CHAPTER 1 The Legal and International Foundations

The Nature of Law Law is a body of enforceable rules governing relationships among individuals and between individuals and their society. Three important schools of legal thought: Natural law tradition. Legal positivism. Legal realism.

Natural Law Tradition One of the oldest and most significant schools of legal thought. Those who believe in natural law hold there is a universal law applicable to all human beings and that this law is of a higher order than positive, or conventional law.

Legal Positivism A school of legal thought centered on the assumption that there is no law higher than the laws created by the government. Laws must be obeyed, even if they are unjust, to prevent anarchy.

Legal Realism A popular school of legal thought during the 1920s and 1930s. Legal realists generally advocated a less abstract and more realistic approach to the law, an approach that would take into account customary practices and the circumstances in which transactions take place. The school left a lasting imprint on American jurisprudence.

Business Activities The law impacts every-day business transactions. Many different laws may affect a single business transaction. Ethics and the legal environment. What is the relationship? What is the relationship between ethics and profits?

Sources of American Law Constitutional Law Statutory Law Administrative Law Case Law and Common Law Doctrines

Sources of American Law Which source of law takes priority in the following situations, and why? A federal statute conflicts with the U.S. Constitution. A federal statute conflicts with a state constitution. A state statute conflicts with the common law of that state. A state constitutional amendment conflicts with the U.S. Constitution. A federal administrative regulation conflicts with a state constitution.

Constitutional Law The law as expressed in the U.S. Constitution and the various state constitutions. The U.S. Constitution is the supreme law of the land. State constitutions are supreme within state borders to the extent that they do not violate the U.S. Constitution or a federal law.

Statutory Law Laws or ordinances created by federal, state, and local legislatures and governing bodies. None of these laws can violate the U.S. Constitution or the relevant state constitutions. Uniform laws, when adopted by a state legislature, become statutory law in that state.

Administrative Law The rules, orders, regulations, and decisions of federal, state, or local government administrative agencies. Federal administrative agencies are created by enabling legislation enacted by the U.S. Congress. Agency functions include: Rulemaking. Investigation and enforcement. Adjudication.

Case Law and Common Law Doctrines Judge-made law, including interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies. The common law, the doctrines and principles embodied in case law, governs all areas not covered by statutory law or agency regulations issued to implement various statutes.

The Common Law Tradition The Common Law originated in medieval England with the creation of the king’s courts, or curia regis, and the development of a body of rules that were applied throughout the land.

Stare Decisis A doctrine under which judges “stand on decided cases,” or follow the rule of precedent, in deciding cases. Stare decisis is the cornerstone of the common law tradition.

Equitable Remedies and Courts of Equity Remedies at law: Money, property, land or something else of value. Remedies in equity: Remedies that are granted when the remedies at law are unavailable or inadequate. Equitable Principles and Maxims.

Equitable Remedies and Courts of Equity

Classifications of Law The law may be broken down according to several classification systems, such as: Substantive vs. Procedural law. Civil vs. Criminal law. Federal vs. State law. National vs. International law. Private vs. Public law.

Civil Law and Criminal Law Civil law spells out rights and duties and relief available for injury to private parties. Usually the remedy is money damages. Criminal is injury to the society as a whole. Remedy is usually prison and/or fines.

National and International Law Increasingly, U.S. businesses are engaging in transactions that extend beyond our national borders. National law vs. International law. What’s the difference? Key difference is that national law can be enforced by government authorities. What government can enforce international law?

National Law Definition: law that pertains to a particular nation. Most nations today have either a common law system or a civil law system.

Common Law System Generally, those countries that were once colonies of Great Britain retained their English common law heritage after they achieved their independence. The doctrine of stare decisis is the cornerstone of the common law tradition.

Cyberlaw Refers to the body of law that governs internet based transactions. Not a new law, but new applications of law. Internet Jurisdiction and the Internet. Minimum contacts requirement. Issues in international jurisdiction.

Civil vs. Common Law of Nations

Civil Law System A legal system stemming from Roman “code law,” in which the primary source of law is a statutory code—an ordered grouping of legal principles enacted into law by a legislature or governing body. Precedents are not binding in a civil law system because they do not follow the doctrine of stare decisis.

International Law A body of written and unwritten laws observed by independent nations and governing the acts of individuals as well as governments. Sources of international law include: National laws. Customs. Treaties. International organizations and conferences.

Appendix: Finding and Analyzing the Law Federal statutes Are found in the United States Code (U.S.C.). State statutes Are found in state statutes or codes such as: 13 Pennsylvania consolidated statutes section 1101. California Commercial Code Section 1101. Federal regulations Are compiled in the Code of Federal regulations (C.F.R.).

Appendix: Finding and Analyzing the Law In order to understand how to find case law, one must first understand the basic organizational structure of the court system. In the U.S. there are two types of courts: Federal courts. State courts. Both systems consist of trial courts, appellate (reviewing) courts, and supreme courts.

State Court Decisions Most state trial court decisions are not published. Written decisions of appellate, or reviewing, courts are published in volumes called reports or reporters. The most commonly used reporters are those of the national reporter system, which divides the states into geographic areas.

State Court Decisions

Federal Court Decisions Federal district court decisions are published in the federal supplement (F. Supp.). Federal circuit courts of appeals decisions are published in the federal reporter (F., F.2d, or F.3d). United States Supreme Court decisions are published in one of three sources: United States reports (U.S.) Supreme Court reporter (S.Ct.) Lawyer’s edition of the Supreme Court reports (L.Ed.)

Reading and Understanding Case Law Case law is critical to decision making in the business context because businesses must operate within the boundaries established by law. The first step in analyzing any case is to carefully read the facts to identify each party. Beware! Although at the trial level, the plaintiff is usually listed first (Adams v. Jones), it is often impossible to distinguish the plaintiff from the defendant in the title of a reported appellate court decision.

Case Titles and Terminology Plaintiffs and Defendants. Appellants and Appellees. Judges and Justices. Decisions and Opinions. Abbreviations.

Diagramming Case Problems You may find it helpful to diagram the facts of a case or problem using symbols and arrows to show who is suing whom. Common symbols include: to represent the plaintiff. to represent the defendant.

Example Case Citations: State Courts 256 Neb. 170, 589 N.W.2d 318 (1999). 75 Cal. App. 4th, 89 Cal. Rptr.2d 146 (1999). 85 N.Y.2d 549, 650 N.E.2d 829, 626 N.Y.S.2d 982 (1995). 236 Ga.App. 582, 512 S.E.2d 27 (1999).

Example Case Citations: Federal Courts 189 U.S. 420, 119 S.Ct. 1961, 144 L.Ed.2d 319 (1999). 177 F.3d 114 (2d Cir. 1999). 38 F.Supp. 2d 1233 (D.Colo. 1999).

CHAPTER 3 Courts and Alternative Dispute Resolution

The Judiciary’s Role in American Government The role of the courts in the American government is to interpret and apply the law. Through the process of judicial review—determining the constitutionality of laws—the judicial branch acts as a check on the executive and legislative branches of government.

Judicial Review: Marbury v. Madison The power of judicial review was established by Chief Justice John Marshall in Marbury v. Madison, well after the Constitution had established the other checks and balances within the federal government. What might result if the courts could not exercise the power of judicial review?

Basic Judicial Requirements Before a lawsuit can be brought before a court, certain requirements must first be met. These include: Jurisdiction Venue Standing to Sue

Jurisdiction Before a court can hear a case, it must have jurisdiction over the person(s) against whom the suit is brought or the property involved in the suit, as well as jurisdiction over the subject matter.

Subject Matter Jurisdiction Limited jurisdiction: Exists when a court is limited to a specific subject matter, such as probate or divorce. General jurisdiction: Exists when a court can hear any kind of case.

Original vs. Appellate Jurisdiction Original jurisdiction: Exists with courts that have authority to hear a case for the first time (trial courts). Appellate jurisdiction: Exists with courts of appeals, or reviewing courts. Generally appellate courts do not have original jurisdiction.

Federal Jurisdiction A federal court can exercise jurisdiction: When a federal question is involved (when the plaintiff’s action is based, at least in part, on the U.S. Constitution, a treaty, or a federal law). When a case involves diversity of citizenship (citizens of different states, for example) and the amount in controversy exceeds $75,000.

Diversity Jurisdiction Because of diversity jurisdiction, federal courts spend a good deal of time deciding issues that arise under state law. As federal courts become increasingly overburdened with cases, some have proposed to significantly limit (or eliminate) diversity jurisdiction. Are the benefits of diversity jurisdiction worth its costs to the federal court system?

Exclusive v. Concurrent Jurisdiction Exclusive jurisdiction: Exists when only state courts or only federal courts have authority to hear a case. Concurrent jurisdiction: Exists when two different courts have authority to hear the same case.

Exclusive v. Concurrent Jurisdiction

Jurisdiction in Cyberspace “Sliding Scale” Standard Case 3.1 Bird v. Parsons (2002). Substantial Business Interaction Passive Website No Depends Yes

Venue Venue has to do with the most appropriate location for a trial, which is usually the geographical area in which the event leading to the dispute took place or where the parties reside.

Standing to Sue A requirement that a party must have a legally protected and tangible interest at stake sufficient to justify seeking relief through the court system. The controversy at issue must also be a justifiable controversy, one that is real and substantial, as opposed to hypothetical or academic.

The State and Federal Court Systems

Trial Courts Federal courts: Court of general jurisdiction is the U.S. District court. Courts of limited jurisdiction include: U.S. Tax Court U.S. Bankruptcy Court U.S. Court of Federal Claims State courts: Courts of general jurisdiction may be called by a variety of names. Courts of limited jurisdiction include: Divorce courts Probate courts Traffic courts Small claims courts

Intermediate Appellate Courts Courts of appeals, or reviewing courts, generally do not have original jurisdiction. Such courts in the federal system are called the U.S. Circuit Courts of Appeals. The U.S. Courts of Appeals are divided into twelve circuit courts (next slide) which hear appeals from federal district courts located in their jurisdictions. A thirteenth circuit, called the federal circuit, hears appeals in certain special types of cases.

U.S. Courts of Appeal

Supreme Courts Each state has a supreme court, although it may be called by some other name, whose decisions are final on questions of state law. Appeals from a state supreme court to the U.S. Supreme Court is possible only if a federal question is involved. The U.S. Supreme Court is the highest court in the federal system and the final arbiter of the Constitution and federal law.

Following a State Court Case A sample civil court case in a state court would involve the following: The Pleadings Pretrial Motions Discovery Post trial Motions Trial Pretrial Conference The Appeal

The Pleadings Complaint: Filed by the plaintiff with the court to initiate the lawsuit; served with a summons on the defendant. Answer: Admits or denies allegations made by the plaintiff; may assert a counterclaim or an affirmative defense.

The Pleadings Motion to dismiss: A request to the court to dismiss the case for stated reasons, such as the plaintiff’s failure to state a claim for which relief can be granted.

Typical Complaint 25

Pretrial Motions Motion for judgment on the pleadings: Will be granted if the parties agree on the facts and the only question is how the law applies to the facts. The judge bases the decision solely on the pleadings. Motion for summary judgment: Will be granted if the parties agree on the facts. The judge applies the law in rendering a judgment. The judge can consider evidence outside the pleadings when evaluating the motion.

Discovery The process of gathering evidence concerning the case. Discovery involves: Depositions (sworn testimony by a party or a witness). Interrogatories (written questions by one party towards the other made with assistance from the attorneys). Various requests (for admissions, documents, medical exams).

Pretrial Conference Either party or the court can request a pretrial conference to: Identify the matters in dispute after discovery has taken place, or To plan the course of the trial.

Jury Selection The jury selection process, also known as voir dire, consists of questions directed to prospective jurors to assess potential bias.

At the Trial The typical course of a trial can be diagrammed as follows: Opening Statements Plaintiff’s Introduction of Evidence Closing Arguments Defendant’s Introduction of Evidence

Opening Statements An opening statement sets forth the facts which the attorneys expect to prove during the trial. Note that such statements are not themselves evidence, but instead an argument as to what the evidence will show.

Introduction of Evidence The plaintiff’s case may consist of relevant documents, exhibits, and testimony of witnesses. The defense is then given the chance to challenge any of the plaintiff’s evidence and cross-examine his witnesses. Unless a motion for a directed verdict is made, the defense is then given a similar opportunity to present its case.

Closing Arguments After the defense concludes the presentation of its case, the attorneys present their closing arguments to the jury. Attorneys use the evidence established at trial to urge the jury to render a verdict in favor of his or her client.

Post Trial Motions After a jury has rendered its verdict, either party may make a post trial motion. These include: Motion for judgment N.O.V. (Notwithstanding the verdict) will be granted if the judge is convinced that the jury was in error.

Post Trial Motions Motion for a new trial will be granted if the judge is convinced that the jury was in error, or there was newly discovered evidence, misconduct by the participants during the trial, or error by the judge.

The Appeal Either party can appeal the trial court’s judgment to an appropriate court of appeals. After reviewing the record on appeal, the abstracts, and the attorneys’ briefs, the appellate court holds a hearing and renders its opinion.

Enforcing the Judgment Securing a verdict does not mean there are assets to pay the judgment. One of the primary factors to decide before filing suit is whether the defendant has resources or assets to pay a judgment.

Courts Adapt to the Online World Courts are experimenting with electronic media, including CD-ROMs, electronic filings and docketing. E-filing is now an option in over 300 courts in Colorado. Virtual visitation rights? Case 3.2 Phansalkar v. Anderson, Weinroth, & Co. (2004).

Alternative Dispute Resolution Alternative dispute resolution methods differ in the degree of formality involved and the extent to which third parties participate in the process. What is the primary difference between negotiation and mediation?

Negotiation and Mediation Negotiation: The parties come together, with or without attorneys to represent them, and try to reach a settlement without the involvement of a third party. Mediation: The parties themselves reach an agreement with the help of a third party, called a mediator, who proposes solutions.

Arbitration A more formal method of ADR in which the parties submit their dispute to a neutral third party, the arbitrator, who renders a decision, which may or may not be legally binding, depending on the circumstances.

Arbitration Some courts refer certain cases for arbitration before allowing the cases to proceed to trial; in most cases, this kind of arbitration is nonbinding on the parties. Case 3.3 Buckeye Check Cashing, Inc. v. Cardegna (2006).

Employment Arbitration Courts generally hold that mandatory arbitration clauses in employment contracts are enforceable. Federal Arbitration Act excludes workers in “interstate commerce.” Supreme Court held that FAA applies to most employment contracts. See Circuit City Stores, Inc. v. Adams (2001).

The Federal Arbitration Act The FAA provides the means for enforcing the arbitration procedure that the parties have established for themselves. The FAA covers any arbitration clause in a contract that involves interstate commerce—even where the business activities may have remote connections or minimal effects on interstate commerce.

Online Dispute Resolution Negotiation Services. Mediation Providers. Arbitration Programs. Virtual Magistrate. Resolution Forum.

CHAPTER 4 Constitutional Authority to Regulate Business

The Constitutional Powers of Government The U.S. Constitution established a federal form of government, in which government powers are shared by the national government and the state governments. Separation of Powers: At the national level, government powers are divided among the legislative, executive, and judicial branches.

The Commerce Clause The breadth of the commerce clause: The commerce clause expressly permits Congress to regulate commerce. Over time, courts expansively interpreted this clause, and today the commerce power authorizes the national government, at least theoretically, to regulate virtually every commercial enterprise in the United States.

The Commerce Clause The regulatory powers of the states: Under their police powers, state governments may regulate private activities to protect or promote the public order, health, safety, morals, and general welfare.

The Commerce Clause If state regulations substantially interfere with interstate commerce, they will be held to violate the commerce clause of the U.S. Constitution. Case 4.1 Heart of Atlanta Motel v. United States (1964). Dormant Commerce Clause. Case 4.2 MaryCLE, LLC v. First Choice Internet, Inc. (2006).

The Supremacy Clause The U.S. Constitution provides that the Constitution, laws, and treaties of the United States are “the supreme law of the land.” Whenever a state law directly conflicts with a federal law, the state law is rendered invalid. Preemption occurs when Congress chooses to act exclusively in a concurrent area.

The Taxing and Spending Powers Power “to pay the debts and provide for the common defense and general welfare…” Congress can spend revenues not only to carry out its enumerated powers but also to promote other objectives so long as it does not violate the Bill of Rights. Taxing power: “Power to lay and collect taxes…” If a tax measure bears some reasonable relationship to revenue production, it is generally held to be within the taxing power.

Business and the Bill of Rights The Bill of Rights, which consists of the first ten amendments to the U.S. Constitution, was adopted in 1791 and embodies a series of protections for individuals, and in most cases, business entities, against types of interference by the federal government.

Business and the Bill of Rights Freedoms guaranteed by the Bill of Rights included the following: Freedom of Speech Freedom of Religion Freedom from Compelled Self-Incrimination Freedom from Unreasonable Searches and Seizures

Freedom of Speech Freedom of speech is the most prized American freedom. Symbolic Speech. Case 4.3 Hodgkins v. Peterson (2004). Other types of speech protected under the First Amendment include: Political speech. Commercial speech (advertising).

Online Obscenity “Obscene” speech is not protected by the First Amendment. However, what standard are we to use when judging whether something is or is not “obscene?” The Communications Decency Act (CDA) made the transmission of “indecent” or “patently offensive” speech or images to minors a criminal offense. COPA: struck down. CIPA: library filtering did not violate the First Amendment.

Freedom of Religion Under the First Amendment, the government may neither: Establish any religion (the establishment clause). Prohibit the free exercise of religion (the free exercise clause).

Due Process and Equal Protection Two other constitutional guaranties of great significance to Americans are the: Due process clause contained in both the Fifth and Fourteenth Amendments. Equal protection clause of the Fourteenth Amendment.

Due Process Both the Fifth and the Fourteenth Amendments provide that no person shall be deprived of “life, liberty, or property, without due process of law.” This due process clause has two components: Procedural due process. Substantive due process.

Procedural v. Substantive Due Process Procedural due process: Requires that any government decision to take life, liberty, or property must be made fairly, using fair procedures. Substantive due process: Focuses on the content of legislation. Generally, a law violates substantive due process unless the law promotes a compelling state interest, such as public safety.

Equal Protection Under the Fourteenth Amendment, a state may not “deny to any person within its jurisdiction the equal protection of the laws.” A law or action that limits the liberty of some person, but not others, may violate the Equal Protection clause. Such a law may be deemed valid, however, if there is a rational basis for the discriminatory treatment of a given group or if the law substantially relates to an important government objective.

Equal Protection Depending on the classification courts apply different types of ‘scrutiny’ to determine whether the law violates equal protection clause: Minimal Scrutiny (“Rational Basis”). Intermediate Scrutiny (cases involving gender). Strict Scrutiny (fundamental rights).

Privacy Rights There is no specific guarantee of a right to privacy in the Constitution, but such a right has been derived from guarantees found in other constitutional amendments, such as the: First Amendment. Third Amendment. Fourth Amendment. Fifth Amendment. Ninth Amendment.

Privacy Rights Federal Statutes Protecting Privacy Rights. Health Insurance Portability and Accountability Act (HIPAA) of 1996 defines how health information can be used or disclosed. Driver’s Privacy Protection Act of 1994. Did Congress exceed its authority?

CHAPTER 5 Torts, Cyber Torts, and Product Liability

Basis of Tort Law A tort is a civil, legal injury to a person or property caused by a breach of a legal duty. Plaintiff (the injured party) sues the Defendant (the Tortfeasor) for damages. Three Torts: Intentional. Unintentional (negligence-no fault). Strict Liability (absolute liability).

Intentional Torts Against Persons Assault and Battery. Assault: the reasonable apprehension or fear of immediate contact. Battery: completion (contact) of the assault. Defenses: Consent. Self-Defense and Others. Defense of Property.

Intentional Torts Against Persons False Imprisonment. Confinement or restraint of another person’s activities without justification. Merchants can detain a suspected shoplifter as long as there is probable cause. Infliction of Emotional Distress. Extreme and outrageous conduct. Some courts require physical symptoms.

Intentional Torts Against Persons Defamation. Publication of a false statement (oral or written) that injures a person’s good reputation. Publication: third party must hear or see statement. Statements made on the internet may be actionable. An individual who re-publishes the statement will be liable. Statement must hold someone up to contempt, ridicule or hatred in the community.

Intentional Torts Against Persons Defamation (cont’d): Slander per se (no proof of damages is required): Loathsome communicable disease. Professional impropriety. Imprisonment for a serious crime. Unmarried woman is unchaste.

Intentional Torts Against Persons Defamation (cont’d). Defenses: Truth is normally an absolute defense. Statement was Privileged: Absolute: judicial and legislative proceedings. Qualified: good faith, limited. Public Figures: plaintiff must show statement made with “actual malice.”

Intentional Torts Against Persons Invasion of the Right to Privacy. Person has the right to solitude. Breach of that duty is a tort. Appropriation. False Light. Public Disclosure of Private Facts. Rights of Internet users?

Intentional Torts Against Persons Misrepresentation (Fraud). Intentionally deceive another to believe in a condition that is different from the condition that already exists. Knowing misrepresentation of fact. Intent to induce innocent party to rely. Justifiable reliance by innocent party. Causation and Damages. Contrast: “puffery” or statements of opinion.

Wrongful Interference Wrongful Interference with Contractual Relationship. Valid, enforceable contract exists between two parties. Third party knows about contract. Third party intentionally causes either party to breach the original contract. Case 5.1 Mathis v. Liu (2002).

Wrongful Interference Wrongful Interference with Business Relationship. Distinguish competition vs. predatory behavior. Predatory behavior is unlawfully driving competitors out of market. To prevail, Plaintiff must show Defendant targeted only Plaintiff’s customers and product. Defenses: Interference is justifiable or permissible.

Intentional Torts Against Property Trespass to Land. Trespass to Personal Property. Case 5.2 Register.com v. Verio, Inc. (2004). Conversion. Disparagement of Property. Slander of Quality. Slander of Title.

Negligence Negligence is an unintentional tort. Occurs when someone suffers injury because of the defendant’s failure to comply with a legal duty. Defendant (tortfeasor) creates foreseeable risk of injury.

Negligence--Analysis Did the Defendant owe the Plaintiff a legal duty of care? Did the Defendant breach that duty? Did the Plaintiff suffer a legal injury? Did the Defendant’s breach of duty cause the Plaintiff’s injury?

Negligence- Duty Duty of Care and Breach Duty is based on reasonable person standard. How would a reasonable person have acted under the circumstances? Duty of Landowners to business invitees and tenants to keep common areas safe. Duty of Professionals to clients (attorneys, CPA’s, doctors).

Negligence-Causation Injury Requirement and Damages. Plaintiff must suffer a legally recognizable injury. Not all injuries can be compensated. Causation. Causation in Fact (“but for” test). Proximate Cause (a foreseeably strong connection).

Negligence-Defenses Defenses. Assumption of the Risk. Superceding Intervening Cause. Event must be unforeseeable.

Negligence-Defenses Defenses: Contributory Negligence (few jurisdictions). Plaintiff recovers nothing if he is at fault. Comparative Negligence (more common). As long as Plaintiff is less than 50% at fault he can recover a pro-rata share of the verdict.

Negligence-Special Special Negligence Doctrines. Res Ipsa Loquitur. Negligence Per Se. Violation of law is legal breach of duty. Plaintiff must show: Defendant broke a law/statute. Plaintiff is in special class to be protected; and Statute designed to prevent injury to Plaintiff. “Danger Invites Rescue” doctrine. Dram Shop Acts.

Cyber Torts Can a person be liable for a tort committed in cyberspace? Defamation Online. Liability of ISP’s? Piercing the Veil of Anonymity: Should an ISP be liable for the actions of its subscriber? Who should be liable for “spam” and computer viruses that cause injury?

Strict Liability Does not require fault, intent or breach of duty. Usually involves ‘abnormally dangerous’ activities and risk cannot be prevented. Dangerous Animals. Product Liability—manufacturers and sellers of harmful or defective products.

Product Liability: Warranty Under the Uniform Commercial Code, certain warranties can arise in a contract for sale of goods. Consumers and others can recover from any seller for losses resulting from a breach of express or implied warranty.

Express Warranties Those made by oral or written representations concerning the goods. Quality, condition, description or performance potential of goods. Buyer relies on the representation. Can be made in advertising or salesperson.

Implied Warranties Warranty of Merchantability: A merchant warrants goods are “reasonably fit for the ordinary purposes for which such goods are used.” Applies only to merchants! Warranty of Fitness for a Particular Purpose: Arises when any seller knows of the particular purpose for which a buyer will use the goods and knows the buyer is relying on the seller to select suitable goods.

Liability for Breach of Warranty The legal liability of manufacturers, sellers, and lessors of goods to consumers, users, and bystanders for injuries or damages that are caused by the goods. Product liability claims are most often based on: Warranty Law. Negligence. Misrepresentation. Strict Liability.

Product Liability Based on Negligence In order to prevent claims of negligence, due care must be used by the manufacturer in: Designing the product. Selecting materials. Using the appropriate production process. Assembling and testing the product. Placing adequate warnings on the label or product.

Product Liability Based on Misrepresentation Fraudulent misrepresentation of a product may result in product liability based on the tort of fraud. Examples include: Intentional mislabeling of packaged cosmetics Intentional concealment of a product’s defects

Product Liability Based on Strict Liability Under the doctrine of strict liability, people may be liable for the results of their acts regardless of their intentions or their exercise of reasonable care. If a child is injured by a toy, should the manufacturer be held liable regardless of the circumstances?

Product Defects: Section 402A of the Restatement (Second) of Torts Requirements for Strict Liability Product Defects: Section 402A of the Restatement (Second) of Torts 1. One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer or to his property, if: a. the seller is engaged in the business of selling such a product, and b. it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.

Product Defects: Section 402A of the Restatement (Second) of Torts Requirements for Strict Liability Product Defects: Section 402A of the Restatement (Second) of Torts 2. The rule stated in Subsection (1) applies although: a. the seller has exercised all possible care in the preparation and sale of his product, and b. the user or consumer has not bought the product from or entered into any contractual relation with the seller.

Six Requirements for Strict Liability The defendant must sell the product in a defective condition. The defendant must normally be engaged in the business of selling that product. The product must be unreasonably dangerous to the user or consumer because of its defective condition (in most states). A court may consider a product so defective as to be unreasonably dangerous if either (a) the product was dangerous beyond the expectation of the ordinary consumer or (b) a less dangerous alternative was economically feasible for the manufacturer, but the manufacturer failed to produce it. The plaintiff must incur physical harm to self or property by use or consumption of the product. The defective condition must be the proximate cause of the injury or damage. The goods must not have been substantially changed from the time the product was sold to the time the injury was sustained.

“Unreasonably Dangerous” Products Claims that a product is so defective as to be unreasonably dangerous generally allege that the product is unreasonably dangerous for one of the following reasons: Because of a flaw in the manufacturing process. Because of a design defect. Because the manufacturer failed to warn adequately of harms associated with the product’s use. Obvious Risks.

Restatement (3rd) Torts Manufacturing Defects: Product “departs from its intended design.” Liabilty on manufacturer and retailer. Design Defects: When “foreseeable risks could have been avoided with…alternative design”

Restatement (3rd) Torts Test for Design Defect: Focuses on actual design, and Whether it was reasonable. Plaintiff must show a reasonable alternative design (at the time the product was designed).

Inadequate Warnings Reasonableness test applies. Defective when foreseeable risks could have been reduced or avoided with instructions, and the omission of instructions renders the product unsafe.

Inadequate Warnings There is NO DUTY to warn about obvious or commonly known risks. Should manufacturers be able to assume that warnings will be read? Case 5.3 Crosswhite v. Jumpking, Inc. (2006).

Defenses to Product Liability There are several defenses that manufacturers, sellers, or lessors can raise to avoid liability for harms caused by their products. Assumption of Risk Product Misuse Comparative Negligence Commonly Known Dangers Other Defenses

Defenses to Product Liability Assumption of Risk: The user or consumer knew of the risk of harm and voluntarily assumed it. Product Misuse: The user or consumer misused the product in a way unforeseeable by the manufacturer.

Defenses to Product Liability Comparative Negligence Liability may be distributed between plaintiff and defendant under the doctrine of comparative negligence. Commonly Known Dangers If a defendant succeeds in convincing the court that a plaintiff’s injury resulted from a commonly known danger, such as the danger associated with using a sharp knife, the defendant will not be liable.

Other Defenses Lack of Required Elements A defendant can also defend against a products liability claim by showing that there is no basis for the plaintiff’s claim (that the plaintiff has not met the requirements for an action in negligence or strict liability).

CHAPTER 6 Criminal Law and Cyber Crimes

Civil vs. Criminal Law Key differences: Civil (Tort) Criminal Preponderance Beyond Reasonable Doubt Damages Jail or Prison Private injury (parties hire their own attorneys) Public injury (Prosecutor represents society) Harm to a person or property Violation of statute

Classification of Crimes A criminal act can also have civil liability. (Remember the O.J. Simpson trials?) Felonies Misdemeanors Serious crimes, punishable by Death or prison for more than one (1) year. Non-serious (petty) crimes punishable by jail for less than one(1) year and/or by fines.

Criminal Liability To be convicted of a crime, the State must show beyond a reasonable doubt that the Defendant: Performed an illegal act (actus reus) AND While performing the act, had the required intent or specific state of mind (mens rea). Without the required intent there can be no conviction.

Corporate Criminal Liability A corporation is a legal “person.” A corporation can be fined or denied legal privileges (license) for criminal activity. Responsible Corporate Officer: officers and directors can be criminally liable.

Types of Crimes Violent Crimes: Crimes against persons (murder, rape). Robbery is a violent crime. Property Crimes - Most common, involves money or property. Burglary. Larceny. Receiving Stolen Goods. Arson. Forgery.

Types of Crimes White Collar Crimes: non-violent crimes involving a business transaction. Embezzlement. Mail and Wire Fraud. Bribery. Theft of Trade Secrets. Insider Trading. Organized Crime –RICO and Money Laundering.

Defenses to Criminal Liability Infancy (juvenile). Involuntary Intoxication: is a defense if person was incapable of understanding act. Insanity: defendant lacked substantial capacity to appreciate the wrongfulness of act or to conform act to law. Mistake. Consent.

Defenses to Criminal Liability Duress. Justifiable Use of Force: use deadly force if reasonable belief of immanent death or serious injury; cannot use deadly force to protect property alone. Entrapment. Statute of Limitations. Immunity.

4th Amendment Protection Fourth Amendment Protections. Search Warrants and Probable Cause. Officer must have “Probable Cause”: Trustworthy Evidence to Convince A Reasonable Person. The warrant must be precise: no ‘general’ warrants (fishing expedition). Exceptions to Warrant.

4th Amendment Search and Seizure in Businesses. Generally, government cannot enter business without a warrant. No warrant required for contaminated food or highly regulated liquor or gun businesses. Case 6.1 United States v. Harwell (2006).

5th Amendment Protection Fifth Amendment Protections. Due Process of Law. Opportunity to Object with a hearing before a neutral Magistrate. Double Jeopardy. Person cannot be retried for the same offense in the same court. A civil action, however, is permitted. Self-Incrimination. “Right to Remain Silent” or not testify against yourself.

6th and 8th Amendments Sixth & Eight Amendment Protections. Right to Speedy Trial. Right to Jury Trial. Right to Public Trial. Right to Confront Witnesses. Right to Counsel. Case 6.2 Fellers v. U.S. (2004). Prohibition on Cruel and Unusual Punishment.

Exclusionary Rule Evidence obtained in violation of constitutional procedures must be excluded Evidence derived from illegal evidence is “fruit of the poisonous tree.” Deters police from misconduct.

Miranda Rule Miranda v Arizona (1966). Exceptions: Inform suspect of his rights when he is arrested, including right to counsel and right to remain silent. Exceptions: Public safety. Unequivocal request for lawyer.

Criminal Process Arrest Booking Initial Appear Prelim Hearing Trial Arraign- ment Charges Filed Guilty Plea Plea Bargain

Criminal Process Indictment or Information. Indictment issued by a grand jury in secret, usually for very serious crimes. Information is a criminal complaint issued by prosecutor’s office and served on accused.

Criminal Process Trial: unanimous verdict. Sentencing Guidelines. Case 6.3 United States v. Yates (2006). Sentencing Guidelines.

Cyber Crimes Cyber crimes involve the use of computers in cyberspace to injure a person or property. Cyber Theft: Financial Crimes. Identity Theft. Cyber Stalking.

Cyber Crimes Hacking. Cyber Terrorism. Prosecuting Cyber Crimes: Location of the crime raises jurisdictional issues. Identification of offenders is difficult.

Cyber Crimes Prosecuting CyberCrimes: Federal Statues: Computer Fraud and Abuse Act, Economic Espionage Act and RICO.

CHAPTER 7 Intellectual Property

Trademarks and Related Property Distinctive mark or emblem affixed to a product that easily identifies, or distinguishes, the product in the marketplace. Case 7.1 Coca-Cola Co. v. Koke Co. of America (1920).

Trademarks and Related Property Statutory Protection of Trademarks. Lanham Trade Mark Act (1946). Federal Trademark Dilution Act (1995): federal cause of action for “dilution” (confusion of similar marks on goods or services).

Trademarks and Related Property Trademark Registration. Federal protection requires registration with U.S. Patent Trademark Office (www.uspto.gov) Mark can be registered if: In current use, or Applicant intends to put the mark into commerce within 6 months.

Trademark Infringement Strong Marks (e.g., Xerox). Fanciful, arbitrary or suggestive. Normally outside the context of the product. Secondary Meaning. Descriptive, geographic terms and personal names. Case 7.2 Menashe v. Secret Catalogue, Inc. (2006). Generic Terms. Bicycle, computer. What about Escalator?

Service, Certification, and Collective Marks Service Mark. Similar to trademark but for services. Certification Mark. Used by other than the owner. Collective Mark. Certification used by members of cooperative or association. “Good Housekeeping” Seal of Approval.

Trade Names / Trade Dress Trade Names applies to all or part of business’s name; directly related to goodwill. Trade Dress refers to the image and appearance of the product.

Cyber Marks Cyber Marks are Trademarks on the internet. What rights does a trademark owner have? Domain Names. ICANN.

Cyber Marks Anticybersquatting Legislation. Meta Tags. Case 7.3 Playboy Enterprises, Inc. v. Welles (2002). Dilution in the Online World. Hasbro v. Internet Entertainment Group.

Patents Patent is a grant from government gives inventor exclusive right to make, use and sell invention for 20 years from filing the application. Software patents are now available. Patent Infringement. Business Process Patents (State Street Bank v. Signature Financial Group).

Copyrights Copyright: Intangible property right to author for her life plus 70 years. Automatic protection after 1978. Works can be protected by registration at U.S. Copyright Office.

What is Protected Expression? Can only copyright the expression of an idea, not the idea itself. Work must be original and fixed in a durable medium. Compilation of facts must be original.

Copyright Infringement Whenever form or expression of idea is copied. “Fair Use”: exception to infringement if educational, news reporting, scholarship or research.

Software Copyright 1980 Congress passed Computer Software Copyright Act. Computer language is a “literary work.” Courts disagree over the ‘look and feel’ of computer.

Copyrights in Digital Information Copyright Act of 1976. When is a copy made? What about collective works (newspaper and electronic databases)?

Copyrights in Digital Information The Digital Millennium Copyright Act of 1998. Provides ‘safe harbors’ from immunity for ISP’s. Provides for flexible ‘fair use’ online.

Copyrights in Digital Information MP3 and File-Sharing Technology. Software allows P2P sharing of files over a distributed network. Is the software maker liable? Napster was found vicariously liable for copyright infringement.

Trade Secrets Trade Secrets: business process or information that cannot or should not be patented, copyrighted or trademarked. Protected from competitors. Uniform Trade Secrets Act. Economic Espionage Act of 1996.

Trade Secrets Can include: customer lists, plans, research, formulae, pricing information, marketing techniques. Hacking into a competitor’s computer may be criminal.

Trade Secrets in Cyberspace Internet facilitates illegal copying and distribution of confidential information. Sometimes mistakes can transfer information.

International Protection Berne Convention (WIPO). Trade-Related Aspects of Intellectual Property (TRIPS) of 1994 (WTO). World Intellectual Property Organization (WIPO) Copyright Treaty 1996.

CHAPTER 8 Contract Formation

Introduction Common law of contracts. Contracts for the Sale of Goods. Restatement of the Law of Contracts. Contracts for the Sale of Goods. UCC Article 2 governs sales contracts. Relationship between common law and Article 2.

Function and Definition Contracts are designed to provide stability and predictability, as well as certainty, for both, buyers and sellers in the marketplace. Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief. What is a Contract? Contract is an agreement (based on a promise) that can be enforced in court.

Requirements of a Valid Contract Agreement. Consideration. Contractual Capacity. Legality. DEFENSES: Genuineness of assent Form.

Types of Contracts Bilateral - Offeree must only promise to perform (“promise for a promise”). Unilateral - Offeree can accept the offer only by completing the contract performance (“promise for an act”). Case 8.1 Ardito v. City of Providence (2003). Offers for Unilateral Contracts are generally revocable unless substantial work.

Types of Contracts Formal vs. Informal Contracts. Express (oral or written) vs. Implied-in-Fact (conduct creates and defines the terms of the contract): Plaintiff furnished some service/property. Plaintiff expected to be paid and defendant knew. Defendant had a chance to reject and did not.

Contract Performance Executed v. Executory. Executed - A contract hat has been fully performed on both sides. Executory - A contract that has not been fully performed on either side.

Contract Enforceability Valid. Elements: Agreement, consideration, contractual capacity, and legality. Voidable (unenforceable). Valid contract can be avoided or rescinded. Void: No contract.

Agreement Agreement = Offer and Acceptance. Once an agreement is reached, if the other elements of a contract are present, a valid contract is formed.

Requirements of the Offer Offeror’s serious intention.  Definiteness of terms.  Communication. 

Offeror’s Serious Intention Offers made in anger, jest, or undue excitement are usually not offers. Case 8.2 Lucy v. Zehmer (1954). Expressions of opinion are not offers. Statements of intention or preliminary negotiations are are not offers. Advertisements, Catalogues, Price Lists, and Auctions are treated as Invitations to negotiate and not as offers.

Definiteness of Terms Terms (Expressed or Implied). Identification of the parties. Object or subject matter of the contract. Consideration to be paid. Time of payment, Delivery, or Performance.

Offer-Communication Offeree’s knowledge of the offer: Directly by the Offeror. Use of Agents.

Termination of the Offer An offer may be terminated prior to acceptance by either: Action of the Parties; or by  Operation of Law.

Termination by Action of the Parties Revocation of the Offer by the Offeror: Offer can be withdrawn anytime before Offeree accepts the offer. Effective when the Offeree or Offeree’s agent receive it. Exceptions: Irrevocable Offers. Option Contract: Promise to hold an offer open for a specified period of time in return of consideration.

Termination by Action of the Parties Exceptions (Cont’d): Detrimental Reliance or Promissory Estoppel where Offeree relies on offer to his or her detriment, thus Offeror is barred from revoking the offer. Rejection of the offer by the Offeree: Rejection by the Offeree (expressed or implied) terminates the offer. Effective only when it is received by the Offeror or Offeror’s agent.

Termination by Action of the Parties Rejection of Offer by Offeree (Cont’d). A counteroffer by the Offeree is a rejection of the original offer and making of a new offer. Mirror Image Rule. Offeree’s acceptance to match the Offeror’s offer exactly.

Termination by Operation of Law Lapse of Time. Offer terminates by law when the period of time specified in the offer has passed. If no time period for acceptance is specified, the offer terminates at the end of a reasonable period of time. Destruction of the Subject Matter.

Termination by Operation of Law Death or Incompetence of the Offeror or Offeree. Supervening Illegality of the Proposed Contract.

Acceptance Acceptance: Additional terms may constitute rejection. Voluntary act (expressed or implied), by the Offeree that shows unequivocal assent (agreement) to the terms of an offer. Additional terms may constitute rejection. Communication: Generally, silence is not acceptance.

Mode and Timeliness of Acceptance Mail Box Rule - Acceptance is effective on dispatch, providing that authorized means of communication is used. Offeror specifies (expressly or impliedly) how acceptance should be made. Effective is properly dispatched (mailed, shipped). Exceptions: 

Mode and Timeliness of Acceptance Exceptions: If acceptance is not properly dispatched by the Offeree. If Offeror specifies that acceptance will not be effective until it is received. If acceptance is sent after rejection, whichever is received first is given effect.

Mode and Timeliness of Acceptance Unauthorized Means of Acceptance. Not effective until it is received by the Offeror. If timely sent and dispatched it is considered to have been effective on its dispatch. Technology creates unique issues for application of the mailbox rule.

Consideration Consideration is legal value given in return for a promise or performance. Must have something of legal value or sufficiency. Must be a bargained-for exchange.

Legal Sufficiency of Consideration Consideration for a promise must be either: Legally detrimental to the promisee, or legally beneficial to the promisor. Adequacy of Consideration. Case 8.3 Seaview Orthopaedics v. National Healthcare Resources, Inc. (2004).

Agreements that Lack Consideration Preexisting Duty: Generally, a promise to to what one already has a legal duty to do is not consideration. Exceptions: Unforeseen Difficulties. Recession and New Contract.

Agreements That Lack Consideration Past Consideration is no consideration because the bargained-for exchange element is missing. Illusory Promise: promissor has not definitely promised to do anything (no promise at all).

Promissory Estoppel Promissory Estoppel / Detrimental Reliance: Must be clear and definite promise. Promisee must justifiably and substantially rely. Justice will be served.

Capacity Contractual Capacity. The legal ability to enter into a contractual relationship. Full competence. No competence. Limited competence.

Minors In most states, a person is no longer a minor for contractual purposes at the age 18. A minor can enter into any contract that an adult can. A contract entered into by a minor is voidable at the option of that minor.

Minor’s Right to Disaffirm A contract can be disaffirmed at any time during minority or for a reasonable period after the minor comes of age. If minor disaffirms he must return the goods. Exception: contracts for necessaries.

Intoxication Key is whether there was contractual capacity at the time the contract was formed. Contract can be either voidable or valid. Courts look at objective indications to determine if contract is voidable. If voidable. Person has the option to disaffirm. Person may ratify the contract expressly or impliedly.

Mental Incompetence Contract Void: If a person has been adjudged mentally incompetent by a court of law and a guardian has been appointed. Contract Voidable: If the person does not know he or she is entering into the contract or lacks the mental capacity to comprehend its nature, purpose, and consequences. Contract Valid: If person is able to understand the nature and effect of entering into a contract yet lack capacity to engage in other activities.

Legality A contract to do something prohibited by federal or state statutory law is illegal and therefore void (never existed). Contract that calls for for a tortious act. Contract that calls for an act contrary to public policy (such as a covenant not to compete).

Genuineness of Assent Contract may be unenforceable if the parties have not genuinely assented to its terms by: Mistake. Misrepresentation. Undue Influence. Duress.

Mutual Mistakes If both parties have made a mistake about a material fact, the contract can be rescinded by either party. Case 8.4 Roberts v. Century Contractors, Inc. (2004).

Unilateral Mistakes of Fact One party mistaken as to some material fact. Does not afford the mistaken party any right to relief from the contract unless: But if other party to the contract knew or should have known that a mistake of fact was made, or If there was a gross clerical error.

Fraudulent Misrepresentation Contract is Voidable by Innocent Party. Elements: Misrepresentation of Material Fact. Intent to Deceive. Reliance on Misrepresentation. Injury to the Innocent Party.

Undue Influence Contract is Voidable. Confidential or Fiduciary Relationship. Relationship of dependence. Influence or Persuasion. Weak party talked into doing something not beneficial to him or herself.

Duress Forcing a party to enter into a contract under fear or threat (voidable contract) Threatened act must be wrongful or illegal. Improper Threat. Threat to exercise legal rights (criminal or civil suit). Economic or physical.

Adhesion Contracts Overwhelming bargaining power of offeror who has exclusive power to create contract. Signer must agree to receive commodity or service. Standard form contracts (arbitration). Case 8.5 Thibodeau v. Comcast Corp. (2006).

The Statute of Frauds To be enforceable, the following types of contracts must be in writing and signed: Contracts involving interest in land. Contracts involving “One year rule.” Collateral or Secondary Contracts. Promise made in consideration of marriage. Contracts for the sale of goods priced at $500 or more.

Statute of Frauds Exceptions: Partial Performance. Admissions. Promissory Estoppel. Special Exceptions under the UCC.

Third Party Rights There are two important exceptions to the rule of privity of contract: A party to a contract may transfer the rights arising from the contract to another or to free himself or herself from the duties by having another person perform them. The first of these actions is referred to as an assignment of rights and the second, delegation of duties. Where a contract involves a third party beneficiary contract.

Assignments Generally, all rights can be assigned, except in the following circumstances: When assignment is expressly prohibited by statute (for example, worker’s compensation benefits). When a contract is personal in nature (unless all that remains is a money payment). Where the assignment will materially increase or alter the risk or duties of the obligor. If a contract stipulates the right cannot be assigned, then ordinarily it cannot be assigned.

Delegations A delegation is the transfer of duties under a contract to a third party (the delegatee), who then assumes the obligation of performing the contractual duties previously held by the one making the delegation (the delegator). A valid delegation of duties does not relieve the delegator of obligations under the contract. If the delegatee fails to perform, the delegator is still liable to the obligee.

Third Party Beneficiaries A third party beneficiary contract is one made for the purpose of benefiting a third party. Third party beneficiaries can be categorized into: Intended beneficiaries, or Incidental beneficiaries.

CHAPTER 9 Contract Performance, Breach, and Remedies

Performance & Discharge A party may be discharged from a valid contract by: Full performance or material breach by the other party. A condition occurring or not occurring. Agreement of the parties. Operation of law.

Conditions Possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract. Types of Conditions: Conditions Precedent. Conditions Subsequent. Conditions Concurrent.

Discharge by Performance The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised. Complete vs. Substantial Performance: Complete: strict performance. Substantial: performance does not vary greatly and create substantial benefit. Other party must pay. Performance to the Satisfaction of One of the Parties or a Third Party.

Material Breach of Contract The nonperformance of a contractual duty. Material breach occurs when there has been a failure of consideration. Discharges the non breaching party from the contract. Case 9.1 Shah v. Cover-It, Inc. (2004).

Anticipatory Repudiation If before performance is due, one party refuses to perform his or her contractual obligation. Results in material breach. The nonbreaching party should not be required to remain ready and willing to perform.The nonbreaching party should have the opportunity to seek a similar contract elsewhere.

Discharge by Agreement Rescission. Novation. Substituted Agreement. Accord and Satisfaction.

Discharge by Operation of Law Alteration of a contract. Statutes of Limitations. Bankruptcy. Impossibility. Commercial Impracticability. Frustration of Purpose.

Types of Damages Compensatory Damages. Compensate injured party for damages actually sustained. Sale of Goods: difference between the contract and market price. Sale of Land: same as sale of goods. Construction Contracts: depends on when and who breaches.

Types of Damages Consequential Damages. Punitive Damages. Foreseeable damages the breaching party is aware--or should be aware—of that cause damage as a consequence of the original injury; can cause the injury party additional loss. Punitive Damages. Designed to punish the wrongdoer and deter similar activity in the future. Nominal Damages. No financial loss.

Mitigation of Damages When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered. Duty owed depends on the nature of the contract.

Liquidated Damages vs. Penalties Amount of damages determined by agreement or court order. Enforceable. Penalty: Designed to punish the breaching party. Generally not enforceable. Case 9.2 Green Park Inn, Inc. v. Moore (2002).

Equitable Remedies Rescission. Restitution. A remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions. Restitution. Both parties must return goods, property, or money previously conveyed.

Specific Performance Equitable remedy calling for the performance of the act promised in the contract. Remedy in cases where the consideration is: Unique, e.g., Sale of Land: Case 9.3 Stainbrook v. Low (2006). Scarce; or Not available remedy in contracts for personal services.

Reformation Equitable remedy allowing a contract to be reformed, or rewritten to reflect the parties true intentions. Available when an agreement is imperfectly expressed in writing.

Recovery Based on Quasi Contract Equitable remedy imposed by courts to obtain justice and prevent unjust enrichment. Requires: A benefit was conferred to the other party. Party conferring did so with the reasonable expectation of being paid. The benefit was not volunteered. Retaining benefit without paying for it would result in unjust enrichment of the party receiving the benefit.

Election of Remedies Doctrine created to prevent double recovery. Nonbreaching party must choose which remedy to pursue. UCC rejects election of remedies. Cumulative in nature and include all the available remedies for breach of contract.

Waiver of Breach Waiver: Knowing relinquishment of a legal right. Consequences of Waiver of Breach? Reasons for Waiving a Breach. Subsequent Breaches.

Contract Provisions Limiting Remedies Exculpatory clauses. Provisions stating that no damages can be recovered. Limitation of liability clauses. Provisions that affect the availability of certain remedies. Case 9.4 Lucier v. Williams (2004).

CHAPTER 10 Sales, Leases, and E-Contracts

The Scope of the UCC Facilitates commercial transactions. UCC Article 2: Governs contracts for sale of goods. UCC 2 preempts common law. Where UCC2 is silent, common law governs.

What is a “Sale”? UCC Article 2 applies to the “sale of goods.” A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc). “Goods” are tangible and movable. A “merchant” has special business expertise and is not a casual buyer/seller.

What is a “Good”? A good is both tangible and movable. UCC does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC does not apply. Generally contracts for services are not considered goods.

What is a “Merchant”? Generally UCC 2 applies to all buyers of sellers of goods. In some instances, sales by/for a merchant imposes special duties. A Merchant: Deals in goods of the kind being sold. Holds himself out with special knowledge or skills. Is employed as a broker or agent in a transaction. Case 10.1 Hammer v. Thompson (2006).

Scope of Article 2A-Leases Contract for lease of personal goods between a lessor and a lessee. Consumer Leases (primarily for family or personal use). Finance Leases (involves a 3rd party-supplier).

Formation of Sales and Lease Contracts At common law once a valid offer is unequivocally accepted, a binding contract is formed. UCC is more flexible, and allows for open pricing, payment, and delivery terms.

Offer - Open Terms Article 2-204: even if terms of uncertain, a contract may still exist. Open Terms: “Indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy.

Offer - Open Terms “Open Quantity” (UCC2-306): generally courts will NOT impose a quantity, UNLESS: Requirements Contract: buyer agrees to purchase what the buyer needs or requires. Output Contract: buyer agrees to buy all of seller’s production or output.

Merchant’s Firm Offer Common law: An offer could be revoked any time prior to acceptance, unless there was some consideration. Article 2: An offer made by a merchant is irrevocable for reasonable period of time if a written assurance is given. No consideration necessary.

Acceptance Any reasonable means under the circumstances is permissible. Promise to ship or prompt shipment is acceptance. Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer.

Additional Terms If either party is a non-merchant, the contract is formed according to original terms of the offer. If both parties are merchants, contract incorporates new terms unless: (1) original offer expressly limits terms or (2) material change or (3) offeror objects within reasonable time. Additional terms may be stricken if both parties acted inconsistent with the terms

Consideration Article 2 requires consideration and modifications must be made in good faith. Modification must be in writing if required by Statute of Frauds.

Statute of Frauds Sale of goods over $500 must have a signed writing to be enforceable. Exceptions to this rule: Specially manufactured goods. Admissions by breaching party. Partial performance. Merchant doesn’t object within 10 days.

Performance: Good Faith Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade. Merchants are held to a higher standard of care than non-merchants.

Obligations of the Seller / Lessor Seller has a duty to “tender” delivery of “conforming goods.” Tender means “delivery” to agreed place: With reasonable notice. At a reasonable hour. In a reasonable manner. Exactly, unless otherwise agreed.

Place of Delivery (Carriers) Shipment contracts. Seller has a duty to: Put goods into hands of independent carrier. Make contract for transportation. Obtain and promptly deliver or tender to the Buyer any documents necessary. Promptly notify Buyer that shipment has been made. Destination contracts. Seller has duty to: Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

The Perfect Tender Rule If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to: Accept the goods; Reject the entire shipment; or Accept part and reject part.

Exceptions to the Perfect Tender Rule Click on the Links Below Agreement of the Parties. Cure. Substitution of Carriers. Installment contracts. Commercial Impracticability. Destruction of Identified Goods. Assurance and Cooperation.

Obligations of the Buyer / Lessee Furnish facilities reasonably suited for receipt of the goods. Payment at the time and place the Buyer receives the goods. Credit has to be prearranged. Credit period begins on the date of shipment. Pay with cash, credit card, check. But if Seller asks for cash, Seller has to give Buyer time to get cash.

Obligations of the Buyer / Lessee Buyer has right to inspect before paying: Costs of inspection borne by Buyer. However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.

Acceptance Buyer can accept goods: By words or conduct. If Buyer had reasonable amount of time and failed to reject. Buyer performs an act which indicates he thinks he is the owner.

Anticipatory Repudiation Party communicates he will not perform by time of contract performance. Non-breaching party may suspend performance and: Treat the A.R. as material breach and pursue a remedy; or Wait a reasonable time.

Remedies for Breach Buyer Remedies Seller Remedies End Click on the Links Below Buyer Remedies Seller Remedies End If Goods in Buyer’s Possession If Seller delivers non-conforming goods If Goods in Transit If Goods in Seller’s Possession If Goods in Seller’s Possession

Remedies of the Seller or Lessor Seller may withhold delivery of the goods: If material breach by Buyer, Seller can withhold delivery of all goods. If non-material breach, Seller can withhold delivery of this installment. Seller can withhold delivery of all goods if Buyer is insolvent.

Remedies of the Seller or Lessor Seller may resell or dispose of the goods; and Recover damages: the difference between the contract price and the resale price + incidental damages+ damages = the market price at the time & place of tender + incidental damages - expenses saved. If No Damages, Seller can sue for lost profits.

Remedies of the Seller or Lessor Seller has the right to recover the purchase price (or lease payments). Seller has the right to recover damages = the market price at the time & place of tender + incidental damages. if there are no damages, Seller can sue for lost profits. Case 10.3 Utica Alloys, Inc. v. Alcoa, Inc. (2004).

Remedies of the Buyer or Lessee When Seller breaches its contract, Buyer/ Lessee has the right to: Cover: buy or lease substitute goods in good faith. Available if buyer rejects goods or revokes acceptance. Buyer can recover difference between cost of cover and contract price. Specific performance: enforce contract for unique goods. Not if in bankruptcy time the Buyer learned of the breach at the place were the Seller was supposed t o deliver the goods

Remedies of the Buyer or Lessee Right to recover damages. Measure of damages is difference between contract price and market price for goods at time of breach.

Remedies of the Buyer or Lessee Right to reject all or part of the goods. If Seller does not make perfect tender Buyer has the right to reject all or part of goods. Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions. Buyer is entitled to commission for selling perishable goods. Buyer may store the goods and retain a security interest in the goods for his costs.

Remedies of the Buyer or Lessee Right to recover damages for accepted goods. If buyer has accepted non-conforming goods, she may: Sue for breach of warranty. Sue for ordinary damages. Deduct damages from purchase price. difference between what was warranted and what Buyer got

Remedies of the Buyer or Lessee Right to revocation of acceptance. Buyer must notify Seller of breach. Revocation of Acceptance only if: substantial nonconformity; and Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover. Case 10.4 Fitl v. Strek (2005).

Contractual Provisions Affecting Remedies Parties can elect or limit UCC remedies in the contract. Contracts can exclude/include consequential damages that are not unconscionable. Cause of action expires FOUR years after breach of contract.

Sales and Lease Warranties: Title Automatically arises in most commercial sales transactions. UCC-312 creates 3 warranties: Good Title. No Liens. No Infringements. Disclaimer of Title warranty can generally be disclaimed only with specific language in contract. Circumstances may be obvious to clearly indicate disclaimer of title, such as a sheriff’s sale.

Express Warranties Can be oral or written-- don’t have to use the words “warrant” or “guarantee.” Any Affirmation or Promise. Any Description. Any Sample or Model.

Express Warranties Statements of Opinion and Value. To create an express warranty, the affirmation of fact must become the “basis of the bargain.” And Buyer must rely on warranty when he enters into contract. Statements of Opinion and Value. Generally excludes “puffing” – “Best car in town”, not an express warranty. However, expert opinion is not puffery.

Implied Warranties Warranty inferred at law based on the circumstances or nature of the transaction. Under the UCC, merchants warrant the goods they sell are “merchantable”, i.e., fit for ordinary purpose for which such goods are sold.

Implied Warranty of Merchantability Automatically arises from merchants. Goods are of average, fair, or medium-grade. Adequately packaged and labeled. Conform to promises on label. Have a consistent quality and quantity among the commercial units. Courts say people can reasonable expect bones in fish, cherry pits in cherry pies, nutshells in packages of shelled nuts not worms

Implied Warranty of Fitness for a Particular Purpose Arises by any Seller who: Knows the particular purpose for which the goods are being bought; and Knows the buyer is relying on seller’s skill and judgment to select suitable goods.

Implied Warranty from Course of Dealing or Trade Warranties can arise from parties’ pre-existing relationship or usage of well-recognized trade customs. Courts will infer common trade usage or course of dealing.

Warranty Disclaimers Express Warranties can be disclaimed: If they were never made (evidentiary matter). If a clear written disclaimer in contract with specific, unambiguous language and called to Buyer’s attention: (BOLD CAPS UNDERLINED).

Warranty Disclaimers Implied Warranties: Merchantability: “As Is,” “With All Faults.” Fitness for a Particular Purpose: must be in writing and conspicuous. If Buyer has the right to fully inspect and either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.

E- Contracts: Offers B2C-Business to Consumer E-Contracts. B2B-Business to Business E-Contracts. Online Offers Should Include: Conspicuous and Obvious Terms. Remedies available (including Seller’s Refund). Statutes of Limitation. Dispute Settlement Provisions. Disclaimers of Liability. How information will be used by Seller.

E-Contracts: Acceptance Online Acceptances: Shrink-Wrap Agreements-Enforceable Terms. Shrink Wrap Agreements-Proposals for Additional Terms (not all terms are enforceable).

E-Contracts: Acceptance Offer (cont’d): Click-On (Click-Wrap) Agreements. Online version of “shrink-wrap” agreements. Acceptance by clicking on an “I Accept” button on the website. “Browse-Wrap” Terms.

E-Signatures Many contracts require a writing and a signature to be enforceable. With E-Contracts, signatures have changed. Signatures can be: Digital (with Cybernotary). Signature Dynamics. Smart Cards, Personal Identification. A Mouse Click (attribution problems).

Laws Governing E-Signatures States: some have e-signature legislation but it is not uniform. Most based on UETA (see below). Federal Law: E-Signatures (E-SIGN Act). E-Documents. Parties must agree to use electronic signatures.

UETA Similar to federal E-SIGN. Highlights: Parties must agree to conduct e-transactions. Can be implied by conduct/email. Attribution are procedures that ensures identity of seller and buyer. Allows formation of contracts by e-agents. Notarization via digital signature. E-Mistakes can make a contract voidable.

Seller: Goods in Seller’s Possession Seller may rescind the contract. Seller may identify the goods to the contract. Seller may sell raw materials for scrap or finish production. Next

CHAPTER 11 Business Organizations

Major Traditional Business Forms Entrepreneurs have used three major forms to structure their business enterprises: Sole Proprietorship Partnership Corporation

Sole Proprietorships The simplest form of business; used by anyone who does business without creating an organization. The owner is the business. The owner pays personal income taxes on all profits and is personally liable for all business debts.

Partnerships General partnerships: Created by agreement of the parties; not treated as an entity except for limited purposes. Partners have unlimited liability for partnership debts, and each partner normally has an equal voice in management. Income is “passed through” the partnership to the individual partners, who pay personal taxes on the income.

Limited Partnerships Limited partnerships: Must be formed in compliance with statutory requirements. A limited partnership consists of one or more general partners, who have unlimited liability for partnership losses, and one or more limited partners, who are liable only to the extent of their contributions. Only general partners can participate in management.

Corporations A corporation is formed in compliance with statutory requirements, is a legal entity separate and distinct from its owners, and can have perpetual existence. The shareholder-owners elect directors, who set policy and hire officers to run the day-to-day business of the corporation.

Corporations Shareholders normally are not personally liable for the debts of the corporation. The corporation pays income tax on net profits; shareholders pay income tax on disbursed dividends.

S Corporations Corporations can further be divided based on their tax status. S Corporations C Corporations

Qualification Requirements for S-Corporations The corporation must: be a domestic corporation. not be a member of an affiliated group of corporations. have only shareholders that are individuals, estates, or certain trusts. Most corporations, partnerships, and non-qualifying trusts cannot normally be shareholders.

Qualification Requirements for S-Corporations The Corporation must: have 100 or fewer shareholders. have only one class of stock, although not all shareholders need have the same voting rights. not have shareholders who are nonresident aliens.

Limited Liability Companies The limited liability company (LLC) is a hybrid form of business organization that offers the limited liability feature of corporations but the tax benefits of partnerships. Unlike limited partners, LLC members participate in management via the operating agreement.

Limited Liability Companies Formation of an LLC. LLC’s, like corporations, are formed under state law by filing Articles of Organization. Most states require at least 2 owners. Name must include “Limited Liability Company” or initials “LLC”.

Limited Liability Companies Unlike shareholders in S corporations, members of LLCs may be corporations or partnerships, are not restricted in number, and may be residents of other countries. Jurisdictional Requirements. Differences between corporations and LLC’s.

Limited Liability Companies LLC Operating Agreement. Contain provisions for: Management. Voting. Transfer of membership interests. New or Deceased members. Member-Managed, or Manager-Managed.

Advantages and Disadvantages of LLC’s Federal Income Tax TAX ASPECT Accumulation Capital Gains PARTNERSHIP CORPORATION Partners are taxed on proportionate shares of partnership income, even if not distributed; the partnership files information returns only. Partners are taxed on accumulated as well as distributed earnings. Partners are taxed on their proportionate shares of capital gains, which are taxed at the ordinary income rate. The income of the corporation is taxed; stockholders are also taxed on distributed dividends. The corporation files corporate income tax forms. Corporate stockholders are not taxed on accumulated earnings. There is, however, a penalty tax, in some instances, that the corporation must pay for “unreasonable” accumulations of income. The corporation is taxed on capital gains and losses.

Advantages and Disadvantages of LLC’s Exempt Income TAX ASPECT Pension Plan Social Security Death Benefits State Taxes PARTNERSHIP CORPORATION Partners are not taxed on their proportionate shares of capital gains, which are taxed at the ordinary income rate. Partners can adopt a Keogh plan, an Individual Retirement Account (IRA), or a 401-K plan. Partners must pay a self-employment tax (in 1998, 12.4% on income up to $68,400, plus 2.9% Medicare tax on all income). There is no exemption for payments to partners’ beneficiaries. The partnership is not subject to taxes. State income taxes are paid by each partner. Any exempt income distributed by a corporation is fully taxable income to the stockholders. Employees and officers who are also stockholders can be beneficiaries of a pension trust. The corporation can deduct its payments to the trust. All compensation to officers and employee-stockholders is subject to Social Security taxation up to the maximum. Benefits up to $5,000 can be received tax-free by employees’ beneficiaries. The corporation is subject to state income taxes (although these taxes can be deducted on federal returns).

Limited Liability Partnerships Similar to an LLC, but LLP’s are designed for professionals. Major advantage of an LLP: pass-through tax entity but limits personal liability of partners. LLP’s are creatures of state statute. Advantages of the LLP.

Major Business Forms Compared

Major Business Forms Compared

Major Business Forms Compared

Major Business Forms Compared

Private Franchises Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services.

Types of Franchises Distributorship Chain-style operations (e.g. automobile dealerships) Chain-style operations (e.g. fast-food chains) Manufacturing/processingplant arrangement (e.g. soft-drink bottling companies, such as Coca-Cola)

Laws Governing Franchising Franchises are governed by contract law, occasionally by agency law, and by federal and state statuary and regulatory laws. Federal Trade Commission has regulations that require disclosure of material facts.

The Franchise Contract Ordinarily requires the franchisee (purchaser) to pay a price for the franchise license. Specifies the territory to be served by the franchisee’s firm. May require the franchisee to purchase certain supplies from the franchisor at an established price.

The Franchise Contract May require the franchisee to abide by certain standards of quality relating to the product or service offered but cannot set retail resale prices. Usually provides for the date and/or conditions of termination of the franchise arrangement. But federal and state statutes attempt to protect certain franchisees from franchisors who unfairly or arbitrarily terminate franchisees. Case 11.1 Kerl v. Dennis Rasmussen, Inc. (2004).

The Nature of the Corporation The corporation is a legal entity distinct from its owners. Formal statutory requirements, which vary somewhat from state to state, must be followed in forming a corporation. The corporation can have perpetual existence or be chartered for a specific period of time.

Corporate Personnel The shareholders own the corporation. They elect a board of directors to govern the corporation. The board of directors hires corporate officers and other employees to run the daily business of the firm.

Corporate Taxation Traditional corporations pay income tax on net profits; shareholders pay income tax on the disbursed dividends that they receive from the corporation. This is what is known as double-taxation feature.

Constitutional Rights of Corporations Corporation is a legal “person” under state and federal law. Corporation has right to: Due process, Equal protection, Speech, Access to Courts, Freedom from unreasonable search and seizure. Does not have 5th amendment right to remain silent.

Classification of Corporations A corporation is referred to as a domestic corporation within its home state (the state in which it incorporates). A corporation is referred to as a foreign corporation by any state that is not its home state. A corporation is referred to as an alien corporation if it originates in another country but does business in the United States.

Torts and Criminal Acts The corporation is liable for the torts committed by its agents or officers within the course and scope of their employment (under the doctrine of respondeat superior). In some circumstances, a corporation can be held liable (and be fined) for the criminal acts of its agents and employees. Case 11.2 Commonwealth v. Angelo Todesca Corp. (2006).

Torts and Criminal Acts In certain situations, corporate officers may be held personally liable for corporate crimes.

Corporate Management - Shareholders The acquisition of a share of stock makes a person an owner and shareholder in a corporation. Although shareholders have no legal title to corporate property, they do have an equitable interest in the firm. Shareholders’ Powers: must approve fundamental corporate changes.

Shareholders’ Meetings Shareholders’ meetings must occur at least annually; special meetings can be called when necessary. Notice of the date, time, and place of the meeting must be sent to the shareholders. Shareholders may vote by proxy and may submit proposals to be included in the company’s proxy materials sent to shareholders before meetings.

Shareholder Voting Shareholder voting requirements and procedures are as follows: A minimum number of shareholders must be present at a meeting for business to be conducted; resolutions are passed by simple majority vote.

Shareholder Voting Cumulative voting may or may not be required or permitted. Cumulative voting gives minority shareholders a better chance to be represented on the board of directors. A shareholder may appoint a proxy to vote his or her shares.

Cumulative Voting

Corporate Management - Directors A corporation typically is governed by a board of directors. Subject to statutory limitations, the number of directors is set forth in the corporation’s articles or bylaws. Case 11.3 MM Companies, Inc. v. Liquid Audio, Inc. (2003).

Election of Directors The first board of directors is usually appointed by the incorporators; thereafter, directors are elected by the shareholders. Directors usually serve a one-year term, although longer and staggered terms are permitted under most state statutes.

Directors’ Qualifications and Compensation Few qualifications are required; a director can be a shareholder but is not required to be. Compensation is usually specified in the corporate articles or bylaws.

Board of Directors’ Meetings The board of directors conducts business by holding formal meetings with recorded minutes. The date of regular meetings is usually established in the corporate articles or bylaws; special meetings can be called, with notice sent to all directors. Quorum requirements vary from state to state; usually, a quorum is the majority of the corporate directors. Voting must usually be done in person, and in ordinary matters only a majority vote is required.

Directors’ Management Responsibilities Directors are responsible for declaring and paying corporate dividends to shareholders; authorizing major corporate decisions; appointing, supervising, and removing corporate officers and other managerial employees; determining employees’ compensation; making financial decisions necessary to the management of corporate affairs; and issuing authorized shares and bonds.

Directors’ Management Responsibilities Directors may delegate some of their responsibilities to executive committees and corporate officers and executives.

Role of Officers and Directors Directors are obligated to act in good faith, to use prudent business judgment in the conduct of corporate affairs, and to act in the corporation’s best interests. Directors have a fiduciary duty to subordinate their own interests to those of the corporation in matters relating to the corporation.

Role of Officers and Directors If a director fails to exercise these duties, he or she can be answerable to the corporation and to the shareholders for breaching the duties. Officers and Directors have fiduciary Duty to corporation based on trust and confidence. No Conflicts of Interest: full disclosure.

The Business Judgment Rule This rule immunizes a director from liability for a corporate decision as long as the decision was within the powers of the corporation and the authority of the director to make and was an informed, reasonable, and loyal decision.

Rights and Duties of Officers and Managers The rights of corporate officers and other high-level managers are defined by employment contracts, because these persons are employees of the company. Corporate officers normally can be removed by the board of directors at any time with or without cause and regardless of the terms of the employment contracts.

Rights and Duties of Officers and Managers Duties of corporate officers are the same as those of directors, because both groups are involved in decision making and are in similar positions of control.

Rights of Shareholders Shareholders have numerous rights, which may include the following: The right to a stock certificate and preemptive rights. Preemptive Rights (preference to current shareholders). The right to obtain a dividend (at the discretion of the directors). Voting rights.

Rights of Shareholders Inspection Rights: The right to inspect the corporate records. Shareholder’s Derivative Suit: rhe right to sue on behalf of the corporation when the directors fail to do so.

Liability of Shareholders Shareholders are generally not liable for corporate obligations. Disregarding the Corporate Entity: shareholders personally liable by “piercing the corporate veil.” Factors: Third party is tricked or misled. Under capitalization. Failure to follow statutory corporate formalities. Commingling of personal and corporate assets.

Liability of Shareholders Shareholders may also be liable for: Stock Subscription Agreements (Par vs. No Par shares). Watered stock (shares issued for less than par value).

Duties of Majority Shareholders In certain situations, majority shareholders may be regarded as having a fiduciary duty to minority shareholders and will be liable if that duty is breached. Case 11.4 Robbins v. Sanders (2004).

CHAPTER 12 Creditors’ Rights and Bankruptcy

Laws Assisting Creditors: Liens Mechanic’s Lien: Nonpossessory filed lien on real estate for labor/services. Artisans’ Lien: Possessory lien on personal property for labor done to property.

Laws Assisting Creditors: Liens Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges. Judicial Liens: Court-ordered seizure/sale of property. Attachment. Writ of Execution.

Garnishment Judicial order that allows creditor to collect a debt by seizing property of the debtor that is being held by a third party, usually wages.

Creditor’s Composition Agreements Creditors take less than owed on a liquidated debt. Binding on those who agree because consideration given by each depending on one another.

Mortgage Foreclosure Mortgagor (Debtor-Borrower). Mortgagee (Creditor-Lender). Debtor Defaults: Foreclosure - go through court to have sheriff seize, advertise, and sell property.

Mortgage Foreclosure Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left. If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. Equity of redemption within statutory period of redemption by the debtor.

Suretyship and Guaranty Promise by a third person (Surety/ Guarantor) to pay a the Creditor a debt owed by Debtor in the event the Debtor does not pay. Principal Debtor Creditor Surety / Guarantor

Surety Express contract between the surety and the creditor. Surety has primary liability. Creditor can demand payment from surety at any time after debt is due. Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible.

Guaranty Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. Statute of Frauds requires guaranty to be in writing. Case 12.1 JSV, Inc. v. Hene Meat, Co. (2003).

Defenses of Surety & Guarantor Surety can use any of the Debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor.

Defenses of Surety & Guarantor Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss.

Defenses of Surety & Guarantor Surrender or impairment of the Debtor’s collateral releases surety to the extent he is damaged. Release of a co-surety releases surety to the extent he is damaged.

Rights of Surety and Guarantor Right of Subrogation. Right of Reimbursement. Right of Contribution from Co-sureties. Sureties in equal amounts. Sureties in equal amounts, one or more co-sureties missing or insolvent.

Laws Assisting Debtors Exemptions (Federal and State). Homestead. Personal property. Holder in Due Course does not work against consumers. Truth-in-Lending Act for consumers.

Bankruptcy and Reorganization Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. Federal court under U.S. district court, can appeal to district courts. Federally appointed judges.

Types of Bankruptcy Relief Bankruptcy code has 8 chapters. 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. Chapter 7 - liquidation proceedings. Chapter 9 - adjustment of debts of a municipality.

Types of Bankruptcy Relief Chapter 11 – reorganizations. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes.

Secured vs Unsecured Creditors Secured creditor holds a security interest in property that, secures, or serves as collateral for, payment of a debt. Perfection of security interest: possession, PMSI, financing statement.

Chapter 7—Liquidation Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. Available for any person, individual, corporation, partnership.

Chapter 7—Liquidation Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

Filing the Petition Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Voluntary vs. Involuntary bankruptcy. 

Voluntary Bankruptcy Petitioner must understand there are other chapters available. Debtor does not have to be insolvent. List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses.

Voluntary Bankruptcy Court issues “Automatic Stay”, ordering relief from creditors. Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. Court will deny if “substantial abuse” of Chapter 7. Presumption of Abuse.

Involuntary Bankruptcy Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). Requirements: If 12 or more creditors, three creditors with $12,300 in unsecured claims must join the petition, OR If less than 12 creditors, one creditor having an unsecured claim of $12,300 may file. Court will order relief if Debtor is generally not paying debts as they come due.

Involuntary Bankruptcy Court will order relief if: A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing. Penalties for frivolous petitions against debtors, including Punitive damages.

Automatic Stay Either voluntary or involuntary. Creditors cannot commence or continue most legal actions. Damages for violation of stay. Creditors can get “adequate protection.” Periodic or one time cash payments or indubitable equivalent.

Creditor’s Meeting and Claims Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Within 90 days, Creditors must file “proof of claim” with court clerk. Leases cannot be for more than one year.

Property of the Estate Debtor’s Estate includes: All Debtor’s legal and equitable interests in property presently held, including community property; Property transferred in a “voidable” transaction; and Property which Debtor becomes entitled within 180 days after filing.

Property of the Estate Estate includes (cont’d): Proceeds and profits from the property of the estate. After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

Creditor’s Meeting and Claims Allowed unless disputed. If claim is disputed or unliquidated, court will decide value. It is a crime to file false claim. Employment contracts and real estate.

Exempt Property See list on page 410. States may pass law requiring Debtor use state exemptions. In some states, Debtor may choose state or federal exemptions. Homestead Exemption.

The Trustee Court-appointed until first meeting of creditors. Creditors elect permanent trustee Administers estate. Collects proceeds, liquidates assets and pay Creditors in order of priority.

The Trustee Powers: can get Debtor’s property back from Creditors by asserting the rights of: Debtor against the creditors. Lien creditors against the creditors. Bona fide purchaser against the creditors. Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period.

The Trustee Voidable Rights: Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

The Trustee Preferences: A Debtor is not permitted to transfer property or make a payment that favors one creditor over another. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

The Trustee Preferences (cont’d): Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Creditor gets more than he would in a Chapter 7. Consumer can transfer up to $600 without constituting a preference.

The Trustee Liens on Debtor’s Property: Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Can avoid liens which were unperfected on date of bankruptcy.

The Trustee Fraudulent Transfers: Trustee may avoid within one year of filing of petition. Trustee may proceed under state law for fraud with a 3 year statute of limitations.

Property Distribution If Secured property: Consumer debtors. Have 30 days from filing petition or before first meeting of creditors. Debtor must tell what she intends to do with collateral-- keep or surrender. Trustee must enforce within 45 days.

Property Distribution If surrenders: creditor can keep or sell. If creditor keeps = full satisfaction of debt. If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.

Property Distribution Unsecured property: Paid according to bankruptcy law. All of one class must be paid before moving to next. Creditor within last class receive proportionately if not enough. See Priority List in text. All creditors paid, trustee gives extra back to debtor.

Discharge Exceptions. Objections to Discharge. Effect of Discharge. Revocation of Discharge. Reaffirmation of a Debt.

Exceptions to Discharge Claims for back taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims against property/money obtained by Debtor under false pretenses. Claims by Creditors who did not know about bankruptcy. Case 12.2 In Re Savage (2004).

Objections to Discharge Debtor’s concealment of assets. Debtor’s fraud/concealment of financials. Granting of discharge within 6 years of filing the petition.

Reaffirmation of Debt Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Agreement is filed with court. Debtor can rescind agreement at any time.

Chapter 11-- Reorganization Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. Same debtors as are eligible under Chapter 7.

Chapter 11 “Fast track” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. “Workouts”.

Chapter 11 Debtor in Possession (DIP). Trustee may be appointed. DIP has same powers as trustee in Chapter 7. Collective Bargaining Agreements. Creditors Committees. The Reorganization Plan. Must be court approved.

Chapter 13— Repayment Plan Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$307,675 or fixed secured debts of <$922,975. Not for partnerships, corporations. Case 12.3 In re Buis (2006).

Chapter 12—Family Farmers and Fishermen “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. Procedure for filing. Content of plan. Court confirmation.

Chapter 12—Family Farmers and Fishermen Family Fisherman: 2005 Act: >50% dependence on commercial fishing operations Debts are 80% related to fishing, not to exceed $1.5 million.

CHAPTER 13 Employment Relationships

Introduction Agency=Principal and Agent. Agency is the most common and most important legal relationship. Understanding agency is crucial to understanding the legal environment of business.

Introduction Principals use agents to be able to conduct multiple business operations simultaneously in various locations. The principal has the right to control the agent in matters entrusted to the agent.

Agency Relationships Agency is a “fiduciary” relationship based on trust and confidence. Distinguish Employee vs. Independent Contractor Relationships. Employer Employee Independent Contractor

Employees vs. Independent Contractors Factors Courts Consider: E’ee I.C. Does the Employer exercise a great degree of control over the details of the work? Yes No Is the worker engaged in an occupation or business distinct from Employer? Is the work usually done under Employer’s supervision? Does Employer provide the tools? Has the worker been employed a long time? Is the worker paid at the end of the job? Is there a great degree of skill required?

Employer Liability Determining whether the worker is an employee or an independent contract affects liability of Principal/Employer. Tax Liability: Employer liable if employee. Case 13.1 Nu-Look Design, Inc. v. IRS (2004).

Employer Liability Contract Liability: Employer not necessarily liable. Tort Liability: Employer liable for torts of employee within scope of employment.

Agency Formation Consensual Agreement. No consideration required. Principal needs contractual capacity, Agent does not. For any legal purpose.

Types of Agencies Agency by Agreement. Agency by Ratification. Agency by Estoppel. Agency by Operation of Law. Necessaries for family. Emergency.

Agency By Agreement Formed through express consent (oral or written), or implied by conduct.

Agency by Ratification Principal either by act or by agreement ratifies conduct of a person who is not in fact an agent.

Agency by Estoppel Principal causes a third person to believe that another person is the Principal’s Agent, and the third person acts to her detriment in reasonable reliance on that belief.

Agency by Operation of Law Agency based on social duty is formed in certain situations when the Agent is unable to contact the Principal. Necessaries. Emergencies.

Agent’s Duties to the Principal Performance: reasonable diligence and skill (special skills). Notification to P. Loyalty (no conflict of interest). Obedience. Accounting.

Principal’s Duties to the Agent Compensation (Express or Implied). Reimbursement and Indemnification. Cooperation. Provide safe working conditions.

Agent’s Authority Actual Authority: Can be Express or Implied.  Oral or written. “Equal Dignity Rule”: if law requires written contract, Agent’s authority must be in writing. Failure to comply with the rule renders contract voidable. Exceptions: Officer acting for Corporation. Agent acts in Principal’s presence.

Implied Authority Inferred or conferred by custom, Agent’s position or what is reasonably necessary to carry out express authority. What the Agent reasonably thinks the Principal means.

Apparent Authority Principal, by either word or act, causes 3rd party to reasonably believe that Agent has authority to act for Principal. If 3rd party changes legal position by relying on Principal’s representations, Principal is estopped from denying Agent had authority to contract.

Liability in Agency Relationships Principal’s liability for Agent’s contract depends on whether Agent’s actions were authorized or unauthorized.

Liability for Contracts Principals are classified as: Disclosed: identity known to 3rd P. Partially Disclosed: 3rd P knows he is dealing with Agent, but doesn’t know Principal’s identity. Undisclosed: 3rd party does not know he is dealing with an Agent, and Principal’s identity is totally unknown.

Liability for Authorized Acts Disclosed or partially disclosed Principal is liable to 3rd party if Agent acts within scope of authority. Agent has no liability to 3rd P for disclosed Principal’s non-performance. (Agent may be liable if Principal is partially disclosed).

Liability for Authorized Acts If undisclosed Principal, no liability unless: Principal expressly excluded. Contract is a negotiable instrument. Agent’s performance is personal. 3rd party would have contracted if he knew the Principal’s identity.

Unauthorized Acts Unauthorized acts outside of Agent’s express, implied or apparent authority. If Agent has no authority, Principal is not liable, but Agent is liable.

Liability for Torts and Crimes Agent is liable to 3rd party for his own torts. Principal may be liable for Agent’s torts if they result from: Principal’s own tort. Principal’s authorization of tort. Agent’s unauthorized but fraudulent conduct made within scope of agency.

Respondeat Superior Applies only to Employer-Employee relationships. Principal/Employer is vicariously liable for Agent/Employee’s negligent torts. committed within the Agent’s “course and scope of employment.”

“Course and Scope of Employment” Factors (p. 449) For Principal to Be Liable, Agent’s Act must have occurred within the Course and Scope of Employment. Employer Liable Employer NOT Liable Was Employee’s act authorized by Employer? Yes No The Time place and purpose of act (factually based) ? Was act commonly performed by Employees? Did act advance Employer’s interests? Did Employer furnish instrumentality (tools)? Did Employer have reason to know Employee would do the act? Did the act involve a serious crime?

Liability for Employee’s Intentional Torts Principal liable for intentional torts committed with the scope of employment. Employee is a tortfeasor as well. Employer is liable for Employee’s acts which Employer knew or should have known the Employee had a propensity to commit.

Liability for Independent Contractor’s Torts First determine whether worker is employee or independent contractor. General rule: Employer is not liable for acts of independent contractors because Employer no right to control. Exception: hazardous activities. Independent Contractor is liable for her own torts.

Liability for Agent’s Crimes General Rule: Agent is liable, Principal is not, unless: Principal authorized or participated in crime. Some jurisdictions hold Principal liable for violating statutes.

Wage-Hour Laws Davis-Bacon Act -- the prevailing wage act. Walsh-Healey Act -- beginning of minimum wages. Fair Labor Standards Act (FLSA): Extension of wage and hour regulation to workers in interstate commerce. Child Labor: FLSA prohibits oppressive child labor practices.

Labor Unions Norris-LaGuardia Act. National Labor Relations Act. Protects peaceful strikes by limiting the injunction powers of federal courts. National Labor Relations Act. Establishes the right of workers to strike and engage in collective bargaining.

Labor Unions Labor Management Relations Act. Prohibits certain unfair union practices such as closed shops. Labor-Management Reporting and Disclosure Act. Regulates the internal operations of unions and outlaws hot-cargo agreements.

Worker Health and Safety The Occupational Safety and Health Act. (OSHA). The fundamental federal law aimed toward safety in the workplace. Enforcement is by OSHA, NIOSH, and the OSHRC.

Workers’ Compensation These laws reduce employer liability to employees for workplace injuries, and provide a measure of assurance that workplace injuries will be compensated, regardless of the solvency of the employer, by: 

Workers’ Compensation Requiring that injured employees make a claim against the employer’s workers’ compensation insurance policy, instead of suing the employer. Requiring most employers to carry workers’ compensation insurance.

Income Security The primary income security laws are Social Security and Welfare. Unemployment Insurance. Case 13.2 Lewis v. Director, Employment Security Dept. (2004).

Income Security Private Pension Plans. Unemployment Compensation. Employee Retirement Income Security Act (ERISA) gives employee a vested right to receive pension benefits at a future date when she stops working. Unemployment Compensation.

COBRA COBRA prohibits the discontinuance of insurance benefits of workers who have voluntarily or involuntarily been separated from work, unless the involuntary separation was on the basis of gross misconduct. Employers must comply if they have more than 20 employees.

Family Medical Leave Act The FMLA requires employers with over 50 employees to provide unpaid leave to employees who need to care for a spouse, child, or parent suffering with a serious medical condition. The employee cannot be terminated for taking leave under the policy, and has the right to restoration to the same or a similar position upon return to work. Case 13.3 Nevada Dept. of Human Resources v. Hibbs (2003).

Employee Privacy Rights Workplace: Electronic Communications Privacy Act allows employers to monitor electronic communications in the workplace. But it prohibits intentional interception of personal communications ECPA does permit employers to monitor employee electronic communications in the course of business.

Employee Privacy Rights Privacy Expectations and Email systems Courts generally hold for employers. Other Types of Monitoring Lie Detector Tests. Prohibited, except under the ongoing investigation exception. Drug Testing. Most government employees are subject to testing and the rights of private employees vary from state to state. AIDS Testing. Some state statutes restrict AIDS testing.

Employee Privacy Rights Other Types of Monitoring. Electronic Performance Surveillance. Most limitations can be avoided if the employer informs employees that surveillance will occur. Screening Procedures. Application question must have some reasonable connection to the job sought.

CHAPTER 14 Equal Employment Opportunities

Title VII of The Civil Rights Act of 1964 Title VII prohibits discrimination in employment on the basis of race, sex, color, religion, and national origin. “Sex” now includes pregnancy. In addition to prohibiting religious discrimination, employers must reasonably accommodate an employee’s religious practices. Enforcement of Title VII by EEOC. Case 14.1 Arbaugh v. Y & H Corp. (2006).

Types of Discrimination Company policies that discriminate are illegal, unless (except for race) they have a substantial demonstrable relationship to realistic qualifications for job. There are two kinds of discrimination: intentional and unintentional.

Intentional Discrimination Intentional discrimination by an employer against an employee is known as disparate-treatment discrimination. Plaintiff must make a prima facie case. Burden then shifts to defendant.

Unintentional Discrimination Unintentional Discrimination: Disparate-impact discrimination occurs when an employer’s work force does not reflect the local market.

Religious Discrimination Employers must “reasonably accommodate” the “sincerely held’ religious practices of its employees, unless to do so would cause undue hardship to employer’s business.

Gender Discrimination Title VII prohibits sex discrimination in the work place. Employers are prohibited from classifying jobs as male or female or from advertising such, unless employer can prove gender is essential to the job. Plaintiff must show gender was determining factor in hiring, firing or lack of promotion. Case 14.2 Conway-Jepsen v. Small Business Administration (2004).

Sex Discrimination Two types of sex discrimination: Differential treatment. Sexual harassment, which itself, exists in two varieties: Hostile Work Environment. Quid Pro Quo.

Sexual Harassment Title VII does not specifically mention sexual harassment as a form of sex discrimination, but the U.S. Supreme Court has interpreted Title VII’s prohibition against sex discrimination to include a prohibition against sexual harassment. There are currently two forms of recognized sexual harassment: Hostile Work Environment. Quid Pro Quo.

“Hostile Work Environment” Hostile environment occurs when workplace is “permeated” with discriminatory intimidation, ridicule, insult so severe to alter the conditions of the victim’s employment. The conduct in the workplace must be offensive to a reasonable person as well as to the victim, and it must be severe and pervasive.

Harassment by Supervisors: Quid Pro Quo Quid Pro Quo harassment involves the demands for sexual favors by a superior from a subordinate, in exchange for some workplace benefit. Under certain conditions, an employer may be liable for the quid pro quo harassment committed by its supervisory employees. There must have been a “tangible employment action” for plaintiff to have standing.

Supreme Court Guidelines Faragher v. City of Boca Raton (1998). Burlington Industries v. Ellerth (1998). Employers can defend by proving: (i) they took reasonable care to prevent and remediate allegations of harassment and (ii) employees failed to follow procedures. Case 14.3 Pennsylvania State Police v. Suders (2004).

Harassment by Co-Workers Employer generally liable only if employer knew or should have known and failed to take action. Employee notice to supervisor is notice to Employer under agency law. Employers may also be liable for harassment by non-employees. Same-sex harassment violates Title VII.

Online Harassment Company email systems. Company chat rooms. Posting sexually explicit images on company computer systems, screen savers, etc. Employees will generally not be liable if prompt action taken.

Remedies under Title VII Liability may be extensive. Plaintiff may receive: Reinstatement. Back Pay. Retroactive Promotions; and Damages.

Discrimination Based on Age The Age Discrimination in Employment Act (ADEA) protects individuals over the age of 40 from workplace discrimination that favors younger workers. Under Kimmel v. Florida Board of Regents, state employees are not covered by ADEA under the 11th Amendment.

Discrimination based on “Disability” The Americans with Disability Act (ADA) requires employers to offer reasonable accommodation to employees or applicants with a “disability” who are otherwise qualified for the job they hold or seek. The duty of reasonable accommodation ends at the point at where it becomes an undue hardship.

ADA To prevail on a claim under ADA, plaintiff must show she: Has a “disability.” Is otherwise qualified for the employment in question; and Was excluded from employment solely because of the disability. Plaintiff must first exhaust administrative relief with EEOC.

ADA: What is a “Disability”? ADA defines disability as: Physical or mental impairment that “substantially limits one or more of major life activities; or A record of such impairment; or Being regarded as having such an impairment. Determination is decided on a case-by-case basis.

ADA: “Reasonable Accommodation” If an employee with a disability can perform the job with reasonable accommodation, without “undue hardship” on the employer, the accommodation must be made. Examples: wheelchair ramps, flexible working hours, improved training materials. Job Applications and Pre-Employment Physical Exams.

Defenses to Employment Discrimination There are four basic types of defenses to employment discrimination claims. Business necessity. Bona fide occupational qualification. Seniority Systems. After-acquired evidence of employee misconduct.

Business Necessity The business necessity defense requires the employer to demonstrate that the imposition of a job qualification is reasonably necessary to the legitimate conduct of the employer’s business. Business necessity is a defense to disparate impact discrimination.

BFOQ The bona fide occupational qualification (BFOQ) defense requires an employer to show that an particular skill is necessary for the performance of a particular job. The BFOQ defense is used in cases of disparate treatment discrimination.

Seniority Systems A seniority system is one that conditions the distribution of job benefits on the length of time one has worked for an employer. A seniority system can be a defense only if it is a bona fide system, not designed to evade the effects of the anti-discrimination laws.

Affirmative Action Affirmative action programs go one step beyond non-discrimination: they are designed to “make up” for past patterns of discrimination by giving preferential treatment to protected classes.

Affirmative Action Affirmative action has led to “reverse discrimination” cases such as Bakke Adarand, and Hopwood (5th Cir.)and the recent U.S. Supreme Court cases: Gratz v. Bollinger (2003). Grutter v. Bollinger (2003).

CHAPTER 15 Labor-Management Relations

Federal Labor Law Four major federal labor law statutes are: Norris-LaGuardia Act of 1932 National Labor Relations Act Labor-Management Relations Act Labor-Management Reporting and Disclosure Act

Norris-LaGuardia Act Extended legal protection to peaceful strikes, picketing, and boycotts. Restricted the power of the courts to issue injunctions against unions engaged in peaceful strikes.

National Labor Relations Act of 1935 (Wagner Act) Established the rights of employees to engage in collective bargaining and to strike. Created the National Labor Relations Board (NLRB) to oversee union elections and prevent employers from engaging in unfair labor practices (such as refusing to recognize and negotiate with a certified union or interfering in union activities).

Labor-Management Relations Act Extended to employers protections already enjoyed by employees. Provided a list of activities prohibited to unions (secondary boycotts, use of coercion or discrimination to influence employees’ decisions to participate or refrain from union activities) and allowed employers to propagandize against unions before any NLRB election.

Labor-Management Relations Act Prohibited closed shops (which require that all workers belong to a union as a condition of employment), allowed states to pass right-to-work laws, and provided for an eighty-day cooling-off period.

Labor-Management Reporting and Disclosure Act Regulated internal union business procedures and union elections. Imposed restrictions on the types of persons who may serve as union officers and outlawed hot-cargo agreements.

The Decision to Form or Select a Union The key starting point for labor relations law is the decision by a company’s employees to form a union, which is usually referred to in the law as their bargaining representative. If the workers decide that they want the added power of collective union representation, they must follow certain steps to have a union certified.

Preliminary Organizing Before beginning an organizing effort, a union will attempt to assess worker support for unionization by obtaining signed authorization cards from the employees. It can then ask the employer to recognize the union, or it can submit the cards with a petition to the National Labor Relations Board.

Appropriate Bargaining Unit In determining whether workers constitute an appropriate bargaining unit, the NLRB considers whether the skills, tasks, and jobs of the workers are sufficiently similar so they can all be adequately served by a single negotiating position.

Moving toward Certification Certification by the NLRB means that the union is the exclusive representative of a bargaining unit and that the employer must recognize the union and bargain in good faith with it over issues affecting all employees who are within the bargaining unit.

Union Election Labor law provides for an election to determine whether employees choose to be represented by a union and, if so, which union. If the election is a fair one, and if the proposed union receives majority support, the board certifies the union as the bargaining representative.

Union Election Campaign Employer’s Right to Limit Campaign Activities. Employers retain great control to limit union activities as long as it can offer legitimate business justifications for those limitations. In regulating the union’s presence on the business premises, the employer must treat the union in the same way it would treat any other entity having on-site contact with its workers.

Union Election Campaign Case 15.1 Associated Rubber Co. v. NLRB (2002). The NLRB is particularly sensitive to any threats in an employer’s communications to workers, such as declarations that a union victory will result in the closing of the plant. The NLRB will also closely monitor sudden policy changes regarding compensation, hours, or working conditions that the employer makes before the election.

Management Election Campaign Management may also campaign among its workers against the union. The employer may not make threats of reprisals if employees vote to unionize. If the employer issues threats or engages in other unfair labor practices and then wins the election, the NLRB may invalidate the results.

Collective Bargaining Once a union is elected, its representatives will engage in collective bargaining with the employer. Each side tries to use its economic power to persuade or pressure the other side to grant concessions.

Subjects of Bargaining Topics such as wages, hours of work, and other conditions of employment are discussed during collective bargaining sessions. Other topics, such as college scholarships for the children of union members, may also be brought up for consideration. Some demands, such as a demand for featherbedding or for a closed shop, are illegal. Case 15.2 National Steel Corp. v. NLRB (2003).

Good Faith Bargaining If the parties reach an impasse, the union may call a strike against the employer to bring additional economic pressure to bear. This is one way in which the union can offset the superior bargaining power possessed by management.

Strikes The right to strike is protected by the U.S. Constitution. During a strike, an employer is no longer obligated to pay union members, and union members are no longer required to show up for work.

Illegal Strikes An otherwise lawful strike may become illegal because of the conduct of the strikers. Two types of illegal strikes include: Secondary Boycotts Wildcat Strikes

Secondary Boycotts Strikers are not permitted to engage in a secondary boycott by picketing the suppliers of an employer. Similarly, striking employees are not permitted to coerce the employer’s customers into agreeing not to do business with it. “Hot Cargo” Agreements.

Wildcat Strikes A wildcat strike occurs when a small group of union members engages in a strike against the employer without the permission of the union.

Replacement Workers If company’s employees go on strike, the company has the right to hire replacements (“scabs”). Employer may even offer permanent positions with company and can use employment agency to fill replacements.

Replacement Workers If the strike is called by the union to protest the employer’s unwillingness to engage in good faith negotiations, the employer must rehire the striking workers after the strike is settled, even if it has since replaced them with other workers.

Lockouts Employers may respond to threatened employee strikes by shutting down the plant altogether to prevent employees from working. Lockouts are used when the employer believes a strike is imminent.

Unfair Labor Practices

Unfair Labor Practices Employer’s Refusal to Recognize Union and Negotiate. Presumption of Employee Support. Questions of Majority Support. Employer’s Interference in Union Activities.

Unfair Labor Practices Employer’s Domination of Union. Employer’s Discrimination Against Union Employees. Union’s Unfair Labor Practices. Coercion. Discrimination.

Rights of Non- Union Employees The National Labor Relations Act protects concerted action on the part of nonunion employees. Employee Committees. Protected concerted action includes walkouts and other activities regarding wages, hours, workplace safety, or other terms or conditions of employment.

CHAPTER 16 Powers and Functions of Administrative Agencies

Agency Creation and Powers Under the U.S. Constitution, Congress may delegate the task of implementing its laws to government agencies. By delegating the task, Congress may indirectly monitor an area in which it has passed legislation without becoming bogged down in the details relating to enforcement of the legislation.

Enabling Legislation Administrative agencies are created by enabling legislation, which usually specifies the name, composition, and powers of the agency. Example: the Federal Trade Commission.

Types of Agencies There are two basic types of administrative agencies: Executive agencies. Independent regulatory agencies. The significant difference between the two types of agencies lies in the accountability of the regulators.

Organization of the F. T. C.

Executive Agencies

Executive Agencies

Administrative Process Three functions of administrative process are: Rulemaking Enforcement Adjudication

Rulemaking Agencies are authorized to create new regulations. This power is conferred on an agency in the enabling legislation, and these rules are as important as formal acts of Congress.

Rulemaking Notice-and-comment rulemaking is the most common rulemaking procedure. Notice of Proposed Rulemaking—Begins with the publication of the proposed regulation in the Federal Register. Opportunity for Comment—After notice is published, time is allowed for private parties to comment on the proposed rule. . . . .

Rulemaking Notice-and-comment rulemaking is the most common rulemaking procedure (cont’d): Publication of the Final Rule—After the agency reviews the comments, it drafts the final rule and publishes it. Case 16.1 Hemp Industries Association v. Drug Enforcement Administration (2004).

Investigation Administrative agencies investigate the entities that they regulate. They conduct investigations during the rulemaking process to obtain information and after rules are issued to monitor compliance.

Investigation The most important investigative tools available to an agency are the following: Inspections and Tests: Used to gather information and to correct or prevent undesirable conditions. Subpoenas: Orders that direct individuals to appear at a hearing or to hand over specified documents. Case 16.2 NLRB v. American Medical Response, Inc. (2006).

Fourth Amendment Limits on Investigations Limits on administrative investigations include the following: The investigation must have a legitimate purpose. The information being sought must be relevant. The demand for testimony or documents must be specified. The burden of the demand is on the party from whom the information is sought.

Adjudication After a preliminary investigation, an agency may initiate an administrative action against an individual or organization by filing a complaint. Most such actions are resolved at this stage, before they go through the formal adjudicatory process. If there is no settlement, the case is presented to an administrative law judge in a proceeding similar to a trial.

Process of Adjudication

Limitations on Agency Powers Combining the functions normally divided among the three branches of government into an administrative agency concentrates considerable power in a single organization. As a result, several controls exist to place such power in check, including: Judicial Controls. Executive Controls. Legislative Controls.

Judicial Controls Administrative agencies are subject to the judicial review of the courts. However, such review is not automatic. Parties seeking review must show: The action is reviewable (the APA presumes this). The party must have standing to sue. The party must have exhausted all possible administrative remedies. There must be an actual controversy.

Judicial Controls A court may review whether: An agency has exceeded the scope of its enabling legislation. An agency has properly interpreted the laws. An agency has violated the U.S. Constitution. An agency has complied with all applicable procedural requirements. An agency’s actions are arbitrary or capricious, or an abuse of discretion. An agency’s conclusions are not supported by substantial evidence. Case 16.3 Cellular Telecommunications & Internet Association v. FCC (2003).

Executive Controls The president can control administrative agencies through appointments of federal officers and through vetoes of legislation creating or affecting agency powers.

Legislative Controls Congress can give power to an agency, take it away, increase or decrease the agency’s finances, or abolish the agency. The Administrative Procedure Act of 1946 also limits agencies. Specific statutes also make agencies accountable to the public.

Public Accountability As a result of growing public concern over the powers exercised by administrative agencies, Congress passed several laws to make agencies more accountable through public scrutiny. Four of the most significant of these laws are: Freedom of Information Act of 1966. Government-in-the-Sunshine Act of 1976. Regulatory Flexibility Act of 1980. Small Business Regulatory Enforcement Fairness Act of 1996.

Government-in-the Sunshine Act of 1976 Requires the following: “[E]very portion of every meeting of an agency” must be open to “public observation.” Procedures must be implemented to ensure that the public is provided with adequate advance notice of the agency’s scheduled meeting and agenda.

Regulatory Flexibility Act of 1980 Concern over the effects of regulation on the efficiency of business, particularly smaller ones, led Congress to pass the Regulatory Flexibility Act in 1980. The act requires a regulatory flexibility analysis whenever a new regulation will have a “significant impact upon a substantial number of small entities.”

Small Business Regulatory Enforcement Fairness Act Allows Congress sixty days to review new federal regulations before they take effect. Allows objections to be heard before Congress. SBFREFA allows small businesses to recover their expenses for excessive fees.

State Administrative Agencies States create agencies that parallel federal agencies to provide similar services on a more localized basis. If the actions of parallel state and federal agencies conflict, the actions of the federal agency will prevail. Judicial Review of State Agency Actions.

CHAPTER 17 Consumer Protection

Deceptive Advertising One of the earliest—and still one of the most important—federal consumer protection laws was the Federal Trade Commission Act of 1914. The act created the Federal Trade Commission (FTC) to carry out the broadly stated goal of preventing unfair and deceptive trade practices, including deceptive advertising.

Deceptive Advertising Defined Generally, an advertising claim will be deemed deceptive if it would mislead a reasonable consumer.

Bait-and-Switch Advertising Advertising a lower-priced product (the “bait”) when the intention is not to sell the advertised product but to lure consumers into the store and convince them to buy a higher-priced product (the “switch”) is prohibited by the FTC.

FTC Actions Against Deceptive Advertising Cease-and-desist orders require the advertiser to stop the challenged advertising. Counter advertising requires the advertiser to advertise to correct the earlier misinformation. Case 17.1 FTC v. Verity International, Ltd. (2006).

Telemarketing and Electronic Advertising The Telephone Consumer Protection Act of 1991 prohibits telephone solicitation using an automatic telephone dialing system or a prerecorded voice, as well as the transmission of advertising materials via fax without first obtaining the recipient’s permission to do so.

Labeling and Packaging Manufacturers must comply with labeling or packaging requirements for their specific products. In general, all labels must be accurate and not misleading.

Sales Many of the laws that protect consumers concern the disclosure of certain terms in sales transactions and provide rules governing the various forms of sales, such as: Door-to-door sales. Telephone and mail-order sales. Online sales.

Health and Safety Protection Laws discussed earlier regarding the labeling and packaging of products go a long way toward promoting consumer health and safety. Laws include: Federal Food, Drug and Cosmetic Act Consumer Product Safety Act

Federal Food, Drug and Cosmetic Act The FFDCA of 1938, as amended, protects consumers against adulterated and misbranded foods and drugs. The act establishes food standards, specifies safe levels of potentially hazardous food additives, and sets classifications of food and food advertising.

Consumer Product Safety Act The Consumer Product Safety Act of 1972 seeks to protect consumers from risk of injury from hazardous products. The Consumer Product Safety Commission has the power to remove products that are deemed imminently hazardous from the market and to ban the manufacture and sale of hazardous products. Case 17.2 U.S. v. Mirama Enterprises, Inc. (2002).

Credit Protection Because of the extensive use of credit by American consumers, credit protection has become an especially important area regulated by consumer protection legislation.

Truth-in-Lending A disclosure law that requires sellers and lenders to disclose credit terms or loan terms in certain transactions, including: retail and installment sales and loans. car loans. home improvement loans. certain real estate loans.

Truth-in-Lending The TILA provides for the following: Equal credit opportunity—Creditors are prohibited from discriminating on the basis of race, religion, marital status, gender, and so on. Credit-card protection—Credit-card users may withhold payment for a faulty product sold, or for an error in billing, until the dispute is resolved; liability of cardholders for unauthorized charges is limited to $50, providing notice requirements are met; consumers are not liable for unauthorized charges made on unsolicited credit cards.

Truth-in-Lending Consumer leases—The CLA of 1988 protects consumers who lease automobiles and other goods priced at $25,000 or less if the lease term exceeds four months.

Fair Credit Reporting Entitles consumers to request verification of the accuracy of a credit report and to have unverified information removed from their files.

Fair Debt Collection Practices Act Prohibits debt collectors from using unfair debt-collection practices, such as contacting the debtor at his or her place of employment if the employer objects or at unreasonable times, contacting third parties about the debt, harassing the debtor, and so on.

State Consumer Protection Laws State laws often provide for greater consumer protection against deceptive trade practices than do federal laws. In addition, the warranty and unconscionability provisions of the Uniform Commercial Code protect consumers against sellers’ deceptive practices.

State Consumer Protection Laws The Uniform Consumer Credit Code, which has not been widely adopted by the states, also provides credit protection for consumers. Case 17.3 ForSaleByOwner.com v. Zinneman (2004).

CHAPTER 18 Protecting the Environment

Common Law Actions Businesses/people responsible for operations that created dirt, smoke, noxious odors, noise, or toxic substances were sometimes held liable under common law theories of nuisance or negligence.

Nuisance A common law doctrine under which actions against pollution-causing activities may be brought. An action is permissible only if an individual suffers a harm separate and distinct from that of the general public.

Negligence and Strict Liability Parties may recover damages for injuries sustained as a result of pollution-causing activities of a firm if it can be demonstrated that: the harm was a foreseeable result of the firm’s failure to exercise reasonable care (negligence). businesses engaging in ultra hazardous activities are liable for whatever injuries the activities cause, regardless of whether the firms exercise reasonable care.

Federal Regulation The National Environmental Policy Act of 1969 imposes environmental responsibilities on all federal agencies and requires for every major federal action the preparation of an environmental impact statement (EIS). An EIS must analyze the action’s impact on the environment, its adverse effects and possible alternatives, and its irreversible effects on environmental quality.

Federal Regulation The Environmental Protection Agency was created in 1970 to coordinate federal environmental programs; it administers most federal environmental policies and statutes. Important areas regulated by the federal government include the following: air pollution, water pollution, noise pollution, toxic chemicals, and radiation

Federal Regulation

Federal Regulation

State and Local Regulation Many states regulate the degree to which the environment may be polluted. City, county, and other local governments control some aspects of the environment.

Noise Pollution Regulated by the Noise Control Act of 1972.

Air Pollution Regulated under the authority of the Clean Air Act of 1963 and its amendments, particularly those of 1970, 1977, and 1990.

Mobile Sources Regulations governing air pollution from automobiles and other mobile sources specify pollution standards and time schedules for meeting the standards. Under the 1990 amendments, automobile manufacturers must cut new automobiles’ exhaust emission of nitrogen oxide by 60% and emission of other pollutants by 35%.

Stationary Sources The Clean Air Act authorizes the EPA to establish air-quality standards for stationary sources but recognizes that the primary responsibility for preventing and controlling air pollution rests with state and local governments. Under the 1990 amendments to the Clean Air Act, 110 of the oldest coal-burning power plants in the US must cut their emissions by 40% by the year 2001 to reduce acid rain. Case 18.1 Clean Air Markets Group v. Pataki (2002).

Hazardous Air Pollutants There are 189 hazardous air pollutants, including asbestos, benzene, beryllium, cadmium, mercury, and vinyl chloride. Instead of establishing specific emissions standards for each hazardous air pollutant, the 1990 amendments to the Clean Air Act require industry to use pollution-control equipment that represents the maximum achievable control technology to limit emissions.

Violations of the Clean Air Act For violations of emission limits under the Clean Air Act, the EPA can assess civil penalties of up to $25,000 per day. Additional fines of up to $5,000 per day can be assessed for other violations, such as failing to maintain the required records. Those who knowingly violate the act may be subject to criminal penalties, including fines of up to $1 million and imprisonment for up to two years.

Water Pollution Regulated by the: Rivers and Harbors Appropriations Act of 1899, as amended. the Federal Water Pollution Control Act of 1948, as amended by the Clean Water Act of 1972.

Navigable Waters In 1972, amendments to the FWPCA established the following goals: Make water safe for swimming. Protect fish and wildlife. Eliminate the discharge of pollutants into the water. Case 18.2 S.D. Warren Co. v. Maine Board of Environmental Protection (2006).

Wetlands Clean Water Act prohibits filling/dredging of wetlands unless a permit is obtained from the Army Corps of Engineers. “Wetlands”: those areas inundated or saturated by surface or ground water that supports vegetation adapted.

Drinking Water Passed in 1974, this act requires the EPA to set maximum levels for pollutants in public water systems. The act was amended in 1996 to give the EPA greater flexibility in setting regulatory standard governing drinking water.

Ocean Dumping The Ocean Dumping Act regulates the transportation and dumping of material into ocean waters. Each violation of any provision or permit may result in a civil penalty of not more than $50,000 or revocation or suspension of the permit. A knowing violation is a criminal offense that may result in a $50,000 fine, imprisonment for not more than a year, or both. An injunction may also be imposed.

Pesticides Case 18.3 Bates v. Dow Agrosciences, LLC (2005). Pesticides and herbicides, toxic substances, and hazardous waste are regulated under the authority of Federal Insecticide, Fungicide, and Rodenticide Act of 1947. Toxic Substances Control Act of 1976. Resource Conservation and Recovery Act of 1976. Case 18.3 Bates v. Dow Agrosciences, LLC (2005).

Hazardous Waste Disposal Resource Conservation and Recovery Act. Authorizes the EPA to issue regulations for the monitoring, transporting, storage, treatment, and disposal of hazardous substances.

Hazardous Waste Disposal CERCLA (Superfund). Designed to ensure the clean-up of hazardous waste sites and to assign liability for the costs of the cleanup operations. Joint and Several Liability for cleanup costs can be assigned to any potentially responsible party (PRP).

CHAPTER 19 Land-Use Control and Real Property

The Nature of Real Property Real property (also called real estate or realty) is immovable. Real property includes land, subsurface and air rights, plant life and vegetation, and fixtures.

Ownership of Real Property Ownership of property is an abstract concept that cannot exist independently of the legal system. Property ownership is often viewed as a bundle of rights.

Ownership in Fee Simple Fee simple absolute: The most complete form of ownership. Fee simple defeasible: Ownership in fee simple that can end if a specified event or condition occurs.

Life Estates An estate that lasts for the life of a specified individual; ownership rights in a life estate are subject to the rights of the future-interest holder.

Nonpossessory Interests An interest that involves the right to use real property but not to possess it. Nonpossessory interests include: Easements. Profits. Licenses.

Transfer of Ownership Ownership of real property can pass from one person to another in a number of ways: Deed. Will or inheritance. Adverse possession.

Deeds When real property is sold or transferred as a gift, title to the property is conveyed by means of a deed. A warranty deed warrants the most extensive protection against defects of title.

Deeds A quitclaim deed conveys to the grantee whatever interest the grantor had; it warrants less than any other deed. A deed may be recorded in the manner prescribed by recording statutes in the appropriate jurisdiction to give third parties notice of the owner’s interest.

Will or Inheritance If the owner dies after having made a valid will, the land passes as specified in the will. If the owner dies without having made a will, the heirs inherit according to state inheritance statutes.

Adverse Possession When a person possesses the property of another for a statutory period of time (3–30 years, with 10 most common), that person acquires title to the property, provided the possession is actual and exclusive, open and visible, continuous and peaceable, and hostile and adverse (without the permission of the owner).

Leasehold Estates A leasehold estate is an interest in real property that is held only for a limited period of time, as specified in the lease agreement. Types of tenancies relating to leased property include the following: Tenancy for Years Periodic Tenancy Tenancy at Will Tenancy at Sufferance

Types of Tenancies Tenancy for Years. Tenancy for a period of time stated by express contract. Periodic Tenancy. Tenancy for a period determined by the frequency of rent payments; automatically renewed unless proper notice is given. Tenancy at Will. Tenancy for as long as both parties agree; no notice of termination is required. Tenancy at Sufferance: Possession of land without legal right.

Landlord-Tenant Relationships Landlord-tenant relationships have become subject to specific state and local statutes and ordinances as well.

Creating the Landlord-Tenant Relationship The landlord-tenant relationship is created by a lease agreement. State or local laws may dictate whether the lease must be in writing and what lease terms are permissible.

Use and Maintenance of the Premises Rights and Duties The rights and duties that arise under a lease agreement generally pertain to the following areas: Possession Use and Maintenance of the Premises Rent

Possession The tenant has an exclusive right to possess the leased premises, which must be available to the tenant at the agreed-on time. Under the covenant of quiet enjoyment, the landlord provides that during the lease term neither the landlord nor anyone having superior title to the property will disturb the tenant’s use and enjoyment of the property.

Use and Maintenance of the Premises Unless the parties agree otherwise, the tenant may make any legal use of the property. The tenant is responsible for any damage that he or she causes. The landlord must comply with laws that set specific standards for the maintenance of real property. The implied warranty of habitability requires that a landlord furnish and maintain residential premises in a habitable condition.

Rent The tenant must pay the rent as long as the lease is in force, unless the tenant justifiably refuses to occupy the property or withholds the rent because of the landlord’s failure to maintain the premises properly.

Transferring Rights to Leased Property If the landlord transfers complete title to the leased property, the tenant becomes the tenant of the new owner. The new owner may then collect the rent but must abide by the existing lease. Generally, tenants may assign their rights under a lease contract to a third person. Tenants may also sublease leased property to a third person, but the original tenant is not relieved of any obligations to the landlord under the lease. In either case, the landlord’s consent may be required.

Land-Use Control The Law of Torts. Private Agreements. Owners are obligated to protect the interests of those who come on the land and those who own nearby land. Private Agreements. Owners may agree with others to limit the use of their property.

Police Power A state can regulate the use of land within its jurisdiction. A state authorizes its city or county governments to regulate the use of land within their local jurisdiction.

Government Plans Most states require that local land-use laws follow a general plan.

Zoning Laws Laws that divide an area into districts to which specific land-use regulations apply. Districts may be zoned for residential, commercial, industrial, or agricultural use. Within all districts there may be minimum lot-size requirements, structural restrictions, and other bulk zoning regulations.

Zoning Laws Variances allows for the use of property in ways that vary from the restrictions. Case 19.1 Richard Roeser Professional Builder, Inc. v. Anne Arundel County (2002).

Subdivision Regulations Laws directing the dedication of specific plots of land to specific uses within a subdivision.

Growth-Management Ordinances Limits on, for example, the number of residential building permits.

Limitations on the Exercise of Police Power Due process and Equal Protection. Land-use controls cannot be arbitrary, unreasonable, or discriminatory. Case 19.2 MacPherson v. Department of Administrative Services (2006).

Limitations on the Exercise of Police Power Just Compensation. Private property taken for a public purpose requires payment of just compensation. “Taking” for a public purpose includes enacting overly burdensome regulations.

Eminent Domain Condemnation power. Governments have the inherent power to take property for public use without the consent of the owner. Limits on the power of eminent domain. Private property taken for a public purpose requires payment of just compensation. Due Process and Equal Protection. Case 19.3 Kelo v. City of New London, Connecticut (2005).

CHAPTER 20 Promoting Competition

The Sherman Antitrust Act In 1890, Congress passed “An Act to Protect Trade and Commerce against Unlawful Restraints and Monopolies”—commonly known as the Sherman Act. The Sherman Act was and remains one of the government’s most powerful weapons in the struggle to maintain a competitive economy.

Major Provisions of the Sherman Act Section 1 - Prohibits contracts, combinations, and conspiracies in restraint of trade. Horizontal restraints subject to Section 1 include price-fixing agreements, group boycotts, horizontal market division, trade association agreements, and joint ventures.

Major Provisions of the Sherman Act Section 1: Vertical restraints subject to Section 1 include resale price maintenance agreements, territorial or customer restrictions, and refusals to deal. Section 2 - Prohibits monopolies and attempts to monopolize.

Jurisdictional Requirements The Sherman Act applies only to activities that have a “significant” impact on interstate commerce.

Section 1 of the Sherman Act The underlying assumption of Section 1 of the Sherman Act is that society’s welfare is harmed if rival firms are permitted to join in an agreement that consolidates their market power or otherwise restrains competition.

Per Se Violations vs. the Rule of Reason Per se Rule: Applied to restraints on trade that are so inherently anticompetitive that they cannot be justified and are deemed illegal as a matter of law. Rule of Reason: Applied when an anticompetitive agreement may be justified by legitimate benefits. Under the rule of reason, the lawfulness of a trade restraint will be determined by the purpose and effects of the restraint.

Section 1 - Horizontal Restraints A horizontal restraint is any agreement that in some way restrains competition between rival firms competing in the same market. Price Fixing: any agreement among competitors to fix prices is a per se violation. Case 20.1 In re Cardizem CD Antitrust Litigation (2003).. Group Boycotts: agreement to not deal with a vendor or third party.

Section 1 - Vertical Restraints A vertical restraint of trade is one that results from an agreement between firms at different levels in the manufacturing and distribution process. Vertical relationships encompass the entire chain of production: inventory, manufacturing, distribution, retail sales. Retail Price Maintenance Agreements.

Section 2 of the Sherman Act Section 2 condemns “every person who shall monopolize, or attempt to monopolize.” There are two distinct types of behavior that are subject to sanction under Section 2: Monopolization Attempts to Monopolize

Monopolization The possession of market power in the relevant market and the intent to monopolize, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. A violation of Section 2 of the Sherman Act requires that both of these elements be established.

Attempts to Monopolize Definition: Any activity by a firm to eliminate competition and gain monopoly power.

The Clayton Act In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act. The Clayton Act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover such as: Price Discrimination Exclusionary Practices Mergers Interlocking Directorates

Section 2 – Price Discrimination As amended in 1936 by the Robinson-Patman Act, prohibits price discrimination that substantially lessens competition and prohibits a seller engaged in interstate commerce from selling goods of similar grade and quality to two or more buyers at different prices when the result is a substantial lessening of competition or the creation of a competitive injury.

Section 3 – Exclusionary Practices Prohibits exclusionary practices, such as exclusive-dealing contracts and tying arrangements, when the effect may be to substantially lessen competition. Case 20.2 Illinois Tool Works, Inc. v. Independent Ink, Inc. (2006).

Section 7 - Mergers Prohibits mergers when the effect may be to substantially lessen competition or to tend to create a monopoly.

Horizontal Mergers The acquisition by merger or consolidation of a competing firm engaged in the same relevant market. Will be unlawful only when a merger results in the merging firms holding a disproportionate share of the market, resulting in a substantial lessening of competition, and if the merger does not enhance consumer welfare by increasing efficiency of production or marketing.

Vertical Mergers The acquisition by a seller of one of its buyers or vice versa. Will be unlawful if the merger prevents competitors of either merging firm from competing in a segment of the market that otherwise would be open to them, resulting in a substantial lessening of competition.

Section 8 – Interlocking Directorates Prohibits individuals from serving as directors on the boards of two or more competing companies simultaneously.

Enforcement of Antitrust Laws Antitrust laws are enforced by: Department of Justice. Federal Trade Commission. Private Parties, who may be awarded treble damages and attorneys’ fees.

Exemptions from Antitrust Laws Labor unions Agricultural associations and fisheries Insurance—when state regulation exists Export trading companies Professional baseball Oil marketing

Exemptions from Antitrust Laws Cooperative research and production Joint efforts by businesspersons to obtain legislative or executive action Other activities, including certain national defense actions, state actions, and actions of certain regulated industries

CHAPTER 21 Investor Protection and Corporate Governance

Introduction The stock market crash of 1929 showed the need for: More disclosure from issuers. Prohibition of deceptive, unfair and manipulative practices in the purchase and sale of securities.

The SEC The Securities and Exchange Commission is an independent federal regulatory agency that enforces federal securities laws. The SEC : Regulates disclosure of facts in offerings made through national securities exchanges (e.g., NASDAQ, NYSE). Investigates and prosecutes securities fraud. Registration and regulation of securities brokers, dealers and investment advisors.

Securities Act of 1933 Securities Act of 1933 regulates solicitation, buying and selling of securities. What is a “Security”? In SEC v. Howey (1946), the U.S. Supreme Court held that a security exists in any transaction in which a person: (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily from others’ managerial or entrepreneurial efforts.

Registration Statement If a security does not qualify for an exemption under §5 of the Securities Act of 1933, the security must be registered with the Securities Exchange Commission (http://www.sec.gov) and state securities agencies before offered to the public. Corporation must file a registration statement and prospectus with the SEC. Prospectus is later distributed to investors.

Registration Statement Description of the significant provisions of the registrant’s “offering” and how the registrant intends to use the proceeds from the sale. Description of the registrant’s properties and business.

Registration Statement Description of the management of the registrant, remuneration, pension, stock offerings, executive interests and compensation. Financial statement certified by and independent accounting firm. Description of pending lawsuits.

Exempt Securities Bank securities sold before 1933. Commercial paper if maturity date does not exceed 9 months. Charitable organization securities. Securities issued to existing securities holders resulting from reorganization, bankruptcy. Securities issued to finance railroad equipment.

Exempt Securities Any insurance, endowment, annuity contract or government-issued securities. Securities issued by banks, savings and loan association, farmers' cooperatives. Regulation A, small offering up to $5 million in a 12 month period to “test the waters”; but requires a circular. Securities issued to existing securities holders, stock split, dividend (really a transaction exemption).

Exempt Transactions Small “Reg D” Offerings Rule 504: up to $1M during 12 months to accredited investors only. Rule 504a. Rule 505: up to $5M during 12 months to both accredited and unaccredited investors. Section 4(6): up to $5M solely to accredited investors.

Violations of the 1933 Act Intentional or negligent fraud of investors by misrepresenting or omitting material facts in the registration statement and/prospectus. Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true.

Violations of the 1933 Act Penalties: Criminal: up to 5 years in prison and $10,000 fine. Civil: damages, refund of investment, injunction.

Securities Exchange Act of 1934 Registration of securities exchanges, brokers, dealers, and national securities exchanges and associations. Requires continuous disclosure system for corporations with securities sold on national exchanges or assets in excess of $5 million and 500 or more shareholders (Sec. 12 companies or 1934 companies).

Section 10(b) , Rule 10b(5) and Insider Trading Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC. Rule 10b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security. Case 21.1 SEC v. Texas Gulf Sulphur Co. (1968).

Section 10(b) , Rule 10b(5) and Insider Trading Insider Trading: Advance information available to corporate officers and directors that can affect future value of stock. Private Securities Litigation Reform Act of 1995. Case 21.2 Merill Lynch, Pierce, Fenner & Smith, Inc. v Dabit (2006).

Section 10(b) , Rule 10b(5) and Insider Trading Prohibited: 10b(5) “Insiders” (Officers, Executives and Directors). 10b(5) “Outsiders”. Tipper/tippee theory--insider’s fiduciary duty must be breached. Misappropriation theory: one wrongfully obtains inside info and trades on it. Courts still require fiduciary duty be breached, to employer, for instance.

Violations of the 1934 Act 10b violation—scienter or intent is required to prove criminal penalties. Imprisonment up to 10 years, fines up to $1 million, $2.5 for partnership or corporation. 16(b) -- strict liability -- no fault or scienter required -- civil penalties. Criminal Penalties and Civil Sanctions. Case 21.3 United States v. Stewart (2004).

Corporate Governance Alignment of shareholder and management interests. Stock options. ‘Outside’ directors. Governance and Corporate Law. Audited Financial Conditions. Legal Protections for Shareholders.

Corporate Governance Purpose of Corporate Law. Board of Directors. Importance of the Audit Committee. Importance of the Compensation Committee.

The Sarbanes-Oxley Act of 2002 Attempts to increase corporate accountability: Imposes stricter disclosures. Harsher penalties for violations. Requires CEO’s to take responsibility for accuracy of financial statements filed with SEC. Creates new private civil actions.

The Sarbanes-Oxley Act of 2002 Creates Public Company Accounting Oversight Board regulates public accounting firms. Key Provisions: Certification Requirements. Loans to Officers and Directors. Protections for Whistleblowers. Enhanced Penalties. Statute of Limitations for Securities Fraud.

Regulation of Investment Companies Act on behalf of many smaller shareholders by buying stock and professionally managing the “portfolio.” (MUTUAL FUNDS.) To safeguard company assets, all securities must be held by a bank or stock exchange member. No dividends paid except from undistributed net income.

State Securities Laws State securities laws are called “blue sky” laws. Issuers must comply with federal and state securities laws and states do not allow the same exemptions as federal government. States could require registration or qualification. Uniform Securities Act has been adopted in part by many states.

Online Securities Offerings and Disclosures Spring Street Brewing Company (1996). First Online IPO. What if there is a discrepancy between online and hard copy versions of prospectus?

Regulations for Online Offerings SEC October 1995 “use of electronic media should be at least an equal alternative to paper-based media.” Downloadable prospectus is permissible. Potential Liability Created by Online Offering Materials (hyperlinks).  What about online securities by foreign companies?

Regulations for Online Offerings Online IPO’s may deliver a prospectus by: Giving timely and adequate notice (e-mails) Making the online communication system readily accessible. Requiring evidence of delivery (email return receipt).

Potential Liability Created by Online Offering Materials Online offers should not link to other sites in prospectus. Problems with status of investors on a general website. For example, Reg D offerings can only be made to “accredited investors”. Perhaps use password protected.

Online Securities Fraud SEC tries to enforce anti-fraud provisions of Securities Laws. Use and abuse of internet chat rooms. Where is the line between free speech and fraud? Pumping and Dumping: buyer pumps the stock and after it rises, he dumps it, selling at a higher price. Selling unregistered securities by unregistered stock brokers is a problem.

CHAPTER 22 Regulation of International Transactions

International Principles and Doctrines International law is a body of written and unwritten laws that are observed by otherwise independent nations and that govern the acts of individuals as well as states. The three important legal principles and doctrines include: Principle of Comity.  Act of State Doctrine.  Doctrine of Sovereign Immunity. 

The Principle of Comity Under this principle, nations give effect to the laws and judicial decrees of other nations for reasons of courtesy and international harmony.

The Act of State Doctrine A doctrine under which American courts avoid passing judgment on the validity of public acts committed by a recognized foreign government within its own territory.

The Doctrine of Sovereign Immunity When certain conditions are satisfied, foreign nations are immune from U.S. jurisdiction under the Foreign Sovereign Immunities Act of 1976.

Doctrine of Sovereign Immunity Exceptions are made when the: foreign state has “waived its immunity either explicitly or by implication”. action is “based upon a commercial activity carried on in the United States by the foreign state”. Case 22.1 Republic of Austria v. Altmann (2004).

Doing Business Internationally Ways in which U.S. domestic firms engage in international business transactions include: exporting, which may involve foreign agents or distributors. manufacturing abroad through licensing arrangements, franchising operations, wholly owned subsidiaries, or joint ventures.

Exporting Exporting can take two forms: Direct exporting—U.S. company signs a sales contract with a foreign purchaser that provides for the conditions of shipment and payment for the goods. Indirect exporting—can be undertaken by the appointment of a foreign agent or a foreign distributor.

Manufacturing Abroad U.S. firms want to establish manufacturing plants abroad if they believe that by doing so they will reduce costs, particularly for labor, shipping, and raw materials. They will be able to compete more effectively in foreign markets.

Commercial Contracts in an International Setting Choice-of-language, forum-selection, and choice-of-law clauses are often included in international business contracts to reduce the uncertainties associated with interpreting the language of the agreement and dealing with legal differences. Case 22.2 Garware Polyester, Ltd. v. Intermax Trading Corp. (2001).

Commercial Contracts in an International Setting Force majeure clauses are included in most domestic and international contracts. They commonly stipulate that certain events, such as floods, fire, accidents, labor strikes, and shortages, may excuse a party from liability for nonperformance of the contract. Arbitration clauses are also frequently found in international contracts.

Making Payment on International Transactions Currency differences between nations and the geographical distance between parties to international sales contracts add a degree of complexity to international sales that does not exist within the domestic market. Because international contracts involve greater financial risks, special care should be taken in drafting these contracts to specify both the currency in which payment is to be made and the method of payment.

Monetary Systems Currency conversion. Correspondent banking. Because nations have different monetary systems, payment on international contracts requires currency conversion at a rate specified in a foreign exchange market. Correspondent banking. Correspondent banks facilitate the transfer of funds from a buyer in one country to a seller in another.

Letters of Credit Letters of credit facilitate international transactions by ensuring payment to sellers and ensuring to buyers that payment will not be made until the sellers have complied with the terms of the letters of credit. Typically, compliance occurs when a bill of lading is delivered to the issuing bank.

Regulation of Specific Business Activities Investing in a Foreign Country. Risk that foreign government may take possession of the investment property. Expropriation. Confiscation.

Regulation of Specific Business Activities Export Restrictions and Incentives. Congress cannot impose export taxes but uses other devices to control and stimulate exports. Import Restrictions. Quotas and Tariffs. Dumping. WTO and minimizing trade barriers.

U.S. Laws in a Global Context Do U.S. laws apply in a global context? Sarbanes-Oxley Act. Three protections for whistleblowers. 18 USC Section 1514A: Administrative Complaint Procedures. Case 22.3 Carnero v. Boston Scientific Corp. (2006).

U.S. Laws in a Global Context U.S. Antitrust laws. U.S. antitrust laws may be applied beyond the borders of the United States. Any conspiracy that has a substantial effect on commerce within the United States may be subject to the Sherman Act, even if the violation occurs outside the U.S.

U.S. Laws in a Global Context Antidiscrimination Laws: Laws in the U.S. prohibiting discrimination on the basis of race, color, national origin, religion, sex, age, and disability.

U.S. Laws in a Global Context Antidiscrimination Laws: affect employment relationships, generally apply extraterritorially. The major U.S. laws prohibiting employment discrimination cover U.S. employees working abroad for U.S. firms—unless to apply the U.S. laws would violate the laws of the host country.