a uniform set of laws across the states to govern routine business transaction. Its provisions reflect the way people conduct business A comprehensive document drafted in the 1940s that assembled a uniform set of laws across the states to govern routine business transaction. Its provisions reflect the way people conduct business The UCC contains ten articles, but Article 2, which governs the sale of goods, affects many small businesses The UCC contains ten articles, but Article 2, which governs the sale of goods, affects many small businesses

16. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 16 The UCC applies to every sale of goods, but it imposes a higher standard on professional merchant sellers and sometimes includes rules that vary slightly or substantially from basic contract law The UCC applies to every sale of goods, but it imposes a higher standard on professional merchant sellers and sometimes includes rules that vary slightly or substantially from basic contract law The Uniform Commercial Code (UCC)

17. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 17 Who Is a Merchant? 1. A merchant is one who deals in goods of the kind involved in the sales contract (e.g. a sporting goods retailer buying sporting goods) 2. A merchant is one who, by occupation, holds himself out as having knowledge or skill pertaining to the practices or goods in the sale (e.g. a bank selling a repossessed car) 3. A person who employs a merchant as a broker or an agent has merchant status for that transaction (e.g. “gentleman farmer” who hires a broker to buy livestock for him) The UCC defines a merchant in three ways:

18. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 18 Sales Warranty A promise or a statement of fact by a seller that a product will meet certain standards A promise or a statement of fact by a seller that a product will meet certain standards Types of warranties: Types of warranties:  Express warranties  Implied warranties Warranty of title Warranty of title Warranty of merchantability Warranty of merchantability Warranty of fitness for a particular purpose Warranty of fitness for a particular purpose

19. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 19 Product Liability Negligence – when a manufacturer or seller fails to do something that a reasonable person would do Negligence – when a manufacturer or seller fails to do something that a reasonable person would do  Negligent design  Negligent manufacturing  Failure to warn Strict liability – when a manufacturer is liable for its actions no matter what its intentions or the extent of its negligence Strict liability – when a manufacturer is liable for its actions no matter what its intentions or the extent of its negligence

20. Source: "Product Liability Cases Commenced," Judicial Business of the United States Courts 2006.

21. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 21 Protecting Intellectual Property Rights Three important tools: Patents Patents Trademarks and service marks Trademarks and service marks Copyrights Copyrights

22. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 22 Patents Patent - a grant from the U.S. Patent and Trademark Office (PTO) to the inventor of a product, giving the exclusive right to make, use, or sell the invention in the U.S. for 20 years from the date of filing the patent application Patent - a grant from the U.S. Patent and Trademark Office (PTO) to the inventor of a product, giving the exclusive right to make, use, or sell the invention in the U.S. for 20 years from the date of filing the patent application P.T.O. has issued more than 7 million patents to date P.T.O. has issued more than 7 million patents to date

23. Source: U.S. Patent and Trademark Office.

24. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 24 Obtaining a Patent Establish novelty Establish novelty Document the device Document the device Search existing patents Search existing patents Study search results Study search results Submit the patent application Submit the patent application Prosecute the patent application Prosecute the patent application

25. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 25 Trademarks Trademark - any distinctive word, symbol, name, logo, slogan, or trade dress that a company uses to distinguish its product from other goods on the market Trademark - any distinctive word, symbol, name, logo, slogan, or trade dress that a company uses to distinguish its product from other goods on the market Any business that claims a trademark can use the  symbol Any business that claims a trademark can use the  symbol Only those businesses that have registered their trademarks with the PTO can use the ® symbol Only those businesses that have registered their trademarks with the PTO can use the ® symbol

26. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 26 Trademarks Trademarks can also cover symbols, shapes, colors, and sounds - all part of “trade dress” Trademarks can also cover symbols, shapes, colors, and sounds - all part of “trade dress” 1.5 million trademarks registered in U.S. 1.5 million trademarks registered in U.S. A service mark, noted by the SM symbol is the same as a trademark except that it identifies and distinguishes the source of a service A service mark, noted by the SM symbol is the same as a trademark except that it identifies and distinguishes the source of a service

27. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 27 Copyrights Copyright - an exclusive right that protects the creator of original works of authorship, such as literary, dramatic, musical, and artistic works – e.g., a video game Copyright - an exclusive right that protects the creator of original works of authorship, such as literary, dramatic, musical, and artistic works – e.g., a video game The  symbol denotes a copyrighted work The  symbol denotes a copyrighted work

28. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 28 The Law of Agency Agent’s duties: Loyalty Loyalty Performance Performance Notification Notification Duty of Care Duty of Care Accounting Accounting

29. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 29 The Law of Agency Principal’s duties: Compensation Compensation Reimbursement Reimbursement Cooperation Cooperation Safe working conditions Safe working conditions

30. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 30 Bankruptcy Chapter 7: Liquidation - Most common type (70% of all filings) Chapter 7: Liquidation - Most common type (70% of all filings)  Business ceases to exist after bankruptcy proceeding is completed Chapter 11: Reorganization - Company is protected from creditors' legal actions while formulating a reorganization plan Chapter 11: Reorganization - Company is protected from creditors' legal actions while formulating a reorganization plan Chapter 13: Individual debtors – Consumer version of Chapter 11 bankruptcy Chapter 13: Individual debtors – Consumer version of Chapter 11 bankruptcy  Less complex and less expensive

31. Source: American Bankruptcy Institute, 2007.

32. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 32 Government Regulation NFIB Study: NFIB Study:  Cost of complying with government regulation cost businesses $1.1 trillion per year  NFIB study: For companies with fewer than 20 employees, costs of complying with government regulations is $7,647 per employee vs. $5,411 per employee for large companies

33. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 33 Government Regulation Trade Practices Trade Practices  Sherman Antitrust Act  Clayton Act  Federal Trade Commission Act  Robinson-Patman Act Consumer Protection Consumer Protection

34. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 34 Consumer Credit Consumer Credit  Consumer Credit Protection Act (Truth-in-Lending Act)  Fair Credit Billing Act  Equal Credit Opportunity Act  Fair Credit Reporting Act  Fair Debt Collection Practices Act Government Regulation

35. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 35 Environment Environment  Clean Air Act  Clean Water Act  Resource Conservation and Recovery Act Government Regulation

36. Chapter 22 Business Law and Government Regulation Copyright 2009 Prentice Hall Publishing Company 36 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall