Business Law

Discussion: Employment Law (200-300words) This week’s discussion on the topic of employment law is a little different. The idea is to watch an episode of the American version of The Office and identify a legal issue related to employment law (Title VII, sexual harassment, ADA, ADEA, etc). I find The Office not only a very entertaining television program but also a source for legal issues that could arise in an employment setting. Therefore when undertaking the assignment provide the fact pattern which you identified in the episode and then analyze the situation using the IRAC method which we have used for the discussions in this course. The Office may still be in syndication on a few television channels and many of the episodes may be seen on NBC.com. Additionally NetFlix and Amazon subscribers will find it in those platforms, “canistream.it” is a way to look for availability and most public libraries should have multiple seasons available. I am sure that there are other ways to view the show as well. In the first portion of your discussion provide the fact pattern to a degree that other students who may not be familiar with the scenario will be able to provide comments to your post.

Below is an example I put together from an episode of the show – this scenario would correspond to Chapter Twenty Two in our text, which we are not covering this term. From the fact pattern I put together 2 IRAC analyses. You only need to do 1. I have seen every episode of The Office a number of times, so do not try and make something up, I will know.

THE OFFICE SCENARIO: The workers in the warehouse of Dunder-Mifflin were considering forming a union. Jan Levinson, an executive of the Dunder-Mifflin, a member of management, informed the employees, who were considering forming a union, that they should take into consideration what happened at another Dunder-Mifflin branch which formed a union. That branch was shut down, implying that the employees all lost their jobs.

ISSUE (1): What procedures must the employees follow to form a union?

RULE (1): To form a union, organizers distribute authorization cards to the employees. If a majority of the cards approve union representation, the employer may voluntarily certify the union. Once a union is certified, the employer must bargain with the union regarding employment terms and conditions.

If the Employer does not voluntarily certify the union, union organizers can petition the NLRB for an election. To authorize an election, a minimum of 30% of employees must support a union or an election on unionization and there must be an appropriate bargaining unit, consisting of employees that share a mutuality of interest.

APPLICATION/CONCLUSION (1): If 50% or more of the warehouse workers state on their authorization cards that they want to be represented by a union, the organizer (let us say Darrel) may submit said results to Dunder-Mifflin for certification. Dunder-Mifflin may choose to certify the union.

If Dunder-Mifflin does not recognize the authorization cards, then Darrel may petition the NLRB for an election. If Darrel can demonstrate a minimum of 30% of the warehouse workers support a union and an appropriate bargaining union exists, the NLRB most likely will authorize an election. Considering that the warehouse workers have a mutuality of interest: they are all located in one location in Scranton, PA and their respective jobs are similar in nature, I believe the requirements for an NLRB election are met. If a majority of the warehouse workers vote in favor, the union is certified and Dunder-Mifflin would be required to negotiate with the union rather than individual employees.

ISSUE (2): Did Jan, as a member of management, commit an unfair labor practice by threatening the employees should they form a union?

RULE (2): Considered unfair labor practices, under the NLRA, and deemed illegal activities, are employer’s actions that adversely affect the employees’ right to unionize and bargain collectively. Though an employer may campaign against the formation of a union at its work place, an employer may not interfere with employees’ activities to form a union or threaten employees’ decision to join a union.

APPLICATION/CONCLUSION (2): Pursuant to a case covered in the text a member of management informed employees forming a union that they (the employees) should read everything carefully before deciding to vote for a union and also told these same employees that the union does not always live up to its promises. In that case, the court found the employer did not interfere or threaten the employees when deciding whether to have union representation. In contrast, I feel that Jan’s actions go further than the aforementioned case. In my opinion Jan’s comments that another branch shut down because the employees chose to form a union is a direct threat, implying that if the warehouse workers at Dunder-Mifflin, Scranton form a union their jobs will be eliminated, obviously impacting the warehouse workers economic well-being. Therefore, I conclude that Jan, on behalf of the employer, committed an unfair labor practice whereby Darrel could file a complaint with the NLRB.

Article Analysis(150-200 words)

you will select an article from a business periodical which generally relates to this course and write a brief summary and analysis. When choosing articles for this weekly assignment, you should ask yourself “Would this article be interesting to a student in this course or to someone who is working as a business professional?” This is an individual project. Two points are deducted each day assignment is late.

Each article analysis assignment shall include four parts:

i. Title of the article, date of publication, and author (note: The Economist does not provide author’s names on articles) of the article that you selected;

ii. A paragraph(s) summarizing the content and context of the selected article;

iii. A paragraph (or more) of your reflections where you clearly and succinctly analyze the article, reflecting on its meaning as it relates to your coursework in this class and/or its usefulness for business professionals seeking to become legally-astute managers, entrepreneurs, government regulators, etc. This analysis paragraph should include at least two references to the readings, resources, and/or discussions which are covered in the course; and,

iv. A link (URL) to the article

Recommended sources for your article:

· The Wall Street Journal (Links to an external site.)Links to an external site.

· The Economist (Links to an external site.)Links to an external site.

· Harvard Business Review (Links to an external site.)Links to an external site.

· The Financial Times (Links to an external site.)Links to an external site.

· National Public Radio U.S. News (Links to an external site.)Links to an external site.

· The New York Times (Links to an external site.)Links to an external site.

· The Washington Post (Links to an external site.)Links to an external site.

· The Guardian U.S. News (Links to an external site.)Links to an external site.

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ETHICS TODAY

Stare Decisis versus Spider-Man Chapter 1, p. 9

Is It Ethical (and Legal) to Brew “Imported” Beer Brands Domestically? Chapter 11, p. 217

Forced Arbitration: Right or Wrong? Chaper 13, p. 267

Should There Be More Relief for Student Loan Defaults? Chapter 15, p. 337

Is It Fair to Classify Uber and Lyft Drivers as Independent Contractors? Chapter 19, p. 418

Is It Fair to Dock Employees’ Pay for Bathroom Breaks? Chapter 20, p. 442

Should Eminent Domain Be Used to Promote Private Development? Chapter 26, p. 562

MANAGERIAL STRATEGY

Should You Consent to Have Your Business Case Decided by a U.S. Magistrate Judge? Chapter 2, p. 38

Marriage Equality and the Constitution Chapter 4, p. 72

When Is a Warning Legally Bulletproof? Chapter 7, p. 142

The Criminalization of American Business Chapter 10, p. 191

Creating Liability Waivers That Are Not Unconscionable Chapter 12, p. 257

Commercial Use of Drones Chapter 14, p. 295

Can a Person Who Is Not a Member of a Protected Class Sue for Discrimination? Chapter 17, p. 376

Union Organizing Using a Company’s E-Mail System Chapter 22, p. 483

The SEC’s New Pay-Ratio Disclosure Rule Chapter 28, p. 590

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Frank B. Cross Herbert D. Kelleher

Centennial Professor in Business Law University of Texas at Austin

Roger LeRoy Miller Institute for University Studies

Arlington, Texas

The L EG A L

EN V IRONMENT of BBUSINESS

T E X T A N D C A SE S

Tenth Edition

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The Legal Environment of Business TEXT AND CASES

Tenth Edition

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Unit One THE FOUNDATIONS 1 Chapter 1 Law and Legal Reasoning 2 Chapter 2 Courts and Alternative Dispute Resolution 26 Chapter 3 Court Procedures 48 Chapter 4 Business and the Constitution 70 Chapter 5 Business Ethics 89

Unit Two THE PUBLIC AND INTERNATIONAL ENVIRONMENT 111 Chapter 6 Tort Law 112 Chapter 7 Strict Liability and Product Liability 134 Chapter 8 Intellectual Property Rights 150 Chapter 9 Internet Law, Social Media, and Privacy 170 Chapter 10 Criminal Law and Cyber Crime 187 Chapter 11 International and Space Law 211

Unit Three THE COMMERCIAL ENVIRONMENT 233 Chapter 12 Formation of Traditional and E-Contracts 234 Chapter 13 Contract Performance, Breach, and Remedies 262 Chapter 14 Sales and Lease Contracts 284 Chapter 15 Creditor-Debtor Relations and Bankruptcy 318

Unit Four THE BUSINESS AND EMPLOYMENT ENVIRONMENT 349 Chapter 16 Small Businesses and Franchises 350 Chapter 17 Limited Liability Business Forms 371 Chapter 18 Corporations 388 Chapter 19 Agency Relationships 416 Chapter 20 Employment Law 438 Chapter 21 Employment Discrimination 453 Chapter 22 Immigration and Labor Law 474

Unit Five THE REGULATORY ENVIRONMENT 495 Chapter 23 Administrative Agencies 496 Chapter 24 Consumer Protection 515 Chapter 25 Environmental Law 532 Chapter 26 Real Property and Land-Use Control 548 Chapter 27 Antitrust Law 568 Chapter 28 Investor Protection and Corporate Governance 588

Brief Contents

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iv BRIEF CONTENTS

APPENDICES A How to Brief Cases and Analyze Case Problems A-1 B �e Constitution of the United States A-5 C Articles 2 and 2A of the A of the A Uniform Commercial Code A-13 D Answers to the Issue Spotters A-51 E Sample Answers for Business Case Problems with Sample Answer A-57

GLOSSARY G-1 TABLE OF CASES TC-1 INDEX I-1

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Unit One THE FOUNDATIONS 1

Chapter 1 Law and Legal Reasoning 2 Business Activities and the Legal Environment 2 Sources of American Law 3 �e Common Law Tradition 6 Schools of Legal �ought 12 Classi�cations of Law 13 How to Find Primary Sources of Law 14 How to Read and Understand Case Law 19

Chapter 2 Courts and Alternative Dispute Resolution 26 �e Judiciary’s Role in American Government 26 Basic Judicial Requirements 27 Case Analysis 2.1 Mala v. Crown Bay Marina, Inc. (2013) 29 Spotlight on Gucci

Case 2.2 Gucci America, Inc. v. Wang Huoqing (2011) 32 �e State and Federal Court Systems 35 Case 2.3 Johnson v. Oxy USA, Inc. (2016) 36 Alternative Dispute Resolution 40 International Dispute Resolution 44

Chapter 3 Court Procedures 48 Procedural Rules 48 Pretrial Procedures 50 Case Analysis 3.1 Espresso Disposition Corp. 1 v. Santana Sales

& Marketing Group, Inc. (2013) 54 Case 3.2 Lewis v. Twenty-First Century Bean

Processing (2016) 56 Case 3.3 Brothers v. Winstead (2014) 58 �e Trial 61 Posttrial Motions 64 �e Appeal 65 Enforcing the Judgment 66

Chapter 4 Business and the Constitution 70 �e Constitutional Powers of Government 70 Classic Case 4.1 Heart of Atlanta Motel v. United

States (1964) 73 Business and the Bill of Rights 75 Spotlight on Beer Labels

Case 4.2 Bad Frog Brewery, Inc. v. New York State Liquor Authority (1998) 78

Case Analysis 4.3 Thompson v. Holm (2016) 81 Due Process and Equal Protection 83 Privacy Rights 84

Chapter 5 Business Ethics 89 Business Ethics 89 Case 5.1 Scott v. Carpanzano (2014) 91 Business Ethics and Social Media 93 Ethical Principles and Philosophies 94 Making Ethical Business Decisions 97 Case 5.2 Al-Dabagh v. Case Western Reserve

University (2015) 99 Case Analysis 5.3 Moseley v. Pepco Energy Services,

Inc. (2011) 100 Global Business Ethics 102 Unit One Application and Ethics:

“Arbitration, No Class Actions” 107

Unit Two THE PUBLIC AND INTERNATIONAL ENVIRONMENT 111

Chapter 6 Tort Law 112 �e Basis of Tort Law 112 Intentional Torts against Persons 113 Case Analysis 6.1 Blake v. Giustibelli (2016) 115 Case 6.2 Revell v. Guido (2015) 120 Intentional Torts against Property 123 Unintentional Torts—Negligence 125 Defenses to Negligence 129 Spotlight on the Seattle Mariners

Case 6.3 Taylor v. Baseball Club of Seattle, LP (2006) 129

v

Contents

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vi CONTENTS

Chapter 7 Strict Liability and Product Liability 134 Strict Liability 134 Product Liability 135 Case Analysis 7.1 Schwarck v. Arctic Cat, Inc. (2016) 136 Strict Product Liability 137 Spotlight on Injuries from Vaccines

Case 7.2 Bruesewitz v. Wyeth, LLC (2011) 138 Defenses to Product Liability 144 Case 7.3 VeRost v. Mitsubishi Caterpillar Forklift America,

Inc. (2015) 144

Chapter 8 Intellectual Property Rights 150 Trademarks and Related Property 150 Classic Case 8.1 The Coca-Cola Co. v. The Koke Co.

of America (1920) 150 Case 8.2 LFP IP, LLC v. Hustler Cincinnati, Inc. (2016) 153 Patents 157 Copyrights 160 Case Analysis 8.3 Winstead v. Jackson (2013) 161 Trade Secrets 164 International Protection for Intellectual Property 166

Chapter 9 Internet Law, Social Media, and Privacy 170 Internet Law 170 Spotlight on Internet Porn

Case 9.1 Hasbro, Inc. v. Internet Entertainment Group, Ltd. (1996) 173

Copyrights in Digital Information 174 Social Media 176 Online Defamation 178 Other Actions Involving Online Posts 180 Case Analysis 9.2 David v. Textor (2016) 181 Privacy 182 Case 9.3 Nucci v. Target Corp. (2015) 182

Chapter 10 Criminal Law and Cyber Crime 187 Civil Law and Criminal Law 187 Criminal Liability 189 Types of Crimes 192 Case 10.1 State of Minnesota v. Smith (2015) 193 Spotlight on White-Collar Crime

Case 10.2 People v. Sisuphan (2010) 195 Defenses to Criminal Liability 198 Criminal Procedures 201 Cyber Crime 204 Case Analysis 10.3 United States v. Warner (2016) 205

Chapter 11 International and Space Law 211 International Law 211 Case Analysis 11.1 Bennett v. Islamic Republic of Iran

(2016) 215 Doing Business Internationally 216 Regulation of Speci�c Business Activities 219 International Dispute Resolution 221 Case 11.2 Carlyle Investment Management, LLC v. Moonmouth

Co. SA (2015) 222 U.S. Laws in a Global Context 223 Spotlight on International Torts

Case 11.3 Daimler AG v. Bauman (2014) 223 Space Law 225 Unit Two Application and Ethics:

The Biggest Data Breach of All Time 230

Unit Three THE COMMERCIAL ENVIRONMENT 233

Chapter 12 Formation of Traditional and E-Contracts 234 An Overview of Contract Law 234 Agreement 238 Classic Case 12.1 Lucy v. Zehmer (1954) 238 Case Analysis 12.2 Hinkal v. Pardoe (2016) 243 E-Contracts 245 Consideration 248 Spotlight on Nike

Case 12.3 Already, LLC v. Nike, Inc. (2013) 251 Contractual Capacity 253 Legality 254 Form 256 �ird Party Rights 256

Chapter 13 Contract Performance, Breach, and Remedies 262 Voluntary ConsentVoluntary ConsentV 262 Case 13.1 Schneiderman v. Trump Entrepreneur Initiative, LLC

(2016) 264 Performance and Discharge 267 Case Analysis 13.2 Kohel v. Bergen Auto Enterprises, L.L.C.

(2013) 270 Damages 274

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CONTENTS vii

Spotlight on Liquidated Damages Case 13.3 Kent State University v. Ford (2015) 277

Equitable Remedies 278 Waiver of Breach 280 Contract Provisions Limiting Remedies 281

Chapter 14 Sales and Lease Contracts 284 �e Scope of Articles 2 (Sales) and 2A (A (A Leases) 284 �e Formation of Sales and Lease Contracts 286 Classic Case 14.1 Jones v. Star Credit Corp. (1969) 291 Title, Risk, and Insurable Interest 292 Case Analysis 14.2 BMW Group, LLC v. Castle Oil Corp.

(2016) 293 Performance and Breach of Sales and Lease Contracts 298 Remedies for Breach of Sales and Lease Contracts 302 Spotlight on Baseball Cards

Case 14.3 Fitl v. Strek (2005) 306 Warranties 307 Contracts for the International Sale of Goods 309

Chapter 15 Creditor-Debtor Relations and Bankruptcy 318 Laws Assisting Creditors 318 Case Analysis 15.1 Picerne Construction Corp. v. Villas

(2016) 319 Mortgages 324 Protection for Debtors 325 Bankruptcy Law 326 Liquidation Proceedings 326 Case 15.2 In re Anderson (2016) 332 Case 15.3 In re Cummings (2015) 336 Reorganizations 338 Bankruptcy Relief under Chapter 12 and Chapter 13 339 Unit Three Application and Ethics:

Fantasy Sports—Legal Gambling? 346

Unit Four THE BUSINESS AND EMPLOYMENT ENVIRONMENT 349

Chapter 16 Small Businesses and Franchises 350 General Considerations for Small Businesses 350 Sole Proprietorships 351

Case Analysis 16.1 A. Gadley Enterprises, Inc. v. Department of Labor and Industry Office of Unemployment Compensation Tax Services (2016) 352

Partnerships 355 Classic Case 16.2 Meinhard v. Salmon (1928) 358 Franchises 362 Spotlight on Holiday Inns

Case 16.3 Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. (2011) 367

Chapter 17 Limited Liability Business Forms 371 �e Limited Liability Company 371 Case 17.1 Hodge v. Strong Built International, LLC (2015) 373 LLC Management and Operation 375 Dissociation and Dissolution of an LLC 377 Case Analysis 17.2 Reese v. Newman (2016) 378 Limited Liability Partnerships 379 Limited Partnerships 381 Case 17.3 DeWine v. Valley View Enterprises, Inc. (2015) 381

Chapter 18 Corporations 388 Nature and Classi�cation 388 Case 18.1 Drake Manufacturing Co. v. Polyflow, Inc.

(2015) 390 Case Analysis 18.2 Pantano v. Newark Museum (2016) 391 Formation and Powers 394 Piercing the Corporate VeilVeilV 399 Directors and O�cers 400 Classic Case 18.3 Guth v. Loft, Inc. (1939) 404 Shareholders 405 Major Business Forms Compared 411

Chapter 19 Agency Relationships 416 Agency Law 416 Formation of the Agency Relationship 419 Duties of Agents and Principals 420 Spotlight on Taser International

Case 19.1 Taser International, Inc. v. Ward (2010) 422 Case Analysis 19.2 NRT New England, LLC v. Jones (2016) 425 Agent’s Authority 426 Liability in Agency Relationships 428 Case 19.3 Asphalt & Concrete Services, Inc. v. Perry (2015) 431 Termination of an Agency 433

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viii CONTENTS

Chapter 20 Employment Law 438 Employment at Will 438 Case Analysis 20.1 Caterpillar, Inc. v. Sudlow (2016) 439 Wages, Hours, and Layo�s 441 Case 20.2 Bailey v. TitleMax of Georgia, Inc. (2015) 443 Family and Medical Leave 444 Case 20.3 Ballard v. Chicago Park District (2014) 445 Health, Safety, and Income Security 446 Employee Privacy Rights 449

Chapter 21 Employment Discrimination 453 Title VII of the Civil Rights Act 453 Case Analysis 21.1 Bauer v. Lynch (2016) 458 Case 21.2 Young v. United Parcel Service, Inc. (2015) 459 Case 21.3 Roberts v. Mike’s Trucking, Ltd. (2014) 462 Discrimination Based on Age 464 Discrimination Based on Disability 466 Discrimination Based on Military Status 469 Defenses to Employment Discrimination 469 A�rmative Action 470

Chapter 22 Immigration and Labor Law 474 Immigration Law 474 Federal Labor Laws 477 Case 22.1 Services Employees International Union v.

National Union of Healthcare Workers (2013) 478 Union Organization 479 Case Analysis 22.2 Contemporary Cars, Inc. v. National Labor

Relations Board (2016) 481 Collective Bargaining 482 Strikes and Lockouts 483 Unfair Labor Practices 485 Case 22.3 Staffing Network Holdings, LLC v.

National Labor Relations Board (2016) 486 Unit Four Application and Ethics:

Health Insurance and Small Business 492

Unit Five THE REGULATORY ENVIRONMENT 495

Chapter 23 Administrative Agencies 496 �e Practical Signi�cance of Administrative Law 496 Agency Creation and Powers 497

Case 23.1 Loving v. Internal Revenue Service (2014) 500 �e Administrative Process 502 Case 23.2 Craker v. Drug Enforcement Administration

(2013) 506 Judicial Deference to Agency Decisions 507 Case Analysis 23.3 Olivares v. Transportation Security

Administration (2016) 508 Public Accountability 510

Chapter 24 Consumer Protection 515 Advertising, Marketing, and Sales 515 Case 24.1 POM Wonderful, LLC v. Federal Trade Commission

(2015) 516 Case 24.2 Lexmark International, Inc. v. Static Control

Components, Inc. (2014) 520 Labeling and Packaging Laws 522 Protection of Health and Safety 523 Credit Protection 524 Case Analysis 24.3 Santangelo v. Comcast Corporation

(2016) 526

Chapter 25 Environmental Law 532 Common Law Actions 532 Federal, State, and Local Regulations 533 Case Analysis 25.1 Friends of Animals v. Clay (2016) 533 Air Pollution 536 Case 25.2 United States v. O’Malley (2014) 538 Water Pollution 539 Case 25.3 Entergy Corp. v. Riverkeeper, Inc. (2009) 540 Toxic Chemicals and Hazardous Waste 543

Chapter 26 Real Property and Land-Use Control 548 �e Nature of Real Property 548 Ownership and Other Interests in Real Property 550 Case 26.1 Main Omni Realty Corp. v. Matus (2015) 551 Transfer of Ownership 555 Spotlight on Sales of Haunted Houses

Case 26.2 Stambovsky v. Ackley (1991) 556 Case Analysis 26.3 Montgomery County v. Bhatt (2016) 559 Limitations on the Rights of Property Owners 561 Land-Use Control and Zoning 563

Chapter 27 Antitrust Law 568 �e Sherman Antitrust Act 568 Section 1 of the Sherman Act 569 Section 2 of the Sherman Act 572

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CONTENTS ix

Case Analysis 27.1 McWane, Inc. v. Federal Trade Commission (2015) 574

Spotlight on Weyerhaeuser Case 27.2 Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (2007) 576

�e Clayton Act 577 Enforcement and Exemptions 580 Case 27.3 TransWeb, LLC v. 3M Innovative Properties Co.

(2016) 580 U.S. Antitrust Laws in the Global Context 583

Chapter 28 Investor Protection and Corporate Governance 588 �e Securities Act of 1933 588 Case 28.1 Omnicare, Inc. v. Laborers District

Council Construction Industry Pension Fund (2015) 594 �e Securities Exchange Act of 1934 595 Classic Case 28.2 SEC v. Texas Gulf Sulphur Co. (1968) 596

Case Analysis 28.3 Rand-Heart of New York, Inc. v. Dolan (2016) 600

State Securities Laws 603 Corporate Governance 603 Unit Five Application and Ethics:

Climate Change 610

Appendices A How to Brief Cases and Analyze Case Problems A-1 B �e Constitution of the United States A-5 C Articles 2 and 2A of the A of the A Uniform Commercial Code A-13 D Answers to the Issue Spotters A-51 E Sample Answers for Business Case Problems with Sample

Answer A-57

Glossary G-1 Table of Cases TC-1 Index I-1

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xi

Concept Summaries

1.1 Sources of American Law 5 1.2 �e Common Law Tradition 11 1.3 Schools of Jurisprudential �ought 13 2.1 Jurisdiction 34 2.2 Types of Courts 4l 3.1 Pretrial Procedures 62 3.2 Trial Procedures 64 3.3 Posttrial Options 66 6.1 Intentional Torts against Persons 122

6.2 Intentional Torts against Property 126 7.1 Defenses to Product Liability 147

10.1 Types of Crimes 199 12.1 Types of Contracts 237 12.2 Methods byWhich

an O�er Can Be Terminated 242 14.1 O�er, Acceptance, and Consideration

under the UCC 289 15.1 Forms of Bankruptcy Relief Compared 342

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xii

1–1 Areas of the Law That Can Affect Business Decision Making 3

1–2 Equitable Maxims 7 1–3 Procedural Differences between

Actions at Law and Actions in Equity 8 1–4 National Reporter Reporter R System—Regional/FederalRegional/FederalR 16 1–5 How to Read CitationsRead CitationsR 17 1–6 A Sample Court Case 21 2–1 Exclusive and Concurrent Jurisdiction 31 2–2 The State and Federal Court Systems 35 2–3 Geographic Boundaries of the

U.S. Courts of Appeals and Appeals and A U.S. District Courts 39 2–4 Basic Differences in the Traditional Forms of ADR 42 3–1 Stages in a Typical Lawsuit 49 3–2 A Typical Complaint A Typical Complaint A 51 3–3 A Typical A Typical A Summons 52 3–4 Pretrial Motions 54 4–1 Protections Guaranteed by the Bill of RightsRightsR 76 4–2 Federal Legislation Relating to PrivacyRelating to PrivacyR 85 8–1 Forms of Intellectual Property 165

10–1 Key Differences between Civil Law and Criminal Law 188

10–2 Civil (Tort) Lawsuit and Criminal Prosecution for the Same Act 189

10–3 Major Procedural Steps in a Criminal Case 203 11–1 The Legal Systems of Selected Nations 213 11–2 Examples of International Principles

and Doctrines 216 12–1 Examples of Agreements That Lack Consideration 250 13–1 Mistakes of Fact 263 13–2 Discharge by Performance 271 13–3 Remedies for Remedies for R Breach of Contract 280 14–1 The Law Governing Contracts 285 14–2 Major Differences between

Contract Law and Sales Law 292 15–1 Suretyship and Guaranty Parties 322

15–2 Collection and Distribution of Property in Most Voluntary Voluntary V Bankruptcies 334

16–1 The FTC’s Franchise Rule Rule R RequirementsRequirementsR 364 17–1 Management of an LLC 375 17–2 A Comparison of A Comparison of A General Partnerships

and Limited Partnerships 383 18–1 Results of Cumulative Results of Cumulative R VotingVotingV 408 18–2 Major Forms of Business Compared 411 19–1 Duties of the Agent 421 19–2 Duties of the Principal 423 19–3 Termination by Act of the Parties 433 21–1 Coverage of Employment Discrimination Laws 468 22–1 Good Faith versus Bad Faith

in Collective Bargaining 484 22–2 Basic Unfair Labor Practices 485 23–1 Executive Departments

and Important Subagencies 498 23–2 Selected Independent Regulatory Regulatory R Agencies 499 23–3 The Formal Administrative

Agency Adjudication Process 505 24–1 Selected Areas of Consumer Law

Regulated by Regulated by R Statutes 516 25–1 Major Federal Environmental Statutes 535 25–2 Environmental Impact Statements 536 25–3 Pollution-Control Equipment Standards under

the Clean Air Act and the Clean Water Act 540 26–1 Interests in Real PropertyReal PropertyR 555 27–1 Required Required R Elements of a Sherman Act ViolationViolationV 569 27–2 Exemptions to Antitrust Enforcement 582 28–1 Exemptions for Securities Offerings

under the 1933 Securities Act 592 28–2 Comparison of Coverage, Application, Application, A

and Liability under SEC Rule 10b-5 and Rule 10b-5 and R Section 16(b) 599

28–3 Some Key Provisions of the Sarbanes-Oxley Act Relating to Corporate Relating to Corporate R Accountability 606

Exhibits

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xiii

The study of the legal environment of business has universal applicability. A student entering any field of A student entering any field of A business must have at least a passing understanding of business law in order to function in the real world. The Legal Environment of Business, Tenth Edition, provides the information that students need in an interesting and contemporary way.

Additionally, students preparing for a career in accounting, government and political science, econom- ics, and even medicine can use much of the information they learn in a legal environment course. In fact, every individual throughout his or her lifetime can bene�t from knowledge of environmental law, intellectual and real property, agency and employment relationships, and other legal environment topics. Consequently, we have fashioned this text as a useful “tool for living” for all of your students (including those taking the revised 2017 CPA2017 CPA2017 CP exam). A exam). A

For the Tenth Edition, we have spent a great deal of e�ort making this book more modern, exciting, and visu- ally appealing than ever before. We have added twenty- seven new features, �fty-two new cases, and seventeen new exhibits. �e text also contains more than one hundred new highlighted and numbered Cases in Point and Examples, and eighty-�ve new case problems. Spe- cial pedagogical elements within the text focus on legal, ethical, global, and corporate issues while addressing core curriculum requirements.

Highlights of the Tenth Edition Instructors have come to rely on the coverage, accuracy, and applicability of The Legal Environment of Business. To make sure that our text engages your students, solidifies their understanding of legal concepts, and provides the best teaching tools available, we now offer the following.

A Variety of New and Exciting Features The Tenth Edition of The Legal Environment of Business is filled with many new features specifically designed to cover current legal topics of high interest. Each feature is related to a topic discussed in the text and ends with Crit-Crit-Crit ical �inking or Business Questions. Suggested answers

to all the Critical �inking and Business Questions are included in the Solutions Manual for this text.

1. Ethics Today These features focus on the ethical aspects of a topic discussed in the text to empha- size that ethics is an integral part of a business law course. Examples include: • Stare Decisis versus Spiderman (Chapter 1) • Is It Ethical (and Legal) to Brew “Imported” Beer

Brands Domestically? (Chapter 11) • Forced Arbitration: Right or Wrong? (Chapter 13) • Should There Be More Relief for Student Loan

Defaults? (Chapter 15) • Is It Fair to Classify Uber and Lyft Drivers as Lyft Drivers as L

Independent Contractors? (Chapter 19) 2. Global Insight These features illustrate how other

nations deal with specific legal concepts to give stu- dents a sense of the global legal environment. Sub- jects include: • Does Cloud Computing Have a Nationality?

(Chapter 18) 3. NEW Digital Update These features are designed

to examine cutting-edge cyberlaw topics, such as the following: • Using Social Media for Service of Process

(Chapter 3) • Should Employees Have a “Right of Disconnect-

ing”? (Chapter 5) • Revenge Porn and Invasion of Privacy (Chapter 6) • Monitoring Employees’ Social Media—Right or

Wrong? (Chapter 9) • Hiring Discrimination Based on Social Media

Posts (Chapter 21) 4. Managerial Strategy These features emphasize the

management aspects of business law and the legal environment. Topics include: • Should You Consent to Have Your Business Case

Decided by a U.S. Magistrate Judge? (Chapter 2) • Marriage Equality and the Constitution (Chapter 4) • When Is a Warning Legally Bulletproof?

(Chapter 7) • The Criminalization of American Business

(Chapter 10) • Commercial Use of Drones (Chapter 14) • The SEC’s New CEO Pay-Ratio Disclosure

Rule (Chapter 28)

Preface

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xiv PREFACE

Entire Chapter on Internet Law, Social Media, and Privacy For the Tenth Edition, we include a whole chapter (Chapter 9) on Internet Law, Social Media, and Privacy. Social media have entered the mainstream and become a part of everyday life for many businesspersons. In this special chapter, we give particular emphasis to the legal issues surrounding the Internet, social media, and pri- vacy. We also recognize this trend throughout the text by incorporating the Internet and social media as they relate to the topics under discussion.

Highlighted and Numbered Examples and Case in Point Illustrations Many instructors use cases and examples to illustrate how the law applies to business. Students understand legal concepts better in the context of their real-world applica- tion. Therefore, for this edition of The Legal Environment of Business, we have expanded the number of highlighted numbered Examples and Examples and Examples Cases in Point in every chap- ter. We have added 102 new Cases in Point and 35 new Examples.

Examples illustrate how the law applies in a speci�c Examples illustrate how the law applies in a speci�c Examples situation. Cases in Point present the facts and issues of an actual case and then describe the court’s decision and rationale. �ese two features are uniquely designed and consecutively numbered throughout each chapter for easy reference. �e Examples and Examples and Examples Cases in Point are inte- grated throughout the text to help students better under-grated throughout the text to help students better under-grated throughout the text to help students better under stand how courts apply legal principles in the real world.

New Unit-Ending Application and Ethics Features For the Tenth Edition, we have created an entirely new feature that concludes each of the five units in the text. Each of these Application and Ethics features provides additional analysis on a topic related to that unit and explores its ethics ramifications. Each of the features ends with two questions—a Critical Thinking and an Ethics Question. Some topics covered by these features include the following:

• The Biggest Data Breach of All Time (Unit 2) • Fantasy Sports—Legal Gambling? (Unit 3) • Health Insurance and Small Business (Unit 4) • Climate Change (Unit 5)

Suggested answers to the questions in Application and Ethics features are included in the Solutions Manual for this text.

New Cases and Case Problems For the Tenth Edition of The Legal Environment of Busi- ness, we have added fifty-two new cases and eighty-five new case problems, most from 2016 and 2015. The new cases and problems have been carefully selected to illus- trate important points of law and to be of high interest to students and instructors. We have made it a point to find recent cases that enhance learning and are relatively easy to understand.

1. Spotlight Cases and Classic Cases. Certain cases and case problems that are exceptionally good teaching cases are labeled as Spotlight Cases and Spotlight Case Problems. Examples include Spotlight on Beer Labels, Spotlight on Gucci, Spotlight on Nike, and Spotlight on the Seattle Mariners. Instructors will find these Spotlight Cases useful to illustrate the legal concepts under discussion, and students will enjoy studying the cases because they involve inter- esting and memorable facts. Other cases have been chosen as Classic Cases because they establish a legal precedent in a particular area of law.

2. Critical Thinking Section. Each case concludes with a Critical Thinking section, which normally includes two questions. The questions may address Legal Environment, E-Commerce, Economic, Envi- ronmental, Ethical, Global, Political, or Technological issues, or they may ask What If the Facts Were Differ- ent? Each Classic Case has a section titled Impact of This Case on Today’s Law and one Critical Thinking question.

3. Longer Excerpts for Case Analysis. We have also included one longer case excerpt in every chap- ter—labeled Case Analysis—followed by three Legal Reasoning Questions. The questions are designed to guide students’ analysis of the case and develop their legal reasoning skills. These Case Analysis cases may be used for case-briefing assignments and are also tied to the Special Case Analysis questions found in every unit of the text (one per unit).

Suggested answers to all case-ending questions and case problems are included in the Solutions Manual for this text.

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PREFACE xv

Business Case Problem with Sample Answer in Each Chapter In response to those instructors who would like students to have sample answers available for some of the ques- tions and case problems, we include a Business Case Prob- lem with Sample Answer in each chapter. The Business Case Problem with Sample Answer is based on an actual case, and students can find a sample answer at the end of the text. Suggested answers to the Business Case Prob- lems with Sample Answers are provided in Appendix Appendix A E at the end of the text and in the Solutions Manual for this text.

New Exhibits and Concept Summaries For this edition, we have spent considerable effort reworking and redesigning all of the exhibits and Concept Summaries in the text to achieve better clarity and more Summaries in the text to achieve better clarity and more Summaries visual appeal. In addition, we have added seventeen new exhibits and three new Concept Summaries.

Special Case Analysis Questions For one chapter in every unit of the text, we provide a Special Case Analysis question that is based on the Case Analysis excerpt in that chapter. These special ques- tions appear in the Business Case Problems at the ends of selected chapters.

�e Special Case Analysis questions are designed to build students’ analytical skills. �ey test students’ ability to perform IRAC (IRAC (IRA Issue, Rule, Application, and Conclusion) case analysis. Students must identify the le- gal issue presented in the chapter’s Case Analysis Case, understand the rule of law, determine how the rule ap- plies to the facts of the case, and describe the court’s conclusion. Instructors can assign these questions as homework or use them in class to elicit student partici- pation and teach case analysis. Suggested answers to the Special Case Analysis questions can be found in the Solutions Manual for this text.

Reviewing Features in Every Chapter In the Tenth Edition of The Legal Environment of Busi- ness, we continue to offer a Reviewing feature at the end Reviewing feature at the end Reviewing of every chapter to help solidify students’ understanding of the chapter materials. Each Reviewing feature presents Reviewing feature presents Reviewing a hypothetical scenario and then asks a series of questions

that require students to identify the issues and apply the legal concepts discussed in the chapter.

�ese features are designed to help students review the chapter topics in a simple and interesting way and see how the legal principles discussed in the chapter af-see how the legal principles discussed in the chapter af-see how the legal principles discussed in the chapter af fect the world in which they live. An instructor can use these features as the basis for in-class discussion or en- courage students to use them for self-study prior to com- pleting homework assignments. Suggested answers to the questions posed in the Reviewing features can be found in the Solutions Manual for this text.

Two Issue Spotters At the conclusion of each chapter, we have included a special section with two Issue Spotters related to the chap- ter’s topics. These questions facilitate student learning and review of the chapter materials. Suggested answers to the Issue Spotters in every chapter are provided in Appendix Appendix A D at the end of the text and in the Solutions Manual for this text.

Legal Reasoning Group Activities For instructors who want their students to engage in group projects, each chapter of the Tenth Edition includes a special Legal Reasoning Group Activity. Each activity begins by describing a business scenario and then poses several specific questions pertaining to the scenario. Each question is to be answered by a different group of students based on the information in the chapter. These projects may be used in class to spur discussion or as homework assignments. Suggested answers to the Legal Reasoning Group Activities are included in the Solu- tions Manual for this text.

Supplements/Digital Learning Systems The Legal Environment of Business, Tenth Edition, pro- vides a comprehensive supplements package designed to make the tasks of teaching and learning more enjoyable and efficient. The following supplements and exciting new digital products are offered in conjunction with the text.

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xvi PREFACE

MindTap MindTap for The Legal Environment of Business, Tenth Edition, is a fully online, highly personalized learning experience built upon Cengage Learning content. Mind- Tap combines student learning tools—such as readings, multimedia, activities, and assessments from Cengage- NOW—into a singular NOW—into a singular NO Learning Path that intuitively guides students through their course.

Instructors can personalize the experience by cus- tomizing authoritative Cengage Learning content and learning tools. MindTap o�ers instructors the ability to add their own content in the Learning Path with apps that integrate into the MindTap framework seamlessly with Learning Management Systems (LMS).

MindTap includes:

• An Interactive book with Whiteboard Videos Videos V and Interactive Cases.

• Automatically graded homework with the folutomatically graded homework with the folutomatically graded homework – lowing consistent question types: • Worksheets—Interactive Worksheets prepare

students for class by ensuring reading and comprehension.

• Video Video V Activities—Real-world video exercises make business law engaging and relevant.

• Brief Hypotheticals—These applications pro- vide students practice in spotting the issue and applying the law in the context of a short, fac- tual scenario.

• Case Problem Analyses—These promote deeper critical thinking and legal reasoning by guiding students step-by-step through a case problem and then adding in a critical thinking section based on “What If the Facts Were Dif-f the Facts Were Dif-f the Facts Were Dif ferent?” These now include a third section, a writing component, which requires students to demonstrate their ability to forecast the legal implications of real-world business scenarios.

• Personalized Student Plan with multimedia study tools and videos.

• New Adaptive Test Prep helps students study for exams.

• Test Bank. • Reporting and Assessment options.

By using the MindTap system, students can com- plete the assignments online and can receive instant feedback on their answers. Instructors can utilize Mind- Tap to upload their course syllabi, create and customize

homework assignments, and keep track of their students’ progress. By hiding, rearranging, or adding content, in- structors control what students see and when they see it to match the Learning Path to their course syllabus exactly. Instructors can also communicate with their students about assignments and due dates, and create re- ports summarizing the data for an individual student or for the whole class.

Cengage Learning Testing Powered by Cognero Cengage Learning Testing Powered by Cognero is a flexible, online system that allows you to do the following:

• Author, edit, and manage Test Bank content from multiple Cengage Learning solutions.

• Create multiple test versions in an instant. • Deliver tests from your LMS, your classroom, or

wherever you want.

Start Right Away! Cengage Learning Testing Powered by Cognero works on any operating system or browser.

• No special installs or downloads are needed. • Create tests from school, home, the coffee shop—

anywhere with Internet access.

What Will You Find?

• Simplicity at every step. A desktop-inspired interA desktop-inspired interA – desktop-inspired inter- desktop-inspired inter face features drop-down menus and familiar intu- itive tools that take you through content creation and management with ease.

• Full-featured test generator. Create ideal assess- ments with your choice of fifteen question types—including true/false, multiple choice, opinion scale/Likert, and essay). Multi-language support, an equation editor, and unlimited meta- data help ensure your tests are complete and compliant.

• Cross-compatible capability. Import and export content to and from other systems.

Instructor’s Companion Web Site The Web site for the Tenth Edition of The Legal Envi- ronment of Business can be found by going to www. cengagebrain.com and entering ISBN 9781305967304. The Instructor’s Companion Web Site contains the fol- lowing supplements:

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PREFACE xvii

• Instructor’s Manual. Includes sections entitled “A“A“ dditional Cases Addressing This Issue” at the end of selected case synopses.

• Solutions Manual. Provides answers to all ques- tions presented in the text, including the ques- tions in each case and feature, the Issue Spotters, the Business Scenarios and Business Case Problems, and the unit-ending features.

• Test Bank. A comprehensive test bank that conA comprehensive test bank that conA – tains multiple-choice, true/false, and short essay questions.

• Case-Problem Cases. • Case Printouts. • PowerPoint Slides. • Lecture Outlines.

For Users of the Ninth Edition First of all, we want to thank you for helping make The Legal Environment of Business one of the best-selling legal environment texts in America today. Second, we want to make you aware of the numerous additions and changes that we have made in this edition—many in response to comments from reviewers.

Every chapter of the Tenth Every chapter of the Tenth E Edition has been revised as necessary to incorporate new developments in the law or to streamline the presentations. We have reorganized the chapters somewhat for better �ow and clarity and now divide the materials into �ve rather than six units. Each unit concludes with a new Application and Ethics feature. Other major changes and additions for this edi- tion include the following:

• Chapter 4 (Business and the Constitution)—The chapter has been revised and updated to be more business oriented. It has two new cases, four new Cases in Point, a new exhibit, and three new case problems. A Managerial Strategy feature on marriage equality and the constitution dis- cusses United States Supreme Court decisions on this issue.

• Chapter 5 (Business Ethics)—This chapter con- tains two new cases, two new Issue Spotters, three new Cases in Point (including a case involving Tom Brady’s suspension from the NFL as a result of “deflategate”), and three new case problems. The chapter includes a section on business ethics and social media, and discusses stakeholders and corporate social responsibility. The chapter also provides step-by-step guidance on making ethical

business decisions and includes materials on global business ethics. A new A new A Digital Update fea- ture examines whether employees should have the right to disconnect from their electronic devices after work hours.

• Chapter 8 (Intellectual Property Rights)—The materials on intellectual property rights have been thoroughly revised and updated to reflect the most current laws and trends. The 2016 case involves the Hustler Club and a trademark infringement claim between brothers. A Digital Update feature examines the problem of pat- ent trolls. There are eleven new Cases in Point, including cases involving FedEx’s color and logo, Google’s digitalization of books, and how the Sherlock Holmes copyright fell into the public domain.

• Chapter 9 (Internet Law, Social Media, and Pri- vacy)—This chapter, which was new to the last edition and covers legal issues that are unique to the Internet, has been thoroughly revised and updated for the Tenth Edition. It includes a new section on cyberstalking, two new cases, and a new Digital Update feature on whether employers can monitor employees’ social media use.

• Chapter 10 (Criminal Law and Cyber Crime)— This chapter includes three new cases, five new Cases in Point, three new examples, and three new case problems. A new A new A Managerial Strategy feature discusses the criminalization of American business.

• Chapter 11 (International and Space Law)—The chapter has been expanded to include a new sec- tion on space law—international and domestic. All three cases presented are new to this edition, including a Spotlight Case on a United States Supreme Court decision concerning the Alien Tort Claims Act. The chapter also now covers the Trans-Pacific Partnership (TPP) and includes an Ethics Today feature on the domestic brewing of imported beer brands.

• Chapters 12 through 15 (the Commercial Envi- ronment unit)—In this unit, we have added ten new cases (including two Spotlight Cases, a Classic Case, and several Case Analysis cases), and twenty new case problems. We have also added new Cases in Point, Examples, exhibits, graphic Concept Sum- maries, numbered lists, and a new Reviewing fea- ture. A new A new A Managerial Strategy feature discusses the commercial use of drones, and an Ethics Today feature examines whether there should be more relief for student loan debt.

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xviii PREFACE

• Chapter 19 (Agency Relationships)—This chapter has been updated to reflect the realities of the gig economy in which many people are working as independent contractors. A new A new A Ethics Today feature continues that emphasis with a discus- sion of whether Uber and Lyft drivers should be Lyft drivers should be L considered employees rather than independent contractors. In addition, new Examples, Cases in Point, and case problems have been added to help students comprehend the important issues and liability in agency relationships.

• Chapter 20 (Employment Law)—The chapter covering employment law has been thoroughly updated to include discussions of legal issues fac- ing employers today. It has three new cases, three new Cases in Point, three new Examples (including one involving wage claims of the Oakland Raiders cheerleaders), and three new case problems. An

Ethics Today feature examines whether employees should receive paid bathroom breaks.

• Chapter 21 (Employment Discrimination)—This chapter has a new section discussing discrimina- tion based on military status and new coverage of same-sex discrimination and discrimination against transgender persons. All three cases are new. There are seven new Cases in Point, five new Examples, a new exhibit, and three new case problems. A Digi- tal Update feature discusses hiring discrimination based on social media posts. We discuss relevant United States Supreme Court decisions affecting employment issues throughout the chapter.

• Chapter 24 (Consumer Protection)—This chapter includes all new cases, and has been significantly updated with new coverage, Examples, and Cases in Point. A Digital Update feature deals with “native” ads on the Internet.

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PREFACE xix

Acknowledgments for Previous Editions Since we began this project many years ago, a sizable number of legal environment of business professors and others have helped us in revising the book and it’s supplements, including the following:

Peter W. Allan Victor Valley College

William Dennis Ames Indiana University of Pennsylvania

Thomas M. Apke California State University, Fullerton

Linda Axelrod Metropolitan State University

Jane Bennett Orange Coast College

Robert C. Bird University of Connecticut

Dean Bredeson University of Texas at Austin

Sam Cassidy University of Denver

Thomas D. Cavenagh North Central College– Naperville, Illinois

Angela Cerino Villanova University

Corey Ciocchetti University of Denver

David Cooper Fullerton College

Steven R. Donley Cypress College

Paul F. Dwyer Siena College

Nena Ellison Florida Atlantic University

Joan Gabel Florida State University

Gamewell Gant Idaho State University

Jacqueline Hagerott Franklin University

Arlene M. Hibschweiler SUNY Fredonia

Barbara W. Kincaid Southern Methodist University

Marty P. Ludlum Oklahoma City Community College

Diane May Winona State University

Marty Salley McGee South Carolina State University

Robert Mitchum Arkansas State University, Beebe

Melanie Morris Raritan Valley Community College

Kathleen A. Phillips University of Houston

David Redle University of Akron

Larry A. Strate University of Nevada–Las Vegas

Dawn Swink Minnesota State University, Mankato

Brian Terry Johnson and Wales University

John Theis Mesa State College

William H. Volz Wayne State University

Michael G. Walsh Villanova University

Glynda White Community College of Southern Nevada

LeVon E. Wilson Western Carolina University

John A. Wrieden Florida International University

Eric D. Yordy Northern Arizona University

Mary-Kathryn Zachary State University of West Georgia

As in all past editions, we owe a debt of extreme grati- tude to the numerous individuals who worked directly with us or at Cengage Learning. In particular, we wish to thank Vicky True-Vicky True-V Baker, senior product manager; Su- zanne Wilder, managing content developer; Sarah Hu- ber, content developer; and Ann Borman, senior content project manager. We also thank Katie Jergens in market- ing and Michelle Kunkler, art director. We are indebted as well to the sta� at Lachina, our compositor, for accu-

rately generating pages for this text and making it pos- sible for us to meet our ambitious printing schedule.

We especially wish to thank Katherine Marie Silsbee for her management of the entire project, as well as for the application of her superb research and editorial skills. We also wish to thank William Eric Hollowell, who co- authored the Instructor’s Manual and the Test Bank, for his excellent research e�orts. We were fortunate enough to have the copyediting and proofreading services of

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xx PREFACE

Beverly Peavler and Kristi Wiswell. We are grateful for the e�orts of Vickie Vickie V Reierson and Roxanna Lee for their proofreading and other assistance, which helped to en- sure an error-free text. Finally, we thank Suzanne Jasin of K & M Consulting for her many special e�orts on this project.

�rough the years, we have enjoyed an ongoing cor-�rough the years, we have enjoyed an ongoing cor-�rough the years, we have enjoyed an ongoing cor respondence with many of you who have found points

on which you wish to comment. We continue to wel- come all comments and promise to respond promptly. By incorporating your ideas, we can continue to write a legal environment text that is best for you and best for your students.

F.B.C. R.L.M.

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To my parents and sisters. F.B.C.

To Ian Gowrie-Smith, Your amazingly high

energy level never ceases to amaze me.

Keep it up!

R.L.M.

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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

Unit One

�e Foundations

1. Law and Legal Reasoning

2. Courts and Alternative Dispute Resolution

3. Court Procedures

4. Business and the Constitution

5. Business Ethics

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1–1a Many Different Laws May Affect a Single Business Decision

As you will note, each chapter in this text covers specific areas of the law and shows how the legal rules in each area affect business activities. Although compartmental- izing the law in this fashion promotes conceptual clarity, it does not indicate the extent to which a number of dif-it does not indicate the extent to which a number of dif-it does not indicate the extent to which a number of dif ferent laws may apply to just one decision. Exhibit 1–1 illustrates the various areas of the law that may influence business decision making.business decision making.business decision making.business decision making.business decision making.

■ EXAMPLE 1.1 When Mark Zuckerberg started Facebook as a Harvard student, he probably did not imagine all the legal challenges his company would face as a result of his business decisions. • Shortly after Facebook was launched, others claimed

that Zuckerberg had stolen their ideas for a social net- working site. Their claims involved alleged theft of intellectual property, fraudulent misrepresentation, and

CHAPTER 1

One of the most important func-tions of law in any society is to provide stability, predictability, and continuity so that people can know how to order their affairs. If any society is to survive, its citizens must be able to determine what is legally right and legally wrong. They must know what sanctions will be imposed on them if they commit wrongful acts. If they suf- fer harm as a result of others’ wrong- ful acts, they must know how they can seek compensation. By setting forth the rights, obligations, and privileges of citi- zens, the law enables individuals to go about their business with confidence and a certain degree of predictability.

Although law has various defi- nitions, they all are based on the

general observation that law con- sists of enforceable rules governing relationships among individuals and between individuals and their society. These “enforceable rules” may con- sist of unwritten principles of behav- ior established by a nomadic tribe. They may be set forth in a law code, such as the Code of Hammurabi in ancient Babylon (c. 1780 B.C.E.) or the law code of one of today’s European nations. They may consist of written laws and court decisions created by modern legislative and judicial bod- ies, as in the United States. Regardless of how such rules are created, they all have one thing in common: they establish rights, duties, and privileges that are consistent with the values

and beliefs of their society or its rul- ing group.

In this introductory chapter, we first look at an important question for any student reading this text: How does the legal environment affect business decision making? We next describe the major sources of American law, the common law tradi- tion, and some basic schools of legal thought. We conclude the chapter with sections offering practical guid- ance on several topics, including how to find the sources of law discussed in this chapter (and referred to through- out the text) and how to read and understand court opinions.

1–1 Business Activities and the Legal Environment

Laws and government regulations affect almost all business activities—from hiring and firing decisions to workplace safety, the manufacturing and marketing of products, business financing, and more. To make good business decisions, a basic knowledge of the laws and regulations governing these activities is beneficial—if not essential.

Realize also that in today’s business world, a knowl- edge of “black-letter” law and what conduct can lead to legal liability is not enough. Businesspersons must develop critical thinking and legal reasoning skills so that they can evaluate how various laws might apply to a given situation and determine the best course of action. Busi- nesspersons are also expected to make ethical decisions. Thus, the study of business law necessarily involves an ethical dimension.

222

Law and Legal Reasoning

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CHAPTER 1 Law and Legal Reasoning 3

violations of partnership law and securities law. Face- book ultimately paid $65 million to settle those claims out of court.

• Facebook has been sued repeatedly for violating users’ privacy (and federal laws) by tracking their Web site usage and by scanning private messages for purposes of data mining and user profiling. A class-action suit filed in Europe alleges that Facebook’s data-use poli- cies violate the law of the European Union. Facebook might have to pay millions in damages in this case.

• Facebook’s business decisions have also come under scrutiny by federal regulators, such as the Federal Trade Commission (FTC). The company settled a complaint filed by the FTC alleging that Facebook had failed to keep “friends” lists and other user information private. ■

1–1b Ethics and Business Decision Making Merely knowing the areas of law that may affect a busi- ness decision is not sufficient in today’s business world. Today, business decision makers need to consider not just whether a decision is legal, but also whether it is ethical.

Ethics generally is defined as the principles governing Ethics generally is defined as the principles governing Ethics what constitutes right or wrong behavior. Often, as in several of the claims against Facebook discussed above, disputes arise in business because one party feels that he or she has been treated unfairly. Thus, the underlying reason for bringing some lawsuits is a breach of ethical duties (such as when a partner or employee attempts to secretly take advantage of a business opportunity).

Throughout this text, you will learn about the rela- tionship between the law and ethics, as well as about some of the types of ethical questions that arise in business. For instance, all of the new unit-ending Application and Eth- ics features include an ics features include an ics Ethical Connection section that explores the ethical dimensions of a topic treated within the unit. We have also included Ethical Questions for Ethical Questions for Ethical Questions each unit, as well as within the critical thinking sections of many of the cases presented in this text. Ethics Today features, which focus on ethical considerations in today’s business climate, appear in selected chapters, including this chapter. A Question of Ethics case problem is included Question of Ethics case problem is included Question of Ethics at the end of every chapter to introduce you to the ethical aspects of specific cases involving real-life situations.

1–2 Sources of American Law American law has numerous sources. Often, these sources of law are classified as either primary or secondary.

Primary sources of law, or sources that establish the law, include the following: 1. The U.S. Constitution and the constitutions of the

various states. 2. Statutory law—including laws passed by Congress,

state legislatures, or local governing bodies. 3. Regulations created by administrative agencies, such

as the Federal Trade Commission. 4. Case law and common law doctrines.

EXHIBIT 1–1 Areas of the Law That Can Affect Business Decision Making

Business Decision Making

Intellectual Property

Contracts

Environmental Law and Sustainability

Internet Law, Internet Law, Internet Law Social Media, and Privacy

Product Liability

Torts

Sales

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4 UNIT ONE The Foundations

We describe each of these important sources of law in the following pages.

Secondary sources of law are books and articles that Secondary sources of law are books and articles that Secondary sources of law summarize and clarify the primary sources of law. Exam- ples include legal encyclopedias, treatises, articles in law reviews, and compilations of law, such as the Restatements of the Law (which will be discussed later). Courts often refer to secondary sources of law for guidance in interpret- ing and applying the primary sources of law discussed here.

1–2a Constitutional Law The federal government and the states have separate writ- ten constitutions that set forth the general organization, powers, and limits of their respective governments. Consti- tutional law is the law as expressed in these constitutions.

According to Article VI of the U.S. Constitution, the Constitution is the supreme law of the land. As such, it is the basis of all law in the United States. A law in viola- tion of the Constitution, if challenged, will be declared unconstitutional and will not be enforced, no matter what its source. Because of its importance in the Ameri- can legal system, we present the complete text of the U.S. Constitution in Appendix B.

The Tenth Amendment to the U.S. Constitution reserves to the states all powers not granted to the federal govern- ment. Each state in the union has its own constitution. Unless it conflicts with the U.S. Constitution or a federal law, a state constitution is supreme within the state’s borders.

1–2b Statutory Law Laws enacted by legislative bodies at any level of gov- ernment, such as statutes passed by Congress or by state legislatures, make up the body of law known as statutory law. When a legislature passes a statute, that statute ulti- mately is included in the federal code of laws or the rel- evant state code of laws.

Statutory law also includes local ordinances—regu- lations passed by municipal or county governing units to deal with matters not covered by federal or state law. Ordinances commonly have to do with city or county land use (zoning ordinances), building and safety codes, and other matters affecting the local community.

A federal statute, of course, applies to all states. A state statute, in contrast, applies only within the state’s bor- ders. State laws thus may vary from state to state. No federal statute may violate the U.S. Constitution, and no state statute or local ordinance may violate the U.S. Con- stitution or the relevant state constitution.

Uniform Laws During the 1800s, the differences among state laws frequently created difficulties for

businesspersons conducting trade and commerce among the states. To counter these problems, a group of legal scholars and lawyers formed the National Conference of Commissioners on Uniform State Laws, or NCCUSL (www.uniformlaws.org), in 1892. The NCCUSL still exists today. Its object is to draft uniform laws (model statutes) for the states to consider adopting.

Each state has the option of adopting or rejecting a uniform law. Only if a state legislature adopts a uniform law does that law become part of the statutory law of that state. Note that a state legislature may adopt all or part of a uniform law as it is written, or the legislature may rewrite the law however the legislature wishes. Hence, even though many states may have adopted a uniform law, those states’ laws may not be entirely “uniform.”

The earliest uniform law, the Uniform Negotiable Instruments Law, was completed by 1896 and adopted in every state by the 1920s (although not all states used exactly the same wording). Over the following decades, other acts were drawn up in a similar manner. In all, more than two hundred uniform acts have been issued by the NCCUSL since its inception. The most ambitious uniform act of all, however, was the Uniform Commercial Code.

The Uniform Commercial Code One of the most important uniform acts is the Uniform Commercial Code (UCC), which was created through the joint efforts of the NCCUSL and the American Law Institute.1 The UCC was first issued in 1952 and has been adopted in all fifty states,2 the District of Columbia, and the Virgin Islands.

The UCC facilitates commerce among the states by providing a uniform, yet flexible, set of rules governing commercial transactions. Because of its importance in the area of commercial law, we cite the UCC frequently in this text. We also present Article 2 of the UCC in Appendix C. From time to time, the NCCUSL revises the articles contained in the UCC and submits the revised versions to the states for adoption.

1–2c Administrative Law Another important source of American law is administra- tive law, which consists of the rules, orders, and decisions of administrative agencies. An administrative agency is a federal, state, or local government agency established to perform a specific function. Administrative law and pro- cedures constitute a dominant element in the regulatory environment of business.

1. This institute was formed in the 1920s and consists of practicing attorneys, legal scholars, and judges.

2. Louisiana has not adopted Articles 2 and 2A (covering contracts for the sale and lease of goods), however.

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CHAPTER 1 Law and Legal Reasoning 5

Rules issued by various administrative agencies now affect almost every aspect of a business’s operations. Reg- ulations govern a business’s capital structure and financ- ing, its hiring and firing procedures, its relations with employees and unions, and the way it manufactures and markets its products. Regulations enacted to protect the environment also often play a significant role in business operations.

Federal Agencies At the national level, the cabinet departments of the executive branch include numerous executive agencies. The U.S. Food and Drug Admin- istration, for instance, is an agency within the U.S. Department of Health and Human Services. Execu- tive agencies are subject to the authority of the presi- dent, who has the power to appoint and remove their officers.

There are also major independent regulatory agencies at the federal level, such as the Federal Trade Commission, the Securities and Exchange Commission, and the Federal Communications Commission. The president’s power is less pronounced in regard to inde- pendent agencies, whose officers serve for fixed terms and cannot be removed without just cause.

State and Local Agencies There are administrative agencies at the state and local levels as well. Commonly, a state agency (such as a state pollution-control agency) is created as a parallel to a federal agency (such as the Envi- ronmental Protection Agency). Just as federal statutes take precedence over conflicting state statutes, federal agency reg- ulations take precedence over conflicting state regulations.

1–2d Case Law and Common Law Doctrines

The rules of law announced in court decisions consti- tute another basic source of American law. These rules include interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations cre- ated by administrative agencies.

Today, this body of judge-made law is referred to as case law. Case law—the doctrines and principles announced in cases—governs all areas not covered by statutory law or administrative law and is part of our common law tradi- tion. We look at the origins and characteristics of the com- mon law tradition in some detail in the pages that follow.

See Concept Summary 1.1 for a review of the sources of American law.

ETHICS TODAY

Law as expressed in the U.S. Constitution or 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 conflict with the U.S. Constitution.

Sources of American Law

The rules, orders, and decisions of federal, state, and local administrative agencies.

Administrative Law

Judge-made law, including interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies.

Case Law and Common Law Doctrines

Constitutional Law

Statutory Law Statutes (including uniform laws) and ordinances enacted by federal, state, and local legislatures. Federal statutes may not violate the U.S. Constitution. State statutes and local ordinances may not violate the U.S. Constitution or the relevant state constitution.

Concept SuETHICS TODAConcept SuETHICS TODAmmarETHICS TODAmmarETHICS TODAy ETHICS TODAy ETHICS TODAETHICS TODAYETHICS TODAy ETHICS TODAYETHICS TODA 1.1

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6 UNIT ONE The Foundations

1–3 The Common Law Tradition Because of our colonial heritage, much of American law is based on the English legal system. Knowledge of this tradition is crucial to understanding our legal system today because judges in the United States still apply com- mon law principles when deciding cases.

1–3a Early English Courts After the Normans conquered England in 1066, William the Conqueror and his successors began the process of unifying the country under their rule. One of the means they used to do this was the establishment of the king’s courts, or curiae regis.

Before the Norman Conquest, disputes had been set- tled according to the local legal customs and traditions in various regions of the country. The king’s courts sought to establish a uniform set of customs for the country as a whole. What evolved in these courts was the begin- ning of the common law—a body of general rules that common law—a body of general rules that common law applied throughout the entire English realm. Eventually, the common law tradition became part of the heritage of all nations that were once British colonies, including the United States.

Courts of Law and Remedies at Law The early English king’s courts could grant only very limited kinds of remedies (the legal means to enforce a right or redress a wrong). If one person wronged another in some way, the king’s courts could award as compensation one or more of the following: (1) land, (2) items of value, or (3) money.

The courts that awarded this compensation became known as courts of law, and the three remedies were called remedies at law. (Today, the remedy at law normally takes the form of monetary damages—an amount given to a party whose legal interests have been injured.) This system made the procedure for settling disputes more uniform. When a complaining party wanted a remedy other than economic compensation, however, the courts of law could do nothing, so “no remedy, no right.”

Courts of Equity When individuals could not obtain an adequate remedy in a court of law, they petitioned the king for relief. Most of these petitions were decided by an adviser to the king, called a chancellor, who had the power to grant new and unique remedies. Eventually, formal chancery courts, or courts of equity, were established. Equity is a branch of law—founded on notions of justice Equity is a branch of law—founded on notions of justice Equity

and fair dealing—that seeks to supply a remedy when no adequate remedy at law is available.

Remedies in Equity The remedies granted by the equity courts became known as remedies in equity, or equitable remedies. These remedies include specific per- formance, injunction, and rescission. Specific performance involves ordering a party to perform an agreement as promised. An injunction is an order to a party to cease engaging in a specific activity or to undo some wrong or injury. Rescission is the cancellation of a contractual obli- gation. We will discuss these and other equitable remedies in more detail in later chapters.

As a general rule, today’s courts, like the early Eng- lish courts, will not grant equitable remedies unless the remedy at law—monetary damages—is inadethe remedy at law—monetary damages—is inadethe remedy at law—monetary damages—is inadethe remedy at law—monetary damages—is inade- quate. ■ EXAMPLE 1.2 Ted forms a contract (a legally Ted forms a contract (a legally binding agreement) to purchase a parcel of land that he thinks will be perfect for his future home. The seller breaches (fails to fulfill) this agreement. Ted could sue the seller for the return of any deposits or down payment he might have made on the land, but this is not the remedy he really wants. What Ted wants is to have a court order the seller to perform the contract. In other words, Ted will seek the equitable remedy of specific performance because monetary damages are inadequate in this situation. ■

Equitable Maxims In fashioning appropriate rem- edies, judges often were (and continue to be) guided by so-called equitable maxims—propositions or general statements of equitable rules. Exhibit 1–2 lists some important equitable maxims.

The last maxim listed in the exhibit—“Equity aids the vigilant, not those who rest on their rights”—merits special attention. It has become known as the equitable doctrine of laches (a term derived from the Latin laxus, meaning “lax” or “negligent”), and it can be used as a defense. A defense is an argument raised by the defen- dant (the party being sued) indicating why the plaintiff (the suing party) should not obtain the remedy sought. (Note that in equity proceedings, the party bringing a lawsuit is called the petitioner, and the party being sued is referred to as the respondent.)

The doctrine of laches arose to encourage people to bring lawsuits while the evidence was fresh. What consti- tutes a reasonable time, of course, varies according to the circumstances of the case. Time periods for different types of cases are now usually fixed by statutes of limitations. After the time allowed under a statute of limitations has expired, no action (lawsuit) can be brought, no matter how strong the case was originally.

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CHAPTER 1 Law and Legal Reasoning 7

1–3b Legal and Equitable Remedies Today The establishment of courts of equity in medieval Eng- land resulted in two distinct court systems: courts of law and courts of equity. The courts had different sets of judges and granted different types of remedies. Dur- ing the nineteenth century, however, most states in the United States adopted rules of procedure that resulted in the combining of courts of law and equity. A party now may request both legal and equitable remedies in the same action, and the trial court judge may grant either or both forms of relief.

The distinction between legal and equitable remedies remains relevant to students of business law, however, because these remedies differ. To seek the proper remedy for a wrong, you must know what remedies are avail- able. Additionally, certain vestiges of the procedures used when there were separate courts of law and equity still exist. For instance, a party has the right to demand a jury trial in an action at law, but not in an action in equity. Exhibit 1–3 summarizes the procedural differ- ences (applicable in most states) between an action at law and an action in equity.

1–3c The Doctrine of Stare Decisis One of the unique features of the common law is that it is judge-made law. The body of principles and doctrines judge-made law. The body of principles and doctrines judge-made that form the common law emerged over time as judges decided legal controversies.

Case Precedents and Case Reporters When possible, judges attempted to be consistent and to base their decisions on the principles suggested by earlier cases. They sought to decide similar cases in a similar way, and they considered new cases with care because they knew that their decisions would make new law. Each interpreta- tion became part of the law on the subject and thus served as a legal precedent. A precedent is a decision that fur- nishes an example or authority for deciding subsequent cases involving identical or similar legal principles or facts.

In the early years of the common law, there was no sin- gle place or publication where court opinions, or written decisions, could be found. By the fourteenth century, por- tions of the most important decisions from each year were being gathered together and recorded in Year Books, which became useful references for lawyers and judges. In the

EXHIBIT 1–2 Equitable Maxims

Equity will not suffer a wrong to be without

a remedy (equitable relief will be awarded when there is no legal remedy)

Equity regards substance rather than form

(fairness and justice are more important than legal

technicalities)

Equity aids the vigilant, not those who

rest on their rights (neglect their rights for an

unreasonable period of time)

One seeking the aid of an equity court must come to the court with clean hands

(have acted fairly and honestly)

Where there is equal equity, e is equal equity, e is equal equity the law must prevail (the law will determine

the outcome)

Whoever seeks equity must do equity (treat others fairly)

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8 UNIT ONE The Foundations

sixteenth century, the Year Books were discontinued, and Year Books were discontinued, and Year Books other forms of case publication became available. Today, cases are published, or “reported,” in volumes called reportcases are published, or “reported,” in volumes called reportcases are published, or “reported,” in volumes called – ers, or reports—and are also posted online. We describe reports—and are also posted online. We describe reports— today’s case reporting system in detail later in this chapter.

Stare Decisis and the Common Law Tradition The practice of deciding new cases with reference to for- mer decisions, or precedents, became a cornerstone of the English and American judicial systems. The practice formed a doctrine known as stare decisis,3 a Latin phrase meaning “to stand on decided cases.”

Under the doctrine of stare decisis, judges are obli- gated to follow the precedents established within their jurisdictions. The term jurisdiction refers to a geographic area in which a court or courts have the power to apply the law. Once a court has set forth a principle of law as being applicable to a certain set of facts, that court must apply the principle in future cases involving similar facts. Courts of lower rank (within the same jurisdiction) must do likewise. Thus, stare decisis has two aspects:stare decisis has two aspects:stare decisis 1. A court should not overturn its own precedents

unless there is a compelling reason to do so. 2. Decisions made by a higher court are binding on

lower courts.

Controlling Precedents Precedents that must be followed within a jurisdiction are called controlling

precedents. Controlling precedents are a type of binding authority. A binding authority is any source of law that a binding authority is any source of law that a binding authority court must follow when deciding a case. Binding authori- ties include constitutions, statutes, and regulations that govern the issue being decided, as well as court decisions that are controlling precedents within the jurisdiction. United States Supreme Court case decisions, no matter how old, remain controlling until they are overruled by a subsequent decision of the Supreme Court or changed by further legislation or a constitutional amendment.

Stare Decisis and Legal Stability The doctrine of stare decisis helps the courts to be more efficient because, stare decisis helps the courts to be more efficient because, stare decisis if other courts have analyzed a similar case, their legal rea- soning and opinions can serve as guides. Stare decisis also Stare decisis also Stare decisis makes the law more stable and predictable. If the law on a subject is well settled, someone bringing a case can usu- ally rely on the court to rule based on what the law has been in the past. See this chapter’s Ethics Today feature for a discussion of how courts often defer to case precedent even when they disagree with the reasoning in the case.

Although courts are obligated to follow precedents, sometimes a court will depart from the rule of precedent if it decides that the precedent should no longer be fol- lowed. If a court decides that a ruling precedent is sim- ply incorrect or that technological or social changes have rendered the precedent inapplicable, the court might rule contrary to the precedent. Cases that overturn precedent often receive a great deal of publicity.often receive a great deal of publicity.often receive a great deal of publicity.often receive a great deal of publicity.

■ CASE IN POINT 1.3 The United States Supreme The United States Supreme Court expressly overturned precedent in the case of

EXHIBIT 1–3 Procedural Differences between Actions at Law and Actions in Equity

Monetary damages

Initiation of lawsuit

Parties

Result

Remedy

By filing a petition

Petitioner and respondent

Decree

Injunction, specific performance, or rescission

By filing a complaint

Plaintiff and defendant

Decision By judge (no jury)By jury or judge

Judgment

PROCEDURE

ACTION IN EQUITYACTION AT LAW

3. Pronounced ster-ay dih-ster-ay dih-ster si-ses.Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 1 Law and Legal Reasoning 9

were inherently unequal. The Supreme Court’s depar- ture from precedent in this case received a tremendous amount of publicity as people began to realize the rami- fications of this change in the law. ■

Note that a lower court will sometimes avoid apply-Note that a lower court will sometimes avoid apply-Note that a lower court will sometimes avoid apply ing a precedent set by a higher court in its jurisdiction by

Brown v. Board of Education of Topeka.4 The Court con- cluded that separate educational facilities for whites and blacks, which it had previously upheld as constitutional,5

Stare Decisis versus Spider-Man

Supreme Court Justice Elena Kagan, in a recent decision involving Marvel Comics’ Spider- Man, ruled that, “What we can decide, we can undecide. But stare decisis teaches that we stare decisis teaches that we stare decisis should exercise that authority sparingly.” Cit- ing a Spider-Man comic book, she went on to say that “in this world, with great power there must also come—great responsibility.”a In its decision in the case—Kimble v. Marvel Entertainment, LLC—the Supreme Court applied LLC—the Supreme Court applied LLC stare decisis and ruled stare decisis and ruled stare decisis against Stephen Kimble, the creator of a toy related to the Spider-Man figure.b

Can a Patent Involving Spider-Man Last Super Long? A patent is an exclusive right granted to the creator of an invention. Under U.S. law, patent owners gener- ally possess that right for twenty years. Patent holders can license the use of their patents as they see fit dur- ing that period. In other words, they can allow others (called licensees) to use their invention in return for a fee (called royalties).

More than fifty years ago, the Supreme Court ruled in its Brulotte decision that a licensee cannot be forced Brulotte decision that a licensee cannot be forced Brulotte to pay royalties to a patent holder after the patent has expired.c So if a licensee signs a contract to continue to pay royalties after the patent has expired, the contract is invalid and thus unenforceable.

At issue in the Kimble case was a contract signed between Marvel Entertainment and Kimble, who had invented a toy made up of a glove equipped with a valve and a canister of pressurized foam. The patented toy allowed people to shoot fake webs intended to look like Spider-Man’s. In 1990, Kimble tried to cut a deal with Marvel Entertainment concerning his toy, but he was unsuccessful. Then Marvel started selling its own version of the toy.

When Kimble sued Marvel for patent infringement, he won. The result was a settle- ment that involved a licensing agreement between Kimble and Marvel with a lump-sum payment plus a royalty to Kimble of 3 percent of all sales of the toy. The agreement did not specify an end date for royalty payments to Kimble, and Marvel later sued to have the pay-

ments stop after the patent expired, consistent with the Court’s earlier Brulotte decision.

A majority of the Supreme Court justices agreed with Marvel. As Justice Kagan said in the opinion, “Patents endow their holders with certain super powers, but only for a limited time.” The court further noted that the fifty- year-old Brulotte decision was perhaps based on what Brulotte decision was perhaps based on what Brulotte today is an outmoded understanding of economics. That decision, according to some, may even hinder competi- tion and innovation. But “respecting stare decisis means stare decisis means stare decisis sticking to some wrong decisions.”

The Ethical Side In a dissenting opinion, Supreme Court Justice Samuel A. Alito, Jr., said, “The decision interferes with the abil- ity of parties to negotiate licensing agreements that reflect the true value of a patent, and it disrupts con- tractual expectations. Stare decisis does not require us Stare decisis does not require us Stare decisis to retain this baseless and damaging precedent. . . . Stare decisis is important to the rule of law, but so are Stare decisis is important to the rule of law, but so are Stare decisis correct judicial decisions.”

In other words, stare decisis holds that courts should stare decisis holds that courts should stare decisis adhere to precedent in order to promote predictability and consistency. But in the business world, shouldn’t parties to contracts be able to, for example, allow a patent licensee to make smaller royalty payments that exceed the life of the patent? Isn’t that a way to reduce the yearly costs to the licensee? After all, the licensee may be cash-strapped in its initial use of the patent. Shouldn’t the parties to a contract be the ones to decide how long the contract should last?

Critical Thinking When is the Supreme Court justified in not following the doctrine of stare decisis?

ETHICS TODAY

a. “Spider-Man,” Amazing Fantasy No. 15 (1962), p. 13. b. 576 U.S. __, 135 S.Ct. 2401, 192 L.Ed.2d 463 (2015). c. Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176 (1964).

4. 347 U.S. 483, 74 S.Ct. 686, 98 L.Ed. 873 (1954). 5. See Plessy v. Ferguson, 163 U.S. 537, 16 S.Ct. 1138, 41 L.Ed. 256 (1896).Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

10 UNIT ONE The Foundations

distinguishing the two cases based on their facts. When this happens, the lower court’s ruling stands unless it is appealed to a higher court and that court overturns the decision.

When There Is No Precedent Occasionally, courts must decide cases for which no precedents exist, called cases of first impression. For instance, as you will read throughout this text, the Internet and certain other tech- nologies have presented many new and challenging issues for the courts to decide.

■ EXAMPLE 1.4 Google Glass is a Bluetooth-enabled, hands-free, wearable computer. A person using Google Glass can take photos and videos, surf the Internet, and do other things through voice commands. Many people expressed concerns about this new technology. Privacy advocates claimed that it is much easier to secretly film or photograph others with wearable video technology than with a camera or a smartphone. Indeed, numerous bars and restaurants, among others, banned the use of Google Glass to protect their patrons’ privacy. Police officers were concerned about driver safety. A California woman was ticketed for wearing Google Glass while driving. But the court dismissed this case of first impression because it was not clear whether the device had been in operation at the time of the offense. ■

In deciding cases of first impression, courts often look at persuasive authorities—legal authorities that a court may consult for guidance but that are not binding on the court. A court may consider precedents from other jurisdictions, for instance, although those precedents are not binding. A court may also consider legal principles and policies underlying previous court decisions or exist- ing statutes. Additionally, a court might look at issues of fairness, social values and customs, and public policy (governmental policy based on widely held societal val- ues). Today, federal courts can also look at unpublished opinions (those not intended for publication in a printed legal reporter) as sources of persuasive authority.6

1–3d Stare Decisis and Legal Reasoning In deciding what law applies to a given dispute and then applying that law to the facts or circumstances of the case, judges rely on the process of legal reasoning. Through the use of legal reasoning, judges harmonize their decisions with those that have been made before, as the doctrine of stare decisis requires.

Students of business law and the legal environment also engage in legal reasoning. For instance, you may be asked to provide answers for some of the case problems

that appear at the end of every chapter in this text. Each problem describes the facts of a particular dispute and the legal question at issue. If you are assigned a case problem, you will be asked to determine how a court would answer that question, and why. In other words, you will need to give legal reasons for whatever conclusion you reach.7 We look next at the basic steps involved in legal reasoning and then describe some forms of reasoning commonly used by the courts in making their decisions.

Basic Steps in Legal Reasoning At times, the legal arguments set forth in court opinions are rela- tively simple and brief. At other times, the arguments are complex and lengthy. Regardless of the length of a legal argument, however, the basic steps of the legal rea- soning process remain the same. These steps, which you can also follow when analyzing cases and case problems, form what is commonly referred to as the IRAC method of legal reasoning. IRAC is an acronym formed from the first letters of the words Issue, Rule, Application, and Con- clusion. To apply the IRAC method, you ask the follow- ing questions: 1. Issue—What are the key facts and issues? Suppose that

a plaintiff comes before the court claiming assault (words or acts that wrongfully and intentionally make another person fearful of immediate physi- cal harm). The plaintiff claims that the defendant threatened her while she was sleeping. Although the plaintiff was unaware that she was being threatened, her roommate heard the defendant make the threat. The legal issue is whether the defendant’s action constitutes the tort of assault, given that the plaintiff was unaware of that action at the time it occurred. (A tort is a wrongful act. As you will see later, torts fall under the governance of civil law rather than criminal law.)

2. Rule—What rule of law applies to the case? A rule of law may be a rule stated by the courts in previous decisions, a state or federal statute, or a state or federal administrative agency regulation. In our hypothetical case, the plaintiff alleges (claims) that the defendant committed a tort. Therefore, the applicable law is the common law of torts—specifically, tort law govern- ing assault. Case precedents involving similar facts and issues thus would be relevant. Often, more than one rule of law will be applicable to a case.

3. Application—How does the rule of law apply to the particular facts and circumstances of this case? This step is often the most difficult because each case presents a unique set of facts, circumstances, and parties.

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CHAPTER 1 Law and Legal Reasoning 11

Although cases may be similar, no two cases are ever identical in all respects. Normally, judges (and law- yers and law students) try to find cases on point— cases on point— cases on point previously decided cases that are as similar as possible to the one under consideration.

4. Conclusion—What conclusion should be drawn? This step normally presents few problems. Usually, the conclusion is evident if the previous three steps have been followed carefully.

There Is No One “Right” Answer Many people believe that there is one “right” answer to every legal question. In most legal controversies, however, there is no single correct result. Good arguments can usually be made to support either side of a legal controversy. Quite often, a case does not involve a “good” person suing a “bad” person. In many cases, both parties have acted in good faith in some measure or in bad faith to some degree. Additionally, each judge has her or his own per- sonal beliefs and philosophy. At least to some extent, these personal factors shape the legal reasoning process. In short, the outcome of a particular lawsuit before a court cannot be predicted with certainty.

1–3e The Common Law Today Today, the common law derived from judicial decisions continues to be applied throughout the United States. Common law doctrines and principles, however, govern only areas not covered by statutory or administrative law. In not covered by statutory or administrative law. In not a dispute concerning a particular employment practice, for instance, if a statute regulates that practice, the statute will apply rather than the common law doctrine that applied before the statute was enacted. The common law tradition and its application are reviewed in Concept Summary 1.2.

Courts Interpret Statutes Even in areas governed by statutory law, judge-made law continues to be impor- tant because there is a significant interplay between statu- tory law and the common law. For instance, many statutes essentially codify existing common law rules, and regula- tions issued by various administrative agencies usually are based, at least in part, on common law principles. Addi- tionally, the courts, in interpreting statutory law, often rely on the common law as a guide to what the legislators intended. Frequently, the applicability of a newly enacted statute does not become clear until a body of case law devel- ops to clarify how, when, and to whom the statute applies.

ETHICS TODAY

The Common Law Tradition

The American legal system is based on the common law tradition, which originated in medieval England.

Remedies at law (land, items of value, or money) and remedies in equity (including specific performance, injunction, and rescission of a contractual obligation) originated in the early English courts of law and courts of equity, respectively.

Case Precedents and the Doctrine of Stare DecisisStare DecisisStar

In the king’s courts, judges attempted to make their decisions consistent with previous decisions, called precedents. This practice gave rise to the doctrine of stare decisis. This doctrine, which became a cornerstone of the common law tradition, obligates judges to abide by precedents established in their jurisdictions.

Concept SuETHICS TODAConcept SuETHICS TODAmmarETHICS TODAmmarETHICS TODAy ETHICS TODAy ETHICS TODAETHICS TODAYETHICS TODAy ETHICS TODAYETHICS TODA 1.2

Origins of Common Law

The common law governs all areas not covered by statutory law or administrative laws. Courts interpret statutes and regulations.

Common Law TodayCommon Law TodayCommon Law T

Legal and Equitable Remedies

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12 UNIT ONE The Foundations

Clearly, a judge’s function is not to make the laws—that make the laws—that make is the function of the legislative branch of government— but to interpret and apply them. From a practical point of view, however, the courts play a significant role in defining the laws enacted by legislative bodies, which tend to be expressed in general terms. Judges thus have some flexibility in interpreting and applying the law. It is because of this flexibility that different courts can, and often do, arrive at different conclusions in cases that involve nearly identical issues, facts, and applicable laws.

Restatements of the Law Clarify and Illus- trate the Common Law The American Law Insti- tute (ALI) has published compilations of the common law called Restatements of the Law, which generally summarize the common law rules followed by most states. There are Restatements of the Law in the areas of contracts, torts, Restatements of the Law in the areas of contracts, torts, Restatements of the Law agency, trusts, property, restitution, security, judgments, and conflict of laws. The Restatements, like other secondary sources of law, do not in themselves have the force of law, but they are an important source of legal analysis and opin- ion. Hence, judges often rely on them in making decisions.

Many of the Restatements are now in their second, third, Restatements are now in their second, third, Restatements or fourth editions. We refer to the Restatements frequently Restatements frequently Restatements in subsequent chapters of this text, indicating in parenthe- ses the edition to which we are referring. For instance, we refer to the third edition of the Restatement of the Law of Contracts as simply the Contracts as simply the Contracts Restatement (Third) of Contracts.

1–4 Schools of Legal Thought How judges apply the law to specific cases, including dis- putes relating to the business world, depends in part on their philosophical approaches to law. Thus, the study of law, or jurisprudence, involves learning about different schools of legal thought and how the approaches to law characteristic of each school can affect judicial decision making.

1–4a The Natural Law School An age-old question about the nature of law has to do with the finality of a nation’s laws. What if a particular law is deemed to be a “bad” law by a substantial number of the nation’s citizens? Must they obey that law? According to the natural law theory, a higher, or universal, law exists that applies to all human beings. Each written law should reflect the principles inherent in natural law. If it does not, then it loses its legitimacy and need not be obeyed.

The natural law tradition is one of the oldest and most significant schools of jurisprudence. It dates back to the days of the Greek philosopher Aristotle (384–322

b.c.e.), who distinguished between natural law and the laws governing a particular nation. According to Aristo- tle, natural law applies universally to all humankind.

The notion that people have “natural rights” stems from the natural law tradition. Those who claim that a specific foreign government is depriving certain citizens of their human rights, for instance, are implicitly appeal- ing to a higher law that has universal applicability.

The question of the universality of basic human rights also comes into play in the context of international busi- ness operations. U.S. companies that have operations abroad often hire foreign workers as employees. Should the same laws that protect U.S. employees apply to these foreign employees? This question is rooted implicitly in a concept of universal rights that has its origins in the natural law tradition.

1–4b The Positivist School Positive law, or national law, is the written law of a given society at a particular time. In contrast to natural law, it applies only to the citizens of that nation or society. Those who adhere to legal positivism believe that there can be no higher law than a nation’s positive law.

According to the positivist school, there are no “natu- ral rights.” Rather, human rights exist solely because of laws. If the laws are not enforced, anarchy will result. Thus, whether a law is “bad” or “good” is irrelevant. The law is the law and must be obeyed until it is changed—in an orderly manner through a legitimate lawmaking pro- cess. A judge who takes this view will probably be more inclined to defer to an existing law than would a judge who adheres to the natural law tradition.

1–4c The Historical School The historical school of legal thought emphasizes the evo- lutionary process of law by concentrating on the origin and history of the legal system. This school looks to the past to discover what the principles of contemporary law should be. The legal doctrines that have withstood the passage of time—those that have worked in the past—are deemed best suited for shaping present laws. Hence, law derives its legitimacy and authority from adhering to the standards that historical development has shown to be workable. Fol- lowers of the historical school are more likely than those of other schools to strictly follow decisions made in past cases.

1–4d Legal Realism In the 1920s and 1930s, a number of jurists and scholars, known as legal realists, rebelled against the historical approach

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CHAPTER 1 Law and Legal Reasoning 13

to law. Legal realism is based on the idea that law is just one of many institutions in society and that it is shaped by social forces and needs. Because the law is a human enterprise, this school reasons that judges should take social and economic realities into account when deciding cases.

Legal realists also believe that the law can never be applied with total uniformity. Given that judges are human beings with unique personalities, value systems, and intellects, different judges will obviously bring differ- ent reasoning processes to the same case. Female judges, for instance, might be more inclined than male judges to consider whether a decision might have a negative impact on the employment of women or minorities.

Legal realism strongly influenced the growth of what is sometimes called the sociological school, which views law as a tool for promoting justice in society. In the 1960s, for instance, the justices of the United States Supreme Court helped advance the civil rights movement by upholding long-neglected laws calling for equal treatment for all Americans, including African Americans and other minor- ities. Generally, jurists who adhere to this philosophy of law are more likely to depart from past decisions than are jurists who adhere to other schools of legal thought.

Concept Summary 1.3 reviews the schools of juris- prudential thought.

1–5 Classifications of Law The law may be broken down according to several clas- sification systems. One system, for instance, divides law into substantive law and procedural law. Substantive law consists of all laws that define, describe, regulate, and create legal rights and obligations. Procedural law consists of all laws that outline the methods of enforcing the rights established by substantive law.

Note that many statutes contain both substantive and procedural provisions. ■ EXAMPLE 1.5 A state law that A state law that provides employees with the right to workers’ compensa- tion benefits for on-the-job injuries is a substantive law tion benefits for on-the-job injuries is a substantive law tion benefits because it creates legal rights. Procedural laws estab- lish the method by which an employee must notify the employer about an on-the-job injury, prove the injury, and periodically submit additional proof to continue receiving workers’ compensation benefits. ■

Other classification systems divide law into federal law and state law, private law (dealing with relationships between private entities) and public law (addressing the relationship between persons and their governments), and national law and international law. Here we look at still another classification system, which divides law into

ETHICS TODAY

Schools of Jurisprudential Thought

One of the oldest and most significant schools of legal thought. Those who believe in natural law hold that there is a universal law applicable to all human beings.

Concept SuETHICS TODAConcept SuETHICS TODAmmarETHICS TODAmmarETHICS TODAy ETHICS TODAy ETHICS TODAETHICS TODAYETHICS TODAy ETHICS TODAYETHICS TODA 1.3

Natural Law School

A school of legal thought that stresses the evolutionary nature of law and looks to doctrines that have withstood the passage of time for guidance in shaping present laws.

Historical School

A school of legal thought that advocates a less abstract and more realistic and pragmatic approach to the law and takes into account customary practices and the circumstances surrounding the particular transaction.

Legal Realism

A school of legal thought centered on the assumption that there is no law higher than the laws created by the government.

Positivist School

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14 UNIT ONE The Foundations

civil law and criminal law. We also explain what is meant by the term cyberlaw.

1–5a Civil Law and Criminal Law Civil law spells out the rights and duties that exist between persons and between persons and their govern- ments, as well as the relief available when a person’s rights are violated. Typically, in a civil case, a private party sues another private party who has failed to comply with a duty. (Note that the government can also sue a party for a civil law violation.) Much of the law that we discuss in this text is civil law, including contract law and tort law.

Criminal law, in contrast, is concerned with wrongs committed against the public as a whole. Criminal acts are defined and prohibited by local, state, or federal govern- ment statutes. Criminal defendants are thus prosecuted by public officials, such as a district attorney (D.A.), on behalf of the state, not by their victims or other private parties. Some statutes, such as those protecting the environment or investors, have both civil and criminal provisions.

1–5b Cyberlaw The use of the Internet to conduct business has led to new types of legal issues. In response, courts have had to adapt traditional laws to situations that are unique to our age. Additionally, legislatures at both the federal and the state levels have created laws to deal specifically with such issues.

Frequently, people use the term cyberlaw to refer to the emerging body of law that governs transactions con- ducted via the Internet. Cyberlaw is not really a classifica- tion of law, though, nor is it a new type of law. Rather, it type of law. Rather, it type is an informal term used to refer to both new laws and modifications of traditional laws that relate to the online environment. Throughout this book, you will read how the law in a given area is evolving to govern specific legal issues that arise in the online context.

1–6 How to Find Primary Sources of Law

This text includes numerous references, or citations, to primary sources of law—federal and state statutes, the U.S. Constitution and state constitutions, regula- tions issued by administrative agencies, and court cases. A citation identifies the publication in which a legal authority—such as a statute or a court decision or other source—can be found. In this section, we explain how you can use citations to find primary sources of law. Note

that in addition to being published in sets of books, as described next, most federal and state laws and case deci- sions are available online.

1–6a Finding Statutory and Administrative Law

When Congress passes laws, they are collected in a pub- lication titled United States Statutes at Large. When state legislatures pass laws, they are collected in similar state publications. Most frequently, however, laws are referred to in their codified form—that is, the form in which they appear in the federal and state codes. In these codes, laws are compiled by subject.

United States Code The United States Code (U.S.C.) United States Code (U.S.C.) United States Code arranges all existing federal laws by broad subject. Each of the fifty-two subjects is given a title and a title number. For instance, laws relating to commerce and trade are col- lected in Title 15, “Commerce and Trade.” Each title is subdivided by sections. A citation to the U.S.C. includes both title and section numbers. Thus, a reference to “15 U.S.C. Section 1” means that the statute can be found in Section 1 of Title 15. (“Section” may be designated by the symbol §, and “Sections,” by §§.)

In addition to the print publication, the federal gov- ernment provides a searchable online database at www .gpo.gov. It includes the United States Code, the U.S. Constitution, and many other federal resources. (Click on “Libraries” and then “Core Documents of Our Democracy” to find these resources.)

Commercial publications of federal laws and regula- tions are also available. For instance, Thomson Reuters publishes the United States Code Annotated (U.S.C.A.). United States Code Annotated (U.S.C.A.). United States Code Annotated The U.S.C.A. contains the official text of the U.S.C., plus notes (annotations) on court decisions that interpret and apply specific sections of the statutes. The U.S.C.A. also includes additional research aids, such as cross- references to related statutes, historical notes, and library references. A citation to the U.S.C.A. is similar to a cita- tion to the U.S.C.: “15 U.S.C.A. Section 1.”

State Codes State codes follow the U.S.C. pattern of arranging law by subject. They may be called codes, revi- sions, compilations, consolidations, general statutes, or statutes, depending on the preferences of the states.

In some codes, subjects are designated by number. In some codes, subjects are designated by number. In some codes, subjects are designated by number. In others, they are designated by name. ■ EXAMPLE 1.6 “13 Pennsylvania Consolidated Statutes Section 1101” means that the statute can be found in Title 13, Section 1101, of the Pennsylvania code. “California Commercial Code Section 1101” means that the statute can be found

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CHAPTER 1 Law and Legal Reasoning 15

under the subject heading “Commercial Code” of the California code in Section 1101. Abbreviations are often used. For example, “13 Pennsylvania Consolidated Stat- utes Section 1101” is abbreviated “13 Pa. C.S. § 1101,” and “California Commercial Code Section 1101” is abbreviated “Cal. Com. Code § 1101.” ■

Administrative Rules Rules and regulations adopted by federal administrative agencies are initially published in the Federal Register, a daily publication of the U.S. gov- ernment. Later, they are incorporated into the Code of Federal Regulations (C.F.R.). The C.F.R. is available online Federal Regulations (C.F.R.). The C.F.R. is available online Federal Regulations on the government database (www.gpo.gov).

Like the U.S.C., the C.F.R. is divided into titles. Rules within each title are assigned section numbers. A full citation to the C.F.R. includes title and section num- bers. ■ EXAMPLE 1.7 A reference to “17 C.F.R. Section 230.504” means that the rule can be found in Section 230.504 of Title 17. ■

1–6b Finding Case Law Before discussing the case reporting system, we need to look briefly at the court system. There are two types of courts in the United States, federal courts and state courts. Both systems consist of several levels, or tiers, of courts. Trial courts, in which evidence is presented and testimony given, are on the bottom tier. Decisions from a trial court can be appealed to a higher court, which commonly is an intermediate court of appeals, or appellate court. Decisions from these intermediate courts of appeals may be appealed to an even higher court, such as a state supreme court or the United States Supreme Court.

State Court Decisions Most state trial court deci- sions are not published in books (except in New York and a few other states, which publish selected trial court opin- ions). Decisions from state trial courts are typically filed in the office of the clerk of the court, where the decisions are available for public inspection. (Increasingly, they can be found online as well.)

Written decisions of the appellate, or reviewing, courts, however, are published and distributed (in print and online). As you will note, most of the state court cases presented in this textbook are from state appellate courts. The reported appellate decisions are published in volumes called reports or reports or reports reporters, which are numbered consecutively. State appellate court decisions are found in the state reporters of that particular state. Official reports are published by the state, whereas unofficial reports are published by nongovernment entities.

Regional Reporters. State court opinions appear in regional units of the West’s National Reporter System, published by �omson Reuters. Most lawyers and librar- ies have these reporters because they report cases more quickly and are distributed more widely than the state- published reporters. In fact, many states have eliminated their own reporters in favor of the National Reporter System.

The National Reporter System divides the states into the following geographic areas: Atlantic (A., A.2d, Atlantic (A., A.2d, Atlantic or A.3d), North Eastern (N.E. or N.E.2d), North West-North West-North West ern (N.W. or N.W.2d), Pacific (P., P.2d, or P.3d), Pacific (P., P.2d, or P.3d), Pacific South Eastern (S.E. or S.E.2d), South Western (S.W., S.W.2d, or S.W.3d), and Southern (So., So.2d, or So.3d). (The 2d and 2d and 2d 3d in the preceding abbreviations refer to 3d in the preceding abbreviations refer to 3d Sec- ond Series and ond Series and ond Series Third Series, respectively.) The states included in each of these regional divisions are indi- cated in Exhibit 1–4, which illustrates the National Reporter System.

Case Citations. After appellate decisions have been pub- lished, they are normally referred to (cited) by the name of the case and the volume, name, and page number of the reporter(s) in which the opinion can be found. �e citation �rst lists the state’s o�cial reporter (if di�erent from the National Reporter System), then the National Reporter, and then any other selected reporter. (Citing a reporter by volume number, name, and page number, in that order, is common to all citations. �e year that the decision was issued is often included at the end in parentheses.) When more than one reporter is cited for the same case, each reference is called a parallel citation.

Note that some states have adopted a “public domain citation system” that uses a somewhat different format for the citation. For instance, in Wisconsin, a Wiscon- sin Supreme Court decision might be designated “2016 WI 40,” meaning that the case was decided in the year 2016 by the Wisconsin Supreme Court and was the forti- eth decision issued by that court during that year. Parallel citations to the Wisconsin Reports and the Wisconsin Reports and the Wisconsin Reports North Western Reporter Reporter Reporter are still included after the public domain citation.

■ EXAMPLE 1.8 Consider the following case citation: Summerhill, LLC v. City of Meridan, 162 Conn.App. 469, 131 A.3d. 1225 (2016). We see that the opinion in this case can be found in Volume 162 of the official Con- necticut Appellate Court Reports, on page 469. The paral- lel citation is to Volume 131 of the Atlantic Reporter, Third Series, page 1225. ■

When we present opinions in this text, in addition to the reporter, we give the name of the court hearing the case and the year of the court’s decision. Sample citations to state court decisions are explained in Exhibit 1–5.

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16 UNIT ONE The Foundations

EXHIBIT 1–4 National Reporter System—Regional/Federal

NATIONAL REPORTER SYSTEM MAP

Coverage Connecticut, Delaware, District of Columbia, Maine, Maryland, New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Ve, New Jersey, Pennsylvania, Rhode Island, and Ve, New Jersey er, Pennsylvania, Rhode Island, and Ver, Pennsylvania, Rhode Island, and V mont. Illinois, Indiana, Massachusetts, New York, and Ohio.Illinois, Indiana, Massachusetts, New York, and Ohio.Illinois, Indiana, Massachusetts, New Y Iowa, Michigan, Minnesota, Nebraska, North Dakota, South Dakota, and Wisconsin. Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kansas, Montana, Nevada, New Mexico, Oklahoma, Oregon, Utah, Washington, and Wyoming. Georgia, North Carolina, South Carolina, Virginia, and West Virginia. Arkansas, Kentucky, Missouri, TArkansas, Kentucky, Missouri, TArkansas, Kentucky ennessee, and T, Missouri, Tennessee, and T, Missouri, T exas.ennessee, and Texas.ennessee, and T

Alabama, Florida, Louisiana, and Mississippi.

U.S. Circuit Courts from 1880 to 1912; U.S. Commerce Court from 1911 to 1913; U.S. District Courts from 1880 to 1932; U.S. Court of Claims (now called U.S. Court of Federal Claims) from 1929 to 1932 and since 1960; U.S. Courts of Appeals since 1891; U.S. Court of Customs and Patent Appeals since 1929; U.S. Emergency Court of Appeals since 1943. U.S. Court of Claims from 1932 to 1960; U.S. District Courts since 1932; U.S. Customs Court since 1956. U.S. District Courts involving the Federal Rules of Civil Procedure since 1939 and Federal Rules of Criminal Procedure since 1946. United States Supreme Court since the October term of 1882. Bankruptcy decisions of U.S. Bankruptcy Courts, U.S. District Courts, U.S. Courts of Appeals, and the United States Supreme Court. U.S. Court of Military Appeals and Courts of Military Review for the Army, Navy, Air ForNavy, Air ForNavy ce, and Coast Guard.

1885

1885 1879

1883

1887 1886

1887

1880

1932

1939

1882 1980

1978

Atlantic Reporter (A., A.2d, or A.3d)

North Eastern Reporth Eastern Reporth Easter ter (N.E. or N.E.2d) North Westerth Westerth W n Reporestern Reporester ter (N.W. or N.W.2d)

Pacific Reporter (P., P (P., P (P .2d, or P., P.2d, or P., P .3d).2d, or P.3d).2d, or P

South Eastern ReporSouth Eastern ReporSouth Easter ter (S.E. or S.E.2d) South WesterSouth WesterSouth W n Reporestern Reporester ter (S.W., S.W.2d, or S.W.3d) Southern ReporSouthern ReporSouther ter (So., So.2d, or So.3d)

Federal Reporters Federal Reporter (F., F.2d, or F.3d)

Federal Supplement (F.Supp., F.Supp.2d, or F.Supp.3d)

Federal Rules Decisions (F.R.D.)

Supreme CourSupreme CourSupr t Reporter (S.Ct.) Bankruptcy Reporter (Bankr.)

Military Justice ReporMilitary Justice ReporMilitar ter (M.J.)

Regional Reporters Coverage Beginning

TENN.

VT.VT.

ALASKA

HAWAIIHAWAIIHAWAIIHAWAIIHAWAIIHAWAIIHAWAIIHAWAIIHAWAIIHAWAIIHAWAII

WASH.

OREGON

CALIF.

NEVADA

IDAHO

MONTANA

WYOMING

UTAH

ARIZONA N. MEXICO

COLORADO

NEBR.

S. DAK.

N. DAK.

KANSAS

OKLA.

TEXAS

ARK.

MO.

IOWA

MINN.

WIS.

ILL. IND.

MICH.

OHIO

KY.

MISS. ALA.

LA.

GA.

FLA.

S. CAR.

N. CAR.

VA. W.VA.

PA.

N.Y.

ME.

DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL.DEL. MD.MD.MD.MD.MD.MD.

N.J. CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.CONN.

R.I.R.I.R.I.R.I.

MASS.MASS.MASS.MASS.MASS.MASS. N.H.N.H.N.H.N.H.N.H.N.H.N.H.N.H.N.H.N.H.

PacificPacificPacificPacific North WesterNorth WesterNorth WesterNorth Western South WesteSouth WesteSouth WesteSouth Western North EasterNorth EasterNorth EasterNorth Eastern AtlanticAtlanticAtlantic South EasteSouth EasteSouth Eastern SoutherSoutherSouthern

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CHAPTER 1 Law and Legal Reasoning 17

EXHIBIT 1–5 How to Read Citations

292 Neb. 681, 874 N.W.2d 681 (2016)292 Neb. 681, 874 N.W.2d 681 (2016)292 Neb. 681, 874 N.W a

243 Cal.App.4th 1366, 197 Cal.Rptr.3d 647 (2016) 243 Cal.App.4th 1366, 197 Cal.Rptr.3d 647 (2016) 243 Cal.App.4th 1366, 197 Cal.Rptr

136 A.D.3d 1094, 24 N.Y.S.3d 448 (2016) 136 A.D.3d 1094, 24 N.Y.S.3d 448 (2016) 136 A.D.3d 1094, 24 N.Y

298 Ga.App. 324, 781 S.E.2d 772 (2016)

___ U.S. ___, 136 S.Ct. 651, 193 L.Ed.2d 556 (2016)

a. The case names have been deleted from these citations to emphasize the publications. It should be kept in mind, however, that om these citations to emphasize the publications. It should be kept in mind, however, that om these citations to emphasize the publications. It should be kept in mind, however the name of a case is as important as the specific page numbers in the volumes in which it is found. If a citation is incorrect, the correct citation may be found in a publication’s index of case names. In addition to providing a check on errors in citations, the date of a case is important because the value of a recent case as an authority is likely to be greater than that of older cases from the same court.

136 A.D.3d 1094, 24 N.Y.S.3d 448 (2016)

___ U.S. ___, 136 S.Ct. 651, 193 L.Ed.2d 556 (2016)

243 Cal.App.4th 1366, 197 Cal.Rptr

136 A.D.3d 1094, 24 N.Y136 A.D.3d 1094, 24 N.Y

STATE COURTS

FEDERAL COURTS

N.WN.W.N.W is the abbreviation for the publication of state court decisions rendered in the North Western Reporter North Western Reporter North W of West’s National Reporter System. est’s National Reporter System. est’ 2d indicates that this case was included in the 2d indicates that this case was included in the 2d Second Series of that Second Series of that Second Series reporter.

Neb. is an abbreviation for Nebraska Reports, Nebraska’s of Nebraska’s of Nebraska’ ficial rs official rs of eports of the decisions of its highest court, the Nebraska Supreme Court.

Cal.RptrCal.Rptr.Cal.Rptr is the abbreviation for the unofficial reviation for the unofficial reviation for the unof eports—titled California Reporter—California Reporter—California Reporter of the decisions of California courts.

N.Y.S. is the abbreviation for the unofficial reviation for the unofficial reviation for the unof eports—titled New YoNew YoNew Y rk Supplement—of the decisions of New Yt—of the decisions of New Yt ork courts.—of the decisions of New York courts.—of the decisions of New Y

A.D. is the abbreviation for the New York Appellate Division ReportsNew York Appellate Division ReportsNew Y , which hears appeals from the New York Suprom the New York Suprom the New Y eme Court—the state’s general trial court. The New Yeme Court—the state’s general trial court. The New Yeme Court—the state’ ork Court s general trial court. The New York Court s general trial court. The New Y of Appeals is the state’s highest court, analogous to other states’ suprof Appeals is the state’s highest court, analogous to other states’ suprof Appeals is the state’ eme courts.

Ga.App. is the abbreviation for Georgia Appeals Reports, Georgia’s of Georgia’s of Georgia’ ficial rs official rs of eports of the decisions of its court of appeals.

L.Ed. is an abbreviation for Lawyers’ Edition of the Supreme Court Reports, an unofficial edition of decisions of the , an unofficial edition of decisions of the , an unof United States Supreme Court.

S.Ct. is the abbreviation for West’s unofest’s unofest’ ficial rs unofficial rs unof eports—titled Supreme Court Reporter—of decisions of the United States SuprCourt Reporter—of decisions of the United States SuprCourt Reporter eme Court.

U.S. is the abbreviation for United States Reports, the official edition of the , the official edition of the , the of decisions of the United States Supreme Court. The blank lines in this citation (or any other citation) indicate that the appropriate volume of the case reporter has not yet been published and no page number is available.

Continued

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18 UNIT ONE The Foundations

EXHIBIT 1–5 How to Read Citations—Continued

809 F.3d 376 (7th Cir809 F.3d 376 (7th Cir809 F . 2016) .3d 376 (7th Cir. 2016) .3d 376 (7th Cir

___ F.Supp.3d ___ (E.D.Cal. 2016) ___ F.Supp.3d ___ (E.D.Cal. 2016) ___ F

18 U.S.C. Section 1961(1)(A)

UCC 2–206(1)(b)

Restatement (Third) of TRestatement (Third) of TRestatement (Thir orts, d) of Torts, d) of T Section 6

17 C.F.R. Section 230.50517 C.F.R. Section 230.50517 C.F

.3d 376 (7th Cir

18 U.S.C. Section 1961(1)(A)

2016 WL 66334

b. Many court decisions that are not yet published or that are not intended for publication can be accessed through Westlaw, an online legal database.

FEDERAL COURTS (Continued)

WESTLAW® CITATIONSb

STATUTORY AND OTHER CITATIONS

7th Cir7th Cir.7th Cir is an abbreviation denoting that this case was decided in the U.S. Court of Appeals for the Seventh Circuit.

E.D.Cal. is an abbreviation indicating that the U.S. District Court for the Eastern District of California decided this case.

U.S.C. denotes United States Code, the codification of United States Statutes at Large. The number 18 refers to the statute’s U.S.C. title numberefers to the statute’s U.S.C. title numberefers to the statute’ and 1961 to its section number within that title. The number 1 in parentheses refers to a subsection within the section, and the letter A in parentheses to a subsection within the subsection.

UCC is an abbrUCC is an abbrUCC eviation for Uniform Commercial Code. The first number 2 is a reference to an article of the UCC, and 206 to a section within that article. The number 1 in parentheses refers to a subsection within the section, and the letter b in parentheses to a subsection within the subsection.

Restatement (Third) of TortsRestatement (Third) of TortsRestatement (Third) of T rorts rorts efers to the third edition of the American Law Institute’s Law Institute’s Law Institute’ Restatement of the Law of TortsRestatement of the Law of TortsRestatement of the Law of T . The number 6 refers to a specific section.

C.F.R.C.F.R.C.F is an abbreviation for Code of Federal Regulations, a compilation of federal administrative regulations. The number 17 designates the regulation’s egulation’s egulation’ title number, and 230.505 designates a specific section within that title.title number, and 230.505 designates a specific section within that title.title number

WL is an abbreviation for Westlaw. The number 2016 is the year of the document that can be found with this citation in the Westlaw database. The number 66334 is a number assigned to a specific document. A higher number indicates that a document was added to the Westlaw database later in the year.

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CHAPTER 1 Law and Legal Reasoning 19

Federal Court Decisions Federal district (trial) court decisions are published unofficially in the Federal Supple- ment (F.Supp. or F.Supp.2d), and opinions from the cirment (F.Supp. or F.Supp.2d), and opinions from the cirment – cuit courts of appeals (reviewing courts) are reported unofficially in the Federal Reporter (F., F.2d, or F.3d). Federal Reporter (F., F.2d, or F.3d). Federal Reporter Cases concerning federal bankruptcy law are published unofficially in the Bankruptcy Reporter (Bankr. or B.R.).Bankruptcy Reporter (Bankr. or B.R.).Bankruptcy Reporter

The official edition of the United States Supreme Court decisions is the United States Reports (U.S.), which is pubUnited States Reports (U.S.), which is pubUnited States Reports – lished by the federal government. Unofficial editions of Supreme Court cases include the Supreme Court Reporter (S.Ct.) and the Lawyers’ Edition of the Supreme Court Reports (L.Ed. or L.Ed.2d). Sample citations for federal court deci- sions are also listed and explained in Exhibit 1–5.

Unpublished Opinions Many court opinions that are not yet published or that are not intended for publi- cation can be accessed through Thomson Reuters West- law® (abbreviated in citations as “WL”), an online legal database. When no citation to a published reporter is available for cases cited in this text, we give the WL cita- tion (such as 2016 WL 145734, which means it was case number 145734 decided in the year 2016). In addition, federal appellate court decisions that are designated as unpublished may appear in the Federal Appendix (Fed.Federal Appendix (Fed.Federal Appendix Appx.) of the National Reporter System.

Old Case Law On a few occasions, this text cites opin- ions from old, classic cases dating to the nineteenth cen- tury or earlier. Some of these are from the English courts. The citations to these cases may not conform to the descriptions just presented because the reporters in which they were originally published were often known by the names of the persons who compiled the reporters.

1–7 How to Read and Understand Case Law

The decisions made by the courts establish the boundar- ies of the law as it applies to almost all business relation- ships. It thus is essential that businesspersons know how to read and understand case law.

The cases that we present in this text have been con- densed from the full text of the courts’ opinions and are presented in a special format. In approximately two-thirds of the cases (including the cases designated as Classic and Classic and Classic Spotlight), we have summarized the backSpotlight), we have summarized the backSpotlight – ground and facts, as well as the court’s decision and rem- edy, in our own words. In those cases, we have included only selected excerpts from the court’s opinion (“In the

Language of the Court”). In the remaining one-third of the cases (labeled “Case Analysis”), we have provided a longer excerpt from the court’s opinion without summa- rizing the background and facts or decision and remedy.

The following sections provide useful insights into how to read and understand case law.

1–7a Case Titles and Terminology The title of a case, such as Adams v. Jones, indicates the names of the parties to the lawsuit. The v. in the case title stands for versus, which means “against.” In the trial court, Adams was the plaintiff—the person who filed the suit. Jones was the defendant.

If the case is appealed, however, the appellate court will sometimes place the name of the party appealing the decision first, so the case may be called Jones v. Adams if Jones appealed. Because some appellate courts retain the trial court order of names, it is often impossible to distinguish the plaintiff from the defendant in the title of a reported appellate court decision. You must carefully read the facts of each case to identify the parties.

The following terms, phrases, and abbreviations are frequently encountered in court opinions and legal publications.

Parties to Lawsuits The party initiating a lawsuit is referred to as the plaintiff or plaintiff or plaintiff petitioner, depending on the petitioner, depending on the petitioner nature of the action. The party against whom a lawsuit is brought is the defendant or defendant or defendant respondent. Lawsuits frerespondent. Lawsuits frerespondent – quently involve more than one plaintiff and/or defendant.

When a case is appealed from the original court or jurisdiction to another court or jurisdiction, the party appealing the case is called the appellant. The appellee is the party against whom the appeal is taken. (In some appellate courts, the party appealing a case is referred to as the petitioner, and the party against whom the suit is brought or appealed is called the respondent.)

Judges and Justices The terms judge and judge and judge justice are justice are justice usually synonymous and represent two designations given to judges in various courts. All members of the United States Supreme Court, for instance, are referred to as justices. Justice is the formal title often given to judges of appellate courts, although this is not always true. In New York, a justice is a judge of the trial court (called the Supreme Court), and a member of the Court of Appeals (the state’s highest court) is called a judge.

The term justice is commonly abbreviated to J., and justice is commonly abbreviated to J., and justice justices, to JJ. A United States Supreme Court case might refer to Justice Sotomayor as Sotomayor, J., or to Chief Justice Roberts as Roberts, C.J.

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20 UNIT ONE The Foundations

Decisions and Opinions Most decisions reached by reviewing, or appellate, courts are explained in written opinions. The opinion contains the court’s reasons for its decision, the rules of law that apply, and the judgment. You may encounter several types of opinions as you read appellate cases, including the following: • When all the judges (or justices) agree, a unanimous

opinion is written for the entire court. • When there is not unanimous agreement, a majority

opinion is generally written. It outlines the views of the majority of the judges deciding the case.

• A judge who agrees (concurs) with the majority opin- ion as to the result but not as to the legal reasoning often writes a concurring opinion. In it, the judge sets out the reasoning that he or she considers correct.

• A dissenting opinion presents the views of one or more judges who disagree with the majority view.

• Sometimes, no single position is fully supported by a majority of the judges deciding a case. In this situ- ation, we may have a plurality opinion. This is the opinion that has the support of the largest number of judges, but the group in agreement is less than a majority.

• Finally, a court occasionally issues a per curiam opin- ion (per curiamion (per curiamion ( is Latin for “of the court”), which does not indicate which judge wrote the opinion.

1–7b Sample Court Case To illustrate the various elements contained in a court opinion, we present an annotated court opinion in Exhibit 1–6. The opinion is from an actual case that the United States Court of Appeals for the Eleventh Circuit decided in 2016.

Background of the Case In December 1955, on a bus in Montgomery, Alabama, Rosa Parks refused to give up her seat to a white man in violation of the city’s seg- regation law. This “courageous act” sparked the modern civil rights movement. Parks’s role in “the most signifi- cant social movement in the history of the United States” has been chronicled in books and movies, and featured on mementoes, some of which are offered for sale by

Target Corp. The Rosa and Raymond Parks Institute for Self Development is a Michigan firm that owns the right to use Parks’s name and likeness for commercial pur- poses. The Institute filed a suit in a federal district court against Target, alleging misappropriation in violation of the Institute’s right of publicity. The court dismissed the complaint. The Institute appealed to the U.S. Court of Appeals for the Eleventh Circuit, arguing that Target’s sales of books, movies, and other items that depict or dis- cuss Rosa Parks and the modern civil rights movement violated Michigan law.

Editorial Practice You will note that triple asterisks (* * *) and quadruple asterisks (* * * *) frequently appear in the opinion. The triple asterisks indicate that we have deleted a few words or sentences from the opinion for the sake of readability or brevity. Quadruple asterisks mean that an entire paragraph (or more) has been omitted.

Additionally, when the opinion cites another case or legal source, the citation to the case or source has been omitted, again for the sake of readability and brevity. These editorial practices are continued in the other court opinions presented in this book. In addition, whenever we present a court opinion that includes a term or phrase that may not be readily understandable, a bracketed defi- nition or paraphrase has been added.

Briefing Cases Knowing how to read and understand court opinions and the legal reasoning used by the courts is an essential step in undertaking accurate legal research. A further step is “briefing,” or summarizing, the case.

Legal researchers routinely brief cases by reducing the texts of the opinions to their essential elements. Gener- ally, when you brief a case, you first summarize the back- ground and facts of the case, as the authors have done for most of the cases presented in this text. You then indicate the issue (or issues) before the court. An important ele- ment in the case brief is, of course, the court’s decision on the issue and the legal reasoning used by the court in reaching that decision.

Detailed instructions on how to brief a case are given in Appendix A, which also includes a briefed version of the sample court case presented in Exhibit 1–6.

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CHAPTER 1 Law and Legal Reasoning 21

EXHIBIT 1–6 A Sample Court Case

Rosa and Raymond Parks Institute for Self Development v. Target Corporation

United States Court of Appeals, Eleventh Circuit,

812 F.3d 824 (2016).

ROSENBAUM, Circuit Judge:ROSENBAUM, Circuit Judge:ROSENBAUM

* * * *

[Rosa] Parks’s courageous act inspired the Montgomery Bus Boycott and served Parks’s courageous act inspired the Montgomery Bus Boycott and served Parks’s courageous act

as the impetus for the modern Civil Rights Movement, transforming the nation.

In response to Parks’s arrest, for 381 days, 42,000 African–Americans boycotted

Montgomery buses, until the United States Supreme Court held the Montgomery

segregation law unconstitutional and ordered desegregation of the buses.

Parks’s refusal to cede ground in the face of continued injustice has made her

among the most revered heroines of our national story; her role in American his-

tory cannot be over-emphasized. Indeed, the United States Congress * * * has cred-

ited Parks with “igniting the most significant social movement in the history of the

United States.”

So it is not surprising that authors would write about Parks’s story and artists

would celebrate it with their works. The commemoration and dissemination of

Parks’s journey continues to entrench and embolden our pursuit of justice. And it is

in the general public interest to relentlessly preserve, spotlight, and recount the story

of Rosa Parks and the Civil Rights Movement—even when that interest allegedly

conflicts with an individual right of publicity.

I.

The Rosa and Raymond Parks Institute for Self Development (the “Institute”) is a

Michigan * * * corporation that owns the name and likeness of the late Rosa Parks * * * .

The court divides the opinion into three sections. The first section summarizes the factual background of the case.

This line provides the name of the judge (or justice) who authored the court’s opinion.

This section contains the cita- tion—the name of the case, the name of the court that heard the case, the year of the deci- sion, and reporters in which the court’s opinion can be found.

A right of publicity is a person’s right of publicity is a person’s right of publicity right to the use of his or her name and likeness for a commer- cial purpose.

To cede is to yield or surrender.

The modern civil rights move- ment (1954–1964) included mass ment (1954–1964) included mass ment demonstrations in which partici- pants sought equality in public and private life at national, state, and local levels, as well as an end to state and local segregation and discrimination in schools, in the workplace and at the polls. The movement culminated in the enactment of two federal Civil Rights acts in 1957 and 1964.

An impetus is a stimulus or a spark.

In December 1955, on a bus in Montgomery, Alabama, Parks refused to give up her seat to a white man in violation of the city’s segregation law.

Continued

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22 UNIT ONE The Foundations

EXHIBIT 1–6 A Sample Court Case—Continued

Target Corporation (“Target”), a national retail corporation headquartered in Min-

neapolis, Minnesota, operates more than 1,800 retail stores across the United States.

Target offered [for sale] seven books about Parks * * * , the * * * movie The Rosa

Parks Story, and a * * * plaque that included * * * a picture of Parks.

* * * *

* * * The Institute filed the underlying complaint in [a federal district court]. The

Institute alleged claims for * * * misappropriation * * * for Target’s sales of all items

using the name and likeness of Rosa Parks.

Generally, the Institute complained that * * * Target had unfairly and “without

the Institute’s prior knowledge, or consent, used Parks’s name, likeness, and image

to sell products * * * for Target’s own commercial advantage.” * * * The district court

dismissed the complaint, and this appeal followed.

II.

* * * In this case we apply * * * the substantive law of Michigan. substantive law of Michigan. substantive law

* * * *

Michigan’s common-law right of publicity is founded upon the interest of the

individual in the exclusive use of his own identity, in so far as it is represented by his

name or likeness, and in so far as the use may be of benefit to him or to others. This

* * * privacy right guards against the appropriation of the commercial value of a per-

son’s identity by using without consent the person’s name, likeness, or other indicia

of identity for the purpose of trade.

Privacy rights, however, are not absolute. * * * Individual rights must yield to the

qualified privilege to communicate on matters of public interest.

* * * *

* * * The privilege attaches to matters of general public interest and extends

to all communications made bona fide upon any subject matter where the party bona fide upon any subject matter where the party bona fide

Indicia is a synonym for indica- tions or signs.

The second major section of the opinion responds to the plain- tiff’s appeal.

Substantive law is law that Substantive law is law that Substantive law defines the rights and duties of persons with respect to each other. A federal court exercising jurisdiction based on diversity of citizenship—as in this case, where the two corporate parties are “citizens” of different states— applies the substantive law of the state in which the court sits (except in cases governed by federal law or the United States Constitution).

Misappropriation is the use of a person’s name or likeness without his or her consent for a commercial purpose. This is commonly referred to as a viola- tion of the individual’s right of publicity.

Qualified privilege gives some- one a limited right to act con- trary to another person’s right without the other person’s hav- ing legal recourse for the act.

In this context, bona fide means sincerely and honestly.

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CHAPTER 1 Law and Legal Reasoning 23

EXHIBIT 1–6 A Sample Court Case—Continued

communicating has an interest or a [legal, moral, or social] duty to a person having

a corresponding interest or duty.

* * * *

Of course, it is beyond dispute that Rosa Parks is a figure of great historical

significance and the Civil Rights Movement a matter of legitimate and important

public interest. And it is uncontested that * * * the * * * books * * * and the movie are uncontested that * * * the * * * books * * * and the movie are uncontested

all bona fide works * * * discussing Parks and her role in the Civil Rights Movement.bona fide works * * * discussing Parks and her role in the Civil Rights Movement.bona fide

Similarly, the plaque depicts images and mentions dates and statements related

to Parks and the Civil Rights Movement, in an effort to convey a message concern-

ing Parks, her courage, and the results of her strength. Indeed, all of the works in

question communicate information, express opinions, recite grievances, and protest

claimed abuses on behalf of a movement whose existence and objectives continue to

be of the highest public interest and concern.

* * * *

* * * The Institute has not articulated any argument as to why Michigan’s quali-

fied privilege for matters of public concern would not apply to these works, in light

of the conspicuous historical importance of Rosa Parks. Nor can we conceive of any.

* * * Indeed, it is difficult to conceive of a discussion of the Civil Rights Move-

ment without reference to Parks and her role in it. And Michigan law does not make

discussion of these topics of public concern contingent on paying a fee. As a result,

[the] books, the movie, and the plaque find protection in Michigan’s qualified privi-

lege protecting matters of public interest.

[III.]

In short, the district court did not err in dismissing the Institute’s complaint. The

district court’s order is AFFIRMED. To affirm is to validate, to give legal force to.

Here, uncontested can mean uncontested can mean uncontested unchallenged or accepted, as well as evident or obvious.

In the third major section of the opinion, the court states its decision.

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24 UNIT ONE The Foundations

Terms and Concepts administrative agency 4 administrative law 4 allege 10 appellant 19 appellee 19 binding authority 8 breach 6 case law 5 case on point 11 citation 14 civil law 14 common law 6 concurring opinion 20 constitutional law 4 court of equity 6 court of law 6 criminal law 14 cyberlaw 14 damages 6

defendant 6 defense 6 dissenting opinion 20 equitable maxims 6 executive agency 5 historical school 12 independent regulatory agency 5 jurisprudence 12 laches 6 law 2 legal positivism 12 legal realism 13 legal reasoning 10 liability 2 majority opinion 20 natural law 12 opinion 20 ordinance 4 persuasive authority 10

per curiam opinion 20 petitioner 6 plainti� 6 plurality opinion 20 precedent 7 procedural law 13 remedy 6 remedy at law 6 remedy in equity 6 reporter 8 respondent 6 sociological school 13 stare decisis 8stare decisis 8stare decisis statute of limitations 6 statutory law 4 substantive law 13 uniform law 4

Debate This . . . Under the doctrine of stare decisis, courts are obligated to follow the precedents established in their jurisdiction unless there is a compelling reason not to. Should U.S. courts continue to adhere to this common law principle, given that our government now regulates so many areas by statute?

Reviewing: Law and Legal Reasoning

Suppose that the California legislature passes a law that severely restricts carbon dioxide emissions from automobiles in that state. A group of automobile manufacturers files suit against the state of California to prevent the enforcement of the law. The automakers claim that a federal law already sets fuel economy standards nationwide and that fuel economy standards are essentially the same as carbon dioxide emission standards. According to the automobile manufacturers, it is unfair to allow California to impose more stringent regulations than those set by the federal law. Using the informa- tion presented in the chapter, answer the following questions. 1. Who are the parties (the plaintiffs and the defendant) in this lawsuit? 2. Are the plaintiffs seeking a legal remedy or an equitable remedy? 3. What is the primary source of the law that is at issue here? 4. Where would you look to find the relevant California and federal laws?

Issue Spotters 1. Under what circumstances might a judge rely on case law

to determine the intent and purpose of a statute? (See Sources of American Law.)

2. After World War II, several Nazis were convicted of “crimes against humanity” by an international court. Assuming that these convicted war criminals had not

disobeyed any law of their country and had merely been following their government’s orders, what law had they violated? Explain. (See Schools of Legal Thought.)

• Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

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CHAPTER 1 Law and Legal Reasoning 25

Business Scenarios 1–1. Binding versus Persuasive Authority. A county court in Illinois is deciding a case involving an issue that has never been addressed before in that state’s courts. The Iowa Supreme Court, however, recently decided a case involving a very similar fact pattern. Is the Illinois court obligated to follow the Iowa Supreme Court’s decision on the issue? If the United States Supreme Court had decided a similar case, would that decision be binding on the Illinois court? Explain. (See The Common Law Tradition.) 1–2. Sources of Law. This chapter discussed a number of sources of American law. Which source of law takes priority in the following situations, and why? (See Sources of American Law.)

(a) A federal statute conflicts with the U.S. Constitution. (b) A federal statute conflicts with a state constitutional

provision. (c) A state statute conflicts with the common law of that

state. (d) A state constitutional amendment conflicts with the U.S.

Constitution. 1–3. Stare Decisis. In this chapter, we stated that the doc- trine of stare decisis “became a cornerstone of the English and stare decisis “became a cornerstone of the English and stare decisis American judicial systems.” What does stare decisis mean, and stare decisis mean, and stare decisis why has this doctrine been so fundamental to the develop- ment of our legal tradition? (See The Common Law Tradition.)

Business Case Problems 1–4. Spotlight on AOL—Common Law. AOL, LLC,

mistakenly made public the personal informa- tion of 650,000 of its members. �e members �led a suit, alleging violations of California law. AOL asked the court to dismiss the suit on the

basis of a “forum-selection clause” in its member agreement that designates Virginia courts as the place where member disputes will be tried. Under a decision of the United States Supreme Court, a forum-selection clause is unenforceable “if enforcement would contravene a strong public policy of the forum in which suit is brought.” California courts have declared in other cases that the AOL clause contravenes a strong public policy. If the court applies the doctrine of stare decisis, will it dismiss the suit? Explain. [Doe 1 v. AOL LLC, Doe 1 v. AOL LLC, Doe 1 v. AOL LLC 552 F.3d 1077 (9th Cir. 2009)] (See �e Common Law Tradition.) 1–5. Business Case Problem with Sample Answer— Reading Citations. Assume that you want to read the entire

court opinion in the case of Equal Employment Opportunity Commission v. Autozone, Inc., 809 F.3d 916 (7th Cir. 2016). Refer to the subsection enti- tled “Finding Case Law” in this chapter, and then

explain speci�cally where you would �nd the court’s opinion. (See How to Find Primary Sources of Law.) • For a sample answer to Problem 1–5, go to Appendix E at

the end of this text.

1–6. A Question of Ethics—The Common Law Tradition. On July 5, 1884, Dudley, Stephens, and Brooks—

”all able-bodied English seamen”—and a teenage English boy were cast adrift in a lifeboat following a storm at sea. �ey had no water with them in the boat, and all they had for sustenance were two one-

pound tins of turnips. On July 24, Dudley proposed that one of the four in the lifeboat be sacri�ced to save the others. Stephens agreed with Dudley, but Brooks refused to consent—and the boy was never asked for his opinion. On July 25, Dudley killed the boy, and the three men then fed on the boy’s body and blood. Four days later, a passing vessel rescued the men. �ey were taken to England and tried for the murder of the boy. If the men had not fed on the boy’s body, they would probably have died of starvation within the four-day period. �e boy, who was in a much weaker condition, would likely have died before the rest. [Regina v. Dudcondition, would likely have died before the rest. [Regina v. Dudcondition, would likely have died before the rest. [ – ley and Stephens, 14 Q.B.D. (Queen’s Bench Division, Eng-. (Queen’s Bench Division, Eng-. (Queen’s Bench Division, Eng land) 273 (1884)] (See �e Common Law Tradition.) (a) The basic question in this case is whether the survivors

should be subject to penalties under English criminal law, given the men’s unusual circumstances. Were the defen- dants’ actions necessary but unethical? Explain your rea- soning. What ethical issues might be involved here?

(b) Should judges ever have the power to look beyond the written “letter of the law” in making their decisions? Why or why not?

Legal Reasoning Group Activity 1–7. Court Opinions. Read through the subsection in this chapter entitled “Decisions and Opinions.” (See How to Read and Understand Case Law.) (a) One group will explain the difference between a concur-

ring opinion and a majority opinion. (b) Another group will outline the difference between a con-

curring opinion and a dissenting opinion.

(c) A third group will explain why judges and justices write concurring and dissenting opinions, given that these opinions will not affect the outcome of the case at hand, which has already been decided by majority vote.

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26

CHAPTER 2

2–1 The Judiciary’s Role in American Government

The body of American law includes the federal and state constitutions, statutes passed by legislative bod- ies, administrative law, and the case decisions and legal principles that form the common law. These laws would be meaningless, however, without the courts to interpret and apply them. The essential role of the judiciary— the courts—in the American governmental system is to interpret the laws and apply them to specific situations.

2–1a Judicial Review As the branch of government entrusted with interpreting the laws, the judiciary can decide, among other things, whether the laws or actions of the other two branches are constitutional. The process for making such a determina- tion is known as judicial review. The power of judicial review enables the judicial branch to act as a check on the other two branches of government, in line with the

system of checks and balances established by the U.S. Constitution.2

2–1b The Origins of Judicial Review in the United States

The power of judicial review is not mentioned in the U.S. Constitution (although many constitutional schol- ars believe that the founders intended the judiciary to have this power). The United States Supreme Court explicitly established this power in 1803 in the case Mar- bury v. Madison.3 In that decision, the Court stated, “It is emphatically the province [authority] and duty of the Judicial Department to say what the law is. . . . If two laws conflict with each other, the courts must decide

2. In a broad sense, judicial review occurs whenever a court “reviews” a case or legal proceeding—as when an appellate court reviews a lower court’s decision. When discussing the judiciary’s role in American government, however, the term judicial review refers to the power of the judiciary to judicial review refers to the power of the judiciary to judicial review decide whether the actions of the other two branches of government vio- late the U.S. Constitution.

3. 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803).

The United States has fifty-two court systems—one for each of the fifty states, one for the District Tthe fifty states, one for the District T of Columbia, and a federal system. Keep in mind that the federal courts are not superior to the state courts. They are simply an independent system of courts, which derives its authority from Article III, Section 2, of the U.S. Constitution. By the power given to it under the U.S. Constitution, Congress has extended the federal court system to U.S. territories such as Guam, Puerto Rico, and the Virgin Islands.1

1. In Guam and the Virgin Islands, territorial courts serve as both federal courts and state courts. In Puerto Rico, they serve only as federal courts.

As we shall see, the United States Supreme Court is the final control- ling voice over all of these fifty-two systems, at least when questions of federal law are involved. The Supreme Court’s decisions—whether on free speech and social media, health-care subsidies, environmental regulation, or same-sex marriage—represent the last word in the most controversial legal debates in our society. Never- theless, many of the legal issues that arise in our daily lives, such as the use of social media by courts, employ- ers, and law enforcement, have not yet come before the nation’s highest court. The lower courts usually resolve

such pressing matters, making these courts equally important in our legal system.

Although an understanding of our nation’s court systems is beneficial for anyone, it is particularly crucial for businesspersons, who will likely face a lawsuit at some time during their careers. Anyone involved in busi- ness should be familiar with the basic requirements that must be met before a party can bring a lawsuit before a particular court.

Courts and Alternative Dispute Resolution

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CHAPTER 2 Courts and Alternative Dispute Resolution 27

on the operation of each. . . . [I]f both [a] law and the Constitution apply to a particular case, . . . the Court must determine which of these conflicting rules governs the case. This is of the very essence of judicial duty.” Since the Marbury v. Madison decision, the power of judicial review has remained unchallenged. Today, this power is exercised by both federal and state courts.

2–2 Basic Judicial Requirements Before a lawsuit can be brought before a court, certain requirements must be met. These requirements relate to jurisdiction, venue, and standing to sue. We examine each of these important concepts here.

2–2a Jurisdiction In Latin, juris means “law,” and juris means “law,” and juris diction means “to speak.” Thus, “the power to speak the law” is the literal meaning of the term jurisdiction. Before any court can hear a case, it must have jurisdiction over the person (or company) against whom the suit is brought (the defendant) or over the property involved in the suit. The court must also have jurisdiction over the subject matter of the dispute.

Jurisdiction over Persons or Property Generally, a particular court can exercise in personam jurisdiction (personal jurisdiction) over any person or business that resides in a certain geographic area. A state trial court, for instance, normally has jurisdictional authority over residents (including businesses) of a particular area of the state, such as a county or district. A state’s highest court (often called the state supreme court4) has jurisdictional authority over all residents within the state.

A court can also exercise jurisdiction over property that is located within its boundaries. This kind of juris- diction is known as in rem jurisdiction jurisdiction, or “jurisdiction over the thing.” ■ EXAMPLE 2.1 A dispute arises over A dispute arises over the ownership of a boat in dry dock in Fort Lauderdale, Florida. The boat is owned by an Ohio resident, over whom a Florida court normally cannot exercise personal jurisdiction. The other party to the dispute is a resident of Nebraska. In this situation, a lawsuit concerning the boat could be brought in a Florida state court on the basis of the court’s in rem jurisdiction. ■

4. As will be discussed shortly, a state’s highest court is often referred to as the state supreme court, but there are exceptions. For instance, in New York the supreme court is a trial court.

Long Arm Statutes and Minimum Contacts. Under the authority of a state long arm statute, a court can exer- cise personal jurisdiction over certain out-of-state defen- dants based on activities that took place within the state. Before a court can exercise jurisdiction, though, it must be demonstrated that the defendant had su�cient con- tacts, or minimum contacts, with the state to justify the jurisdiction.5

Generally, the minimum-contacts requirement means that the defendant must have sufficient connection to the state for the judge to conclude that it is fair for the state to exercise power over the defendant. For instance, if an out-of-state defendant caused an automobile accident within the state or breached a contract formed there, a court will usually find that minimum contacts exist to exercise jurisdiction over that defendant. Similarly, a state may exercise personal jurisdiction over a nonresident defendant that is sued for selling defective goods within the state.

■ CASE IN POINT 2.2 An Xbox game system caught fire in Bonnie Broquet’s home in Texas and caused sub- stantial personal injuries. Broquet filed a lawsuit in a Texas court against Ji-Haw Industrial Company, a non- resident company that made the Xbox components. Bro- quet alleged that Ji-Haw’s components were defective and had caused the fire. Ji-Haw argued that the Texas court lacked jurisdiction over it, but a state appellate court held that the Texas long arm statute authorized the exercise of jurisdiction over the out-of-state defendant.6 ■

Corporate Contacts. Because corporations are con- sidered legal persons, courts use the same principles to determine whether it is fair to exercise jurisdiction over a corporation. A corporation normally is subject to per- sonal jurisdiction in the state in which it is incorporated, has its principal o�ce, and/or is doing business.

Courts apply the minimum-contacts test to determine if they can exercise jurisdiction over out-of-state corpo- rations. The minimum-contacts requirement is usually met if the corporation advertises or sells its products within the state, or places its goods into the “stream of commerce” with the intent that the goods be sold in the commerce” with the intent that the goods be sold in the commerce” with the intent that the goods be sold in the commerce” with the intent that the goods be sold in the state. ■ EXAMPLE 2.3 A business is incorporated under A business is incorporated under the laws of Maine but has a branch office and manufac- turing plant in Georgia. The corporation also advertises and sells its products in Georgia. These activities would likely constitute sufficient contacts with the state of

5. The minimum-contacts standard was first established in International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).

6. Ji-Haw Industrial Co. v. Broquet, 2008 WL 441822 (Tex.App.—San Ji-Haw Industrial Co. v. Broquet, 2008 WL 441822 (Tex.App.—San Ji-Haw Industrial Co. v. Broquet Antonio 2008).

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28 UNIT ONE The Foundations

Georgia to allow a Georgia court to exercise jurisdiction over the corporation. ■

Some corporations do not sell or advertise their products in the general marketplace. Determining what constitutes minimum contacts in these situations can be more difficult. ■ CASE IN POINT 2.4 Independence Plating Corporation is a New Jersey corporation that provides metal-coating services. Its only office and all of its personnel are located in New Jersey, and it does not advertise out of state. Independence had a long-standing business relationship with Southern Prestige Industries, Inc., a North Carolina company. Eventually, Southern Prestige filed suit in North Carolina against Indepen- dence for defective workmanship. Independence argued that North Carolina did not have jurisdiction over it, but the court held that Independence had sufficient mini- mum contacts with the state to justify jurisdiction. The two parties had exchanged thirty-two separate purchase orders in a period of less than twelve months.7 ■

Jurisdiction over Subject Matter Subject-matter jurisdiction refers to the limitations on the types of cases a court can hear. Certain courts are empowered to hear certain kinds of disputes. In both the federal and the state court systems, there are courts of general (unlimited) jurisdiction and courts of limited jurisdiction.

A court of general jurisdiction can decide cases involv- ing a broad array of issues. An example of a court of gen- eral jurisdiction is a state trial court or a federal district court.

In contrast, a court of limited jurisdiction can hear only specific types of cases. An example of a state court of lim- ited jurisdiction is a probate court. Probate courts are state courts that handle only the disposition of a person’s assets and obligations after that person’s death, including issues relating to the custody and guardianship of chil- dren. An example of a federal court of limited subject- matter jurisdiction is a bankruptcy court. Bankruptcy courts handle only bankruptcy proceedings, which are governed by federal bankruptcy law.

A court’s jurisdiction over subject matter is usually defined in the statute or constitution that created the court. In both the federal and the state court systems, a court’s subject-matter jurisdiction can be limited by any of the following: 1. The subject of the lawsuit. 2. The sum in controversy.

7. Southern Prestige Industries, Inc. v. Independence Plating Corp., 690 S.E.2d 768 (N.C. 2010).

3. Whether the case involves a felony (a serious type of crime) or a misdemeanor (a less serious type of crime).

4. Whether the proceeding is a trial or an appeal.

Original and Appellate Jurisdiction The distinc- tion between courts of original jurisdiction and courts of appellate jurisdiction normally lies in whether the case is being heard for the first time. Courts having original jurisdiction are courts of the first instance, or trial courts. These are courts in which lawsuits begin, trials take place, and evidence is presented. In the federal court system, the district courts are trial courts. In the various state court district courts are trial courts. In the various state court district courts systems, the trial courts are known by various names, as will be discussed shortly.

The key point here is that any court having original jurisdiction normally serves as a trial court. Courts hav- ing appellate jurisdiction act as reviewing, or appellate, courts. In general, cases can be brought before appellate courts only on appeal from an order or a judgment of a trial court or other lower courts.

Jurisdiction of the Federal Courts Because the federal government is a government of limited powers, the jurisdiction of the federal courts is limited. Federal courts have subject-matter jurisdiction in two situations: when a federal question is involved and when there is diversity of citizenship.

Federal Questions. Article III of the U.S. Constitution establishes the boundaries of federal judicial power. Sec- tion 2 of Article III states that “the judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority.”

In effect, this clause means that whenever a plaintiff ’s cause of action is based, at least in part, on the U.S. Con- stitution, a treaty, or a federal law, a federal question arises. Any lawsuit involving a federal question, such as a person’s rights under the U.S. Constitution, can originate in a federal court. Note that in a case based on a federal question, a federal court will apply federal law.

Diversity of Citizenship. Federal district courts can also exercise original jurisdiction over cases involving diversity of citizenship. �e most common type of diversity juris- diction8 requires both of the following:both of the following:both

8. Diversity jurisdiction also exists in cases between (1) a foreign country and citizens of a state or of different states and (2) citizens of a state and citizens or subjects of a foreign country. Cases based on these types of diversity jurisdiction occur infrequently.

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CHAPTER 2 Courts and Alternative Dispute Resolution 29

1. The plaintiff and defendant must be residents of dif-The plaintiff and defendant must be residents of dif-The plaintiff and defendant must be residents of dif ferent states.

2. The dollar amount in controversy must exceed $75,000.

For purposes of diversity jurisdiction, a corporation is a citizen of both the state in which it is incorporated and the state in which its principal place of business is located.

A case involving diversity of citizenship can be filed in the appropriate federal district court. (If the case starts in a state court, it can sometimes be transferred, or “removed,” to a federal court.) A large percentage of the cases filed in federal courts each year are based on diversity of citizenship. As noted before, a federal court will apply federal law in cases involving federal questions.

In a case based on diversity of citizenship, in contrast, a federal court will apply the relevant state law (which is often the law of the state in which the court sits).

The following case focused on whether diversity jurisdiction existed. A boat owner was severely burned when his boat exploded after being overfilled with fuel at a marina in the U.S. Virgin Islands. The owner filed a suit in a federal district court against the marina and sought a jury trial. The defendant argued that a plain- tiff in an admiralty, or maritime, case (a case based on something that happened at sea) does not have a right to a jury trial unless the court has diversity jurisdiction. The defendant claimed that because both parties were citizens of the Virgin Islands, the court had no such jurisdiction.

In the Language of the Court SMITH, Circuit Judge.SMITH, Circuit Judge.SMITH

* * * * Kelley Mala is a citizen of the United

States Virgin Islands. * * * He went for a cruise in his powerboat near St. Thomas, Virgin Islands. When his boat ran low on gas, he entered Crown Bay Marina to refuel. Mala tied the boat to one of Crown Bay’s eight fueling stations and began filling his tank with an automatic gas pump. Before walking to the cash register to buy oil, Mala asked a Crown Bay attendant to watch his boat.

By the time Mala returned, the boat’s tank was overflowing and fuel was spilling into the boat and into the water. The attendant manually shut off the pump and acknowledged that the pump had been malfunctioning in recent days. Mala began cleaning up the fuel, and at some point, the attendant provided soap and water. Mala eventu- ally departed the marina, but as he did so, the engine caught fire and exploded. Mala was thrown into the water and was severely burned. His boat was unsalvageable.

* * * Mala sued Crown Bay in the District Court of the Virgin Islands.

Mala’s * * * complaint asserted * * * that Crown Bay negligently maintained its gas pump. [Negligence is the failure to exercise the standard of care that a rea- sonable person would exercise in similar circumstances. Negligence can form the basis for a legal claim.] The complaint also alleged that the District Court had admiralty and diversity jurisdiction over the case, and it requested a jury trial.

* * * * * * * Crown Bay filed a motion

to strike Mala’s jury demand. Crown Bay argued that plaintiffs generally do not have a jury-trial right in admiralty cases—only when the court also has diversity jurisdiction. And Crown Bay asserted that the parties were not diverse in this case * * * . In response to this motion, the District Court ruled that both Mala and Crown Bay were citizens of the Virgin Islands. The court therefore struck Mala’s jury demand, but neverthe- less opted to empanel an advisory jury. [The court could accept or reject the advisory jury’s verdict.]

* * * At the end of the trial, the advi- sory jury returned a verdict of $460,000 for Mala—$400,000 for pain and suf-for Mala—$400,000 for pain and suf-for Mala—$400,000 for pain and suf fering and $60,000 in compensatory

damages. It con- cluded that Mala was 25 percent at fault and that Crown Bay was 75 percent at fault. The District Court ultimately rejected the verdict and entered judg- ment for Crown Bay.

* * * * This appeal followed. * * * * Mala * * * argues that the District

Court improperly refused to conduct a jury trial. This claim ultimately depends on whether the District Court had diver- sity jurisdiction.

The Seventh Amendment [to the U.S. Constitution] creates a right to civil jury trials in federal court: “In Suits at common law * * * the right of trial by jury shall be preserved.” Admiralty suits are not “Suits at common law,” which means that when a district court has only admiralty jurisdiction the plaintiff does not have a jury-trial right. But [a federal statute] allows plaintiffs to pursue state claims in admiralty cases as long as the district court also has diversity jurisdic- tion. In such cases [the statute] preserves whatever jury-trial right exists with respect to the underlying state claims.

Case Analysis 2.1 Mala v. Crown Bay Marina, Inc. United States Court of Appeals, Third Circuit, 704 F.3d 239 (2013).

Case 2.1 Continues Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

30 UNIT ONE The Foundations

Legal Reasoning Questions

1. What is “diversity of citizenship”? 2. How does the presence—or lack—of diversity of citizenship affect a lawsuit? 3. What did the court conclude with respect to the parties’ diversity of citizenship in this case?

Mala argues that the District Court had both admiralty and diversity juris- diction. As a preliminary matter, the court certainly had admiralty jurisdic- tion. The alleged tort occurred on navigable water and bore a substantial connection to maritime activity.

The grounds for diversity jurisdiction are less certain. District courts have juris- diction only if the parties are completely diverse. This means that no plaintiff may have the same state or territorial citizen- ship as any defendant. The parties agree that Mala was a citizen of the Virgin Islands. [Emphasis added.]

Unfortunately for Mala, the District Court concluded that Crown Bay also

was a citizen of the Virgin Islands. Mala rejects this conclusion.

Mala bears the burden of proving that the District Court had diversity jurisdiction. Mala failed to meet that burden because he did not offer evidence that Crown Bay was anything other than a citizen of the Virgin Islands. Mala con- tends that Crown Bay admitted to being a citizen of Florida, but Crown Bay actu- ally denied Mala’s allegation.

Absent evidence that the parties were diverse, we are left with Mala’s allegations. Allegations are insufficient at trial. And they are especially insufficient on appeal, where we review the District on appeal, where we review the District on appeal Court’s underlying factual findings for

clear error. Under this standard, we will not reverse unless we are left with the definite and firm conviction that Crown Bay was in fact a citizen of Florida. Mala has not presented any credible evidence that Crown Bay was a citizen of Florida—much less evidence that would leave us with the requisite firm convic- tion. [Emphasis added.]

* * * Accordingly, the parties were not diverse and Mala does not have a jury- trial right.

* * * * * * * For these reasons we will affirm

the District Court’s judgment.

Case 2.1 Continued

Exclusive versus Concurrent Jurisdiction When both federal and state courts have the power to hear a case, as is true in lawsuits involving diversity of citizen- ship, concurrent jurisdiction exists. When cases can be tried only in federal courts or only in state courts, exclu- sive jurisdiction exists.

Federal courts have exclusive jurisdiction in cases involv- ing federal crimes, bankruptcy, most patent and copyright claims, suits against the United States, and some areas of admiralty law. State courts also have exclusive jurisdiction over certain subjects—for instance, divorce and adoption.

When concurrent jurisdiction exists, a party may choose to bring a suit in either a federal court or a state court. Many factors can affect a party’s decision to liti- gate in a federal versus a state court. Examples include the availability of different remedies, the distance to the respective courthouses, or the experience or reputation of a particular judge.

For instance, if the dispute involves a trade secret, a party might conclude that a federal court—which has exclusive jurisdiction over copyrights and patents— would have more expertise in the matter. In contrast, a plaintiff might choose to litigate in a state court if the court has a reputation for awarding substantial amounts of damages or if the judge is perceived as being

pro-plaintiff. The concepts of exclusive and concurrent jurisdiction are illustrated in Exhibit 2–1.

Jurisdiction in Cyberspace The Internet’s capacity to bypass political and geographic boundaries undercuts the traditional basis on which courts assert personal juris- diction. As discussed, for a court to compel a defendant to come before it, the defendant must have a sufficient connection—that is, minimum contacts—with the state. When a defendant’s only contacts with the state are through a Web site, however, it can be difficult to deter- mine whether these contacts are sufficient for a court to exercise jurisdiction.

The “Sliding-Scale” Standard. �e courts have developed a “sliding-scale” standard to determine when they can exer- cise personal jurisdiction over an out-of-state defendant based on the defendant’s Web activities. �e sliding-scale standard identi�es three types of Internet business contacts and outlines the following rules for jurisdiction: 1. When the defendant conducts substantial business

over the Internet (such as contracts and sales), juris- diction is proper.

2. When there is some interactivity through a Web site, jurisdiction may be proper, depending on the

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CHAPTER 2 Courts and Alternative Dispute Resolution 31

circumstances. Even a single contact can satisfy the minimum-contacts requirement in certain situations.

3. When a defendant merely engages in passive adver- tising on the Web, jurisdiction is never proper.9 An Internet communication is typically considered pas- sive if people have to voluntarily access it to read the message and active if it is sent to specific individuals. ■ CASE IN POINT 2.5 Samantha Guffey lives in

Oklahoma. She placed a winning bid on eBay for a used 2009 Volvo XC90 from Motorcars of Nashville, Inc. (MNI), a Tennessee corporation. Before she won the auction, she spoke with Otto Ostonakulov at the deal- ership. Later, Ostonakulov sent the necessary paper- work to Guffey in Oklahoma. She signed and returned it by mail, and he arranged for MNI to ship the Volvo to Oklahoma.

When the car was delivered to Guffey, she discov- ered it was not in the condition advertised. She filed a lawsuit in Oklahoma against MNI and Ostonakulov, alleging fraud and a violation of state consumer protec- tion laws. Guffey’s complaint alleged that the defen- dants were active “power sellers” on eBay, averaging twelve to twenty-five cars for sale every day. The sellers claimed that the Oklahoma court lacked jurisdiction over them, and a trial court dismissed the complaint. Guffey appealed. The reviewing court found that Okla- homa had jurisdiction because the sellers’ “use of eBay to make multiple sales is systemic and appears to be a

9. For a leading case on this issue, see Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997).

core part of their business.” They had negotiated with Guffey directly to sell her a vehicle in Oklahoma and had regularly used eBay to sell vehicles to remote parties in the past.10 ■

International Jurisdictional Issues. Because the Inter- net is international in scope, it obviously raises interna- tional jurisdictional issues. �e world’s courts seem to be developing a standard that echoes the requirement of minimum contacts applied by the U.S. courts.

Most courts are indicating that minimum contacts— doing business within the jurisdiction, for instance— are enough to compel a defendant to appear and that a physical presence in the country is not necessary. The effect of this standard is that a business firm has to comply with the laws in any jurisdiction in which it targets customers for its products. This situation is complicated by the fact that many countries’ laws on particular issues—free speech, for instance—are very different from U.S. laws.

The following case illustrates how federal courts apply a sliding-scale standard to determine if they can exercise jurisdiction over a foreign defendant whose only contact with the United States is through a Web site.

10. Guffey v. Ostonakulov, 2014 OK 6, 321 P.3d 971 (Ok.Sup. 2014). Note that a single sale on eBay does not necessarily form the basis for jurisdic- tion. Jurisdiction depends on whether the seller regularly uses eBay as a means for doing business with remote buyers. See Hinners v. Robey, 336 S.W.3d 891 (Ky.Sup. 2008).

Exclusive Federal Jurisdiction

(cases involving federal crimes, federal antitrust law, bankruptcyfederal antitrust law, bankruptcyfederal antitrust law ,, bankruptcy,, bankruptcy patents, copyrights, trademarks, suits against the United States,

some areas of admiralty law, and certain other matters specified

in federal statutes)

Exclusive State Jurisdiction

(cases involving all matters not subject to federal jurisdiction— for example, divorce and adoption

cases)

Concurrent Jurisdiction

(most cases involving federal questions, diversity-of-

citizenship cases)

EXHIBIT 2–1 Exclusive and Concurrent Jurisdiction

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32 UNIT ONE The Foundations

Company Profile Gucci America, Inc., a New York corporation headquartered in New York City, is part of Gucci Group, a global fashion firm with offices in China, France, Great Britain, Italy, and Japan. Gucci makes and sells high-quality luxury goods, including footwear, belts, sunglasses, handbags, wallets, jewelry, fragrances, and children’s clothing. In connection with its products, Gucci uses twenty-one federally regis- tered trademarks. Gucci also operates a number of boutiques, some of which are located in California.

Background and Facts Wang Huoqing, a resident of the People’s Republic of China, operates numerous Web sites. When Gucci discovered that Wang Huoqing’s Web sites offered for sale coun- terfeit goods—products bearing Gucci’s trademarks but not genuine Gucci articles—it hired a private investigator in San Jose, California, to buy goods from the Web sites. The investigator purchased a wallet that was labeled Gucci but was counterfeit.

Gucci filed a trademark infringement lawsuit against Wang Huoqing in a federal district court in California seeking damages and an injunction to prevent further infringement. Wang Huoqing was notified of the lawsuit via e-mail but did not appear in court. Gucci asked the court to enter a default judgment—that is, a judgment entered when the defendant fails to appear. First, however, the court had to determine whether it had personal jurisdiction over Wang Huoqing based on the Internet sales.

In the Language of the Court Joseph C. SPERO, United States Magistrate Judge.

* * * * * * * Under California’s long-arm statute, federal courts in California may exercise jurisdiction to the

extent permitted by the Due Process Clause of the Constitution. The Due Process Clause allows federal courts to exercise jurisdiction where * * * the defendant has had sufficient minimum contacts with the forum to subject him or her to the specific jurisdiction of the court. The courts apply a three-part test to determine whether specific jurisdiction exists:

(1) The nonresident defendant must do some act or consummate some transaction with the forum or perform some act by which he purposefully avails himself of the privilege of conduct- ing activities in the forum, thereby invoking the benefits and protections of its laws; (2) the claim must be one which arises out of or results from the defendant’s forum-related activities; and (3) exercise of jurisdiction must be reasonable.

* * * * In order to satisfy the first prong of the test for specific jurisdiction, a defendant must have either

purposefully availed itself of the privilege of conducting business activities within the forum or purpose- fully directed activities toward the forum. Purposeful availment typically consists of action taking place in the forum that invokes the benefits and protections of the laws of the forum, such as executing or performing a contract within the forum. To show purposeful availment, a plaintiff must show that the defendant “engage[d] in some form of affirmative conduct allowing or promoting the transaction of business within the forum state.” [Emphasis added.]

“In the Internet context, the Ninth Circuit utilizes a sliding scale analysis under which ‘passive’ websites do not create sufficient contacts to establish purposeful availment, whereas interactive websites may create sufficient contacts, depending on how interactive the website is.” * * * Personal jurisdiction is appropriate where an entity is conducting business over the Internet and has offered for sale and sold its prod-appropriate where an entity is conducting business over the Internet and has offered for sale and sold its prod-appropriate where an entity is conducting business over the Internet and has offered for sale and sold its prod ucts to forum [California] residents. [Emphasis added.]

Here, the allegations and evidence presented by Plaintiffs in support of the Motion are sufficient to show purposeful availment on the part of Defendant Wang Huoqing. Plaintiffs have alleged that Defen- dant operates “fully interactive Internet websites operating under the Subject Domain Names” and have presented evidence in the form of copies of web pages showing that the websites are, in fact, interactive.

Spotlight on Gucci

Case 2.2 Gucci America, Inc. v. Wang HuoqingCase 2.2 Gucci America, Inc. v. Wang HuoqingCase 2.2 Gucci America, Inc. v. Wang Huoqing United States District Court, Northern District of California, 2011 WL 30972 (2011).United States District Court, Northern District of California, 2011 WL 30972 (2011).United States District Court, Northern District of California, 2011 WL 30972 (2011).

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 2 Courts and Alternative Dispute Resolution 33

* * * Additionally, Plaintiffs allege Defendant is conducting counterfeiting and infringing activities within this Judicial District and has advertised and sold his counterfeit goods in the State of California. * * * Plaintiffs have also presented evidence of one actual sale within this district, made by investigator Robert Holmes from the website bag2do.cn.* * * Finally, Plaintiffs have presented evidence that Defendant Wang Huoqing owns or controls the twenty-eight websites listed in the Motion for Default Judgment. * * * Such commercial activity in the forum amounts to purposeful availment of the privilege of conducting activities within the forum, thus invoking the benefits and protections of its laws. Accordingly, the Court concludes that Defendant’s contacts with California are sufficient to show purposeful availment.

Decision and Remedy The U.S. District Court for the Northern District of California held that it had personal jurisdiction over the foreign defendant, Wang Huoqing. The court entered a default judgment against Wang Huoqing and granted Gucci an injunction.

Critical Thinking • What If the Facts Were Different? Suppose that Gucci had not presented evidence that Wang Huoqing

had made one actual sale through his Web site to a resident of the court’s district (the private investigator). Would the court still have found that it had personal jurisdiction over Wang Huoqing? Why or why not?

• Legal Environment Is it relevant to the analysis of jurisdiction that Gucci America’s principal place of business is in New York rather than California? Explain.

Case 2.2 Continued

Minimum Contacts and Smartphones. �e widespread use of cellular phones, particularly smartphones, also complicates the determination of personal jurisdiction. People use their smartphones while traveling to make purchases, negotiate business deals, enter contracts, and download applications (apps). If a person traveling in another state (or nation) uses a smartphone to form a contract, does that forum have jurisdiction over the per- son? Is the party that creates an app subject to jurisdic- tion anywhere the app is downloaded or used? Because an app di�ers from a Web page, what degree of interactivity is required for apps to confer jurisdiction in the sliding- scale analysis? �e courts will be addressing these ques- tions in coming years and adapting traditional notions of jurisdiction to ever-changing technology.

Concept Summary 2.1 reviews the various types of jurisdiction, including jurisdiction in cyberspace.

2–2b Venue Jurisdiction has to do with whether a court has author- ity to hear a case involving specific persons, property, or subject matter. Venue11 is concerned with the most appropriate location for a trial. For instance, two state courts (or two federal courts) may have the authority to exercise jurisdiction over a case. Nonetheless, it may be

11. Pronounced ven-yoo.

more appropriate or convenient to hear the case in one court than in the other.

The concept of venue reflects the policy that a court trying a case should be in the geographic neighborhood (usually the county) where the incident occurred or where the parties reside. Venue in a civil case typically is where the defendant resides or does business, whereas venue in a criminal case normally is where the crime occurred.

In some cases, pretrial publicity or other factors may require a change of venue to another community, espe- cially in criminal cases in which the defendant’s right to a fair and impartial jury has been impaired. Note, though, that venue has lost some significance in today’s world because of the Internet and 24/7 news reporting. Courts now rarely grant requests for a change of venue. Because everyone has instant access to all information about a pur- ported crime, courts reason that no community is more or less informed or prejudiced for or against a defendant.

2–2c Standing to Sue Before a party can bring a lawsuit to court, that party must have standing to sue, or a sufficient stake in a matter to justify seeking relief through the court system. Standing means that the party that filed the action in court has a legally protected interest at stake in the liti- gation. At times, a person can have standing to sue on behalf of another person, such as a minor (child) or a mentally incompetent person.

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34 UNIT ONE The Foundations

Limits the court’s jurisdictional authority to particular types of cases.

Jurisdiction

● Is located in the court’s territorial boundaries. Qualifies under state long arm statutes. Is a corporation doing business within the state. Advertises, sells, or places goods into commerce within the state.

Concept Summary 2.1

Personal

● General jurisdiction—Exists when a court can hear cases involving aGeneral jurisdiction—Exists when a court can hear cases involving aGeneral jurisdiction broad array of issues. Limited jurisdiction—Exists when a court is limited to a specific subjectLimited jurisdiction—Exists when a court is limited to a specific subjectLimited jurisdiction matter, such as probate or divorce.

Subject Matter

● When the plaintiff’s cause of action involves a federal question (is based at least in part on the U.S. Constitution, a treaty, or a federal law). In cases between citizens of different states (or cases involving U.S. citizens and foreign countries or their citizens) when the amount in controversy exceeds $75,000 (diversity-of-citizenship jurisdiction).

Federal

● Exists when the property that is subject to a lawsuit is located within the court’s territorial boundaries.

Property

● Exists with courts that have the authority to hear a case for the first time (trial courts, district courts).

Original

● Exists with courts of appeal and review. Generally, appellate courts do not have original jurisdiction.

Appellate

● Exists when both federal and state courts have authority to hear the same case.ConcurrentConcurrentConcurr

● Exists when only state courts or only federal courts have authority to hear a case.Exclusive

● The courts have developed a sliding-scale standard to use in determining when jurisdiction over a Web site owner or operator in another state is proper.

Cyberspace

Exists when a defendant:

A federal court can exercise jurisdiction:

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CHAPTER 2 Courts and Alternative Dispute Resolution 35

Standing can be broken down into three elements: 1. Harm. The party bringing the action must have

suffered harm—an invasion of a legally protected interest—or must face imminent harm. The con- troversy must be real and substantial rather than hypothetical.

2. Causation. There must be a causal connection between the conduct complained of and the injury.

3. Remedy. It must be likely, as opposed to merely specu- lative, that a favorable court decision will remedy the injury suffered. ■ CASE IN POINT 2.6 Harold Wagner obtained a Harold Wagner obtained a

loan through M.S.T. Mortgage Group to buy a house in Texas. After the sale, M.S.T. transferred its interest in the loan to another lender, which, in turn, assigned it to another lender (a common practice in the mortgage industry). Eventually, when Wagner failed to make the loan payments, CitiMortgage, Inc., notified him that it was going to foreclose on the property and sell the house.

Wagner filed a lawsuit, claiming that the lenders had improperly assigned the mortgage loan. In 2014, a fed- eral district court ruled that Wagner lacked standing to contest the assignment. Under Texas law, only the parties directly involved in an assignment can challenge its valid- ity. In this case, the assignment was between two lenders and did not directly involve Wagner.12 ■

12. Wagner v. CitiMortgage, Inc., 995 F.Supp.2d 621 (N.D.Tex. 2014).

2–3 The State and Federal Court Systems

Each state has its own court system. Additionally, there is a system of federal courts. The right-hand side of Exhibit 2–2 illustrates the basic organizational framework char- acteristic of the court systems in many states. The exhibit also shows how the federal court system is structured. We turn now to an examination of these court systems, beginning with the state courts.

2–3a The State Court Systems No two state court systems are exactly the same. Typi- cally, though, a state court system includes several lev- els, or tiers, of courts, as shown in Exhibit 2–2. State courts may include (1) trial courts of limited jurisdic- tion, (2) trial courts of general jurisdiction, (3) appellate courts (intermediate appellate courts), and (4) the state’s highest court (often called the state supreme court).

Generally, any person who is a party to a lawsuit has the opportunity to plead the case before a trial court and then, if he or she loses, before at least one level of appellate court. If the case involves a federal statute or a federal constitutional issue, the decision of the state supreme court may be further appealed to the United States Supreme Court. Note that lawsuits can take years to resolve through the courts, especially since many states have experienced large cuts in court funding in recent years. In fact, the United States Supreme Court decided a

Supreme Court of the United States

Specialized U.S. Courts

• Bankruptcy Courts • Court of Federal Claims

• Court of International Trade

• Tax Court• Tax Court• T

Highest State Courts

State Courts of Appeals

State Trial CourtsState Trial CourtsState T of General Jurisdiction

Local Trial Courts ofLocal Trial Courts ofLocal T Limited Jurisdiction

State Administrative Agencies

U.S. Courts of Appeals

Federal Administrative

Agencies

U.S. District Courts

EXHIBIT 2–2 The State and Federal Court Systems

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36 UNIT ONE The Foundations

case in 2015 involving a trademark dispute that had been in the courts for more than sixteen years.13

The states use various methods to select judges for their courts. Usually, voters elect judges, but in some states judges are appointed. For instance, in Iowa, the governor appoints judges, and then the general popula- tion decides whether to confirm their appointment in the next general election. The states usually specify the number of years that judges will serve.

Trial Courts Trial courts are exactly what their name implies—courts in which trials are held and testimony is taken. State trial courts have either general or limited jurisdiction, as defined earlier.

General Jurisdiction. Trial courts that have general juris- diction as to subject matter may be called county, district, superior, or circuit courts.14 State trial courts of general jurisdiction have jurisdiction over a wide variety of sub- jects, including both civil disputes and criminal prosecu- tions. In some states, trial courts of general jurisdiction may hear appeals from courts of limited jurisdiction.

Limited Jurisdiction. Courts of limited jurisdiction as to subject matter are generally inferior trial courts or minor judiciary courts. Limited jurisdiction courts might include local municipal courts (which could include sepa- rate tra�c courts and drug courts) and domestic relations courts (which handle divorce and child-custody disputes).

Small claims courts are inferior trial courts that hear only civil cases involving claims of less than a certain amount, such as $5,000 (the amount varies from state to state). Procedures in small claims courts are generally informal, and lawyers are not required (in a few states, lawyers are not even allowed). Decisions of small claims

13. B&B Hardware, Inc. v. Hargis Industries, Inc., ___ U.S. ___, 135 S.Ct. 1293, 191 L.Ed.2d 222 (2015).

14. The name in Ohio and Pennsylvania is Court of Common Pleas. The name in New York is Supreme Court, Trial Division.

courts and municipal courts may sometimes be appealed to a state trial court of general jurisdiction.

A few states have also established Islamic law courts, which are courts of limited jurisdiction that serve the American Muslim community. These courts decide cases with reference to the sharia, a system of law used in most Islamic countries that is derived from the Qur’an and the sayings and doings of Muhammad and his followers.

Appellate, or Reviewing, Courts Every state has at least one court of appeals (appellate court, or reviewing court), which may be an intermediate appellate court or the state’s highest court. About three-fourths of the states have intermediate appellate courts.

Generally, courts of appeals do not conduct new trials, in which evidence is submitted to the court and witnesses are examined. Rather, an appellate court panel of three or more judges reviews the record of the case on appeal, which includes a transcript of the trial proceedings. The appellate court hears arguments from attorneys and determines whether the trial court committed an error.

Reviewing courts focus on questions of law, not ques- tions of fact. A question of fact deals with what really question of fact deals with what really question of fact happened in regard to the dispute being tried—such as whether a party actually burned a flag. A question of law concerns the application or interpretation of the law— such as whether flag-burning is a form of speech pro- tected by the First Amendment to the U.S. Constitution. Only a judge, not a jury, can rule on questions of law.

Appellate courts normally defer (give significant weight) to the trial court’s findings on questions of fact because the trial court judge and jury were in a better position to evalu- ate testimony. The trial court judge and jury can directly observe witnesses’ gestures, demeanor, and other nonver- bal behavior during the trial. An appellate court cannot.

In the following case, neither the administrative agency that initially ruled on the dispute nor the trial court to which the agency’s decision was appealed made a finding on a crucial question of fact. Faced with that circumstance, what should a state appellate court do?

Background and Facts Jennifer Johnson was working as a finance analyst for Oxy USA, Inc., when Oxy changed the job’s requirements. To meet the new standards, Johnson took courses to become a certified public accountant. Oxy’s “Educational Assistance Policy” was to reimburse employees for the

Johnson v. Oxy USA, Inc. Court of Appeals of Texas, Houston—14th District, __ S.W.3d __ , 2016 WL 93559 (2016).

Case 2.3

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CHAPTER 2 Courts and Alternative Dispute Resolution 37

cost of such courses. Johnson further agreed that Oxy could withhold the reimbursed amount from her final paycheck if she quit Oxy within a year. When she resigned less than a year later, Oxy with- held that amount from her last check. Johnson filed a claim for the amount with the Texas Workforce Commission (TWC). The TWC ruled that she was not entitled to the unpaid wages. She filed a suit in a Texas state court against Oxy, alleging breach of contract. The court affirmed the TWC’s ruling. Johnson appealed.

In the Language of the Court Ken WISE, Justice WISE, Justice WISE

* * * * * * * The trial court * * * held that Johnson’s [claim for breach of contract was] barred by res judicata

[“a matter judged”]. In a court of law, a claimant typically cannot pursue one remedy to an unfavorable outcome and then seek the same remedy in another proceeding before the same or a different tribunal. Res judicata bars the relitigation of claims that have been finally adjudicated or that could have been litigated Res judicata bars the relitigation of claims that have been finally adjudicated or that could have been litigated Res judicata in the prior action. [Emphasis added.]

Johnson argues that res judicata does not apply here because the TWC did not render a final judgres judicata does not apply here because the TWC did not render a final judgres judicata – ment on the merits of her claim that Oxy misinterpreted its Educational Assistance Policy. Specifically, Johnson claims she was “denied the right of full adjudication of her claim because the TWC refused to consider her arguments at the administrative level as beyond its jurisdiction.” To support this contention, Johnson points to the following excerpt from the * * * decision:

* * * The TWC does not interpret contracts between employers and employee but only enforces the Texas Payday Law [the Texas state law that governs the timing of employees’ paychecks]. * * * The question of whether the employer properly interpreted their policy on reimbursed educa- tional expenses versus a business expense is a question for a different forum.

According to Johnson, this language shows that the TWC refused to consider the merits of the issue she raised as “beyond its reach.” In contrast, the defendants contend that Johnson’s claims are barred by res judicata because they are based on claims previously decided by the TWC.res judicata because they are based on claims previously decided by the TWC.res judicata

* * * * In Johnson’s case, however, the TWC did not decide the key question of fact in dispute—whether Oxy

violated its own Educational Assistance Policy when it withheld Johnson’s final wages as reimbursement for the CPA courses. In fact, the TWC explicitly refused to do so, stating that the agency “does not interpret contracts between employers and employee.” * * * Because this question goes to the heart of Johnson’s breach of contract * * * claim, we hold that res judicata does not bar [that] claim. [Emphasis added.]res judicata does not bar [that] claim. [Emphasis added.]res judicata

The defendants argue that because Johnson seeks to recover the same wages in this suit as she did in her claim with the TWC, res judicata must bar her common law cause of action. However, * * * res judicata must bar her common law cause of action. However, * * * res judicata res judicata would only bar a claim if TWC’s order is considered final. * * * Here, the order in Johnson’s case judicata would only bar a claim if TWC’s order is considered final. * * * Here, the order in Johnson’s case judicata made no such findings with regard to the Educational Assistance Policy. The order expressly declined to address that issue. Therefore, * * * res judicata will not bar Johnson’s breach of contract * * * claim.res judicata will not bar Johnson’s breach of contract * * * claim.res judicata

Decision and Remedy A state intermediate appellate court reversed the lower court’s decision. “The TWC did not decide the key question of fact in dispute—whether Oxy violated its own Educational Assis- tance Policy when it withheld Johnson’s final wages. In fact, the TWC explicitly refused to do so, stating that the agency ‘does not interpret contracts between employers and employee.’“ The appellate court remanded the case for a trial on the merits.

Critical Thinking • Legal Environment Who can decide questions of fact? Who can rule on questions of law? Why? • Global In some cases, a court may be asked to determine and interpret the law of a foreign country. Some

states consider the issue of what the law of a foreign country requires to be a question of fact. Federal rules of procedure provide that this issue is a question of law. Which position seems more appropriate? Why?

Case 2.3 Continued

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38 UNIT ONE The Foundations

Should You Consent to Have Your Business Case Decided by a U.S. Magistrate Judge?

You have a strong case in a contract dispute with one of your business’s suppliers. The sup- plier is located in another state. Your attorney did everything necessary to obtain your “day in court.” The court in question is a federal district court. But you have just found out that your case may not be heard for several years— or even longer. Your attorney tells you that the case can be heard in just a few months if you consent to place it in the hands of a U.S. magistrate judge.a

Should you consent?

A Short History of U.S. Magistrate Judges

Congress authorized the creation of a new federal judicial officer, the U.S. magistrate, in 1968 to help reduce delays in the U.S. district courts.b These junior federal officers were to conduct a wide range of judicial proceedings as set out by statute and as assigned by the district judges under whom they served. In 1979, Congress gave U.S. magistrates consent jurisdiction, which authorized them to conduct all civil trials as long as the parties consent.c Currently, magistrate judges dispose of over one million civil and criminal district court matters, which include motions and hearings.

The Selection and Quality of Magistrate Judges

As mentioned, federal district judges are nominated by the president, confirmed by the Senate, and appointed for life. In contrast, U.S. magistrate judges are selected by federal district court judges based on the recommenda-

tions of a merit screening committee. They serve an eight-year term (which can be renewed).

By statute, magistrate judges must be chosen through a merit selection process. Applicants are interviewed by a screening committee of lawyers and others from the dis- trict in which the position will be filled.d Politi- cal party affiliation plays no part in the process.

A variety of experienced attorneys, administrative law judges, state court judges, and others apply for magistrate judge positions. A typical opening receives about a hundred applicants. The merit selection panel selects the five most qualified, who are then voted on by federal district court judges.

Because the selection process for a magistrate judge is not the same as for a district judge, some critics have expressed concerns about the quality of magistrate judges. Some groups, such as People for the American Way, are not in favor of allowing magistrate judges the power to decide cases. These critics believe that because of their limited terms, they are not completely immune from outside pressure.

Business Questions 1. If you were facing an especially complex legal dispute—

one involving many facets and several different types of law—would you consent to allowing a U.S. magistrate judge to decide the case? Why or why not?

2. If you had to decide whether to allow a U.S. magistrate judge to hear your case, what information might you ask your attorney to provide concerning that individual?

d. 28 U.S.C. Section 631(b)(5).

MANAGERIAL STRATEGY

a. 28 U.S.C. Sec 636(c); Roell v, Withrow, 538 U.S. 580, 123 S.Ct. 1698, 155 L.Ed.2d 775 (2003).

b. Federal Magistrates Act, 82 Stat. 1107, October 17, 1968. c. U.S.C. Section 636(c)(1).

Highest State Courts The highest appellate court in a state is usually called the supreme court but may be des- ignated by some other name. For instance, in both New York and Maryland, the highest state court is called the Court of Appeals. The highest state court in Maine and Massachusetts is the Supreme Judicial Court. In West Vir- ginia, it is the Supreme Court of Appeals.

The decisions of each state’s highest court on all questions of state law are final. Only when issues of federal law are involved can the United States Supreme Court overrule a decision made by a state’s highCourt overrule a decision made by a state’s highCourt overrule a decision made by a state’s high- est court. ■ EXAMPLE 2.7 A city enacts an ordinance that prohibits citizens from engaging in door-to-door

advocacy without first registering with the mayor’s office and receiving a permit. A religious group then sues the city, arguing that the law violates the freedoms of speech and religion guaranteed by the First Amendment. If the state supreme court upholds the law, the group could appeal the decision to the United States Supreme Court, because a constitutional (federal) issue is involved. ■

2–3b The Federal Court System The federal court system is basically a three-tiered model consisting of (1) U.S. district courts (trial courts of general jurisdiction) and various courts of limited

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 2 Courts and Alternative Dispute Resolution 39

jurisdiction, (2) U.S. courts of appeals (intermediate courts of appeals), and (3) the United States Supreme Court.

Unlike state court judges, who are usually elected, fed- eral court judges—including the justices of the Supreme Court—are appointed by the president of the United States, subject to confirmation by the U.S. Senate. Fed- eral judges receive lifetime appointments under Article III of the U.S. Constitution, which states that federal judges “hold their offices during good Behaviour.” In the entire history of the United States, only seven federal judges have been removed from office through impeach- ment proceedings.

Certain federal court officers are not chosen in the way just described. This chapter’s Managerial Strategy feature describes how U.S. magistrate judges are selected.

U.S. District Courts At the federal level, the equiva- lent of a state trial court of general jurisdiction is the dis- trict court. U.S. district courts have original jurisdiction in matters involving a federal question and concurrent

jurisdiction with state courts when diversity jurisdiction exists. Federal cases typically originate in district courts. There are other federal courts with original, but special (or limited), jurisdiction, such as the federal bankruptcy courts and tax courts.

Every state has at least one federal district court. The number of judicial districts can vary over time, primarily owing to population changes and corresponding changes in caseloads. Today, there are ninety-four federal judicial districts. Exhibit 2–3 shows the boundaries of both the U.S. district courts and the U.S. courts of appeals.

U.S. Courts of Appeals In the federal court system, there are thirteen U.S. courts of appeals—referred to as U.S. circuit courts of appeals. Twelve of these courts (including the Court of Appeals for the D.C. Circuit) hear appeals from the federal district courts located within their respective judicial circuits (shown in Exhibit 2–3).15

15. Historically, judges were required to “ride the circuit” and hear appeals in different courts around the country, which is how the name “circuit court” came about.

W E

E N

C

S

W

N

E

NW

W

E

S

E

S

N

E W

W E

S

NN

W

E

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E

S

S

N

S W

W

E

E

N N

MMS

N

S

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S

E

E

W S

N

MW

N W

M

W N

M

W

W

N

M

E

S

NNNNNN

7

1

9

10

5

9

8

9

3 6

4

11

2

1

9

3

Atlanta

Maine

VeVermontrmont

Puerto RicoPuerto Rico

Virgin Islands

D.C. Circuit

Federal Circuit

HawaiiHawaiiHawaiiHawaii

Michigan

Washington, D.C.

Washington, D.C.

Legend Circuit boundaries

State boundaries

District boundaries

Location of U.S. Court of Appeals

Florida

MarylandMarylandMaryland DelawareDelawareDelaware

NewNew JerseyJerseyJersey

PennsylvaniaPennsylvania

ConnecticutConnecticut Rhode IslandRhode Island MassachusettsMassachusetts

New HampshireHampshire

New York

GuamGuam

Northern Mariana IslandsIslands

Boston

NewNewNewNew Y Yorkork York Y York Y

PhiladelphiaPhiladelphiaPhiladelphia

District of ColumbiDistrict of Columbia WWashington, D.C. RichmondRichmond

New OrleansNew OrleansNew Orleans

CincinnatiCincinnatiCincinnatiCincinnatiCincinnati

Chicago

St. LouisSt. Louis

Denver SanSan

FranciscoFranciscoFrancisco

Source: Source: Administrative OfAdministrative Office of the United States Courts.

Texas

MississippiMississippiMississippi

Alaska

California

Nevada

Oregon

Washington

Idaho

Montana

Wyoming

Utah

Arizona

New Mexico

Colorado

Kansas

Oklahoma

Nebraska

So. Dakota

No. Dakota Minnesota

Iowa

Missouri

Arkansas

Georgia Alabama

So. Carolina

No. Carolina

Virginia W. Va.

Ohio

Kentucky

Tennessee

Michigan

Indiana Illinois

Wisconsin

irginia

Chicago

Louisiana

12

13

EXHIBIT 2–3 Geographic Boundaries of the U.S. Courts of Appeals and U.S. District Courts

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

40 UNIT ONE The Foundations

The Court of Appeals for the Thirteenth Circuit, called the Federal Circuit, has national appellate jurisdiction over certain types of cases, including those involving patent law and those in which the U.S. government is a defendant.

The decisions of a circuit court of appeals are binding on all courts within the circuit court’s jurisdiction. These decisions are final in most cases, but appeal to the United States Supreme Court is possible.

The United States Supreme Court The highest level of the three-tiered federal court system is the United States Supreme Court. According to the U.S. Constitu- tion, there is only one national Supreme Court. All other courts in the federal system are considered “inferior.” Congress is empowered to create inferior courts as it deems necessary. The inferior courts that Congress has created include the second tier in our model—the U.S. circuit courts of appeals—as well as the district courts and the various federal courts of limited, or specialized, jurisdiction.

The United States Supreme Court consists of nine justices. Although the Supreme Court has original, or trial, jurisdiction in rare instances (set forth in Article III, Sections 1 and 2), most of its work is as an appeals court. The Supreme Court can review any case decided by any of the federal courts of appeals. It also has appellate authority over cases involving federal questions that have been decided in the state courts. The Supreme Court is the final authority on the Constitution and federal law.

Appeals to the Supreme Court. To bring a case before the Supreme Court, a party requests the Court to issue a writ of certiorari.16 A writ of certiorari is an order issued certiorari is an order issued certiorari by the Supreme Court to a lower court requiring the lat- ter to send it the record of the case for review. �e Court will not issue a writ unless at least four of the nine justices approve of it. �is is called the rule of four.

Whether the Court will issue a writ of certiorari is certiorari is certiorari entirely within its discretion, and most petitions for writs are denied. (Although thousands of cases are filed with the Supreme Court each year, it hears, on average, fewer than one hundred of these cases.)17 A denial of the request to issue a writ of certiorari is not a decision on the certiorari is not a decision on the certiorari merits of the case, nor does it indicate agreement with the lower court’s opinion. Also, denial of the writ has no

16. Pronounced sur-shee-uh-rah-ree. 17. From the mid-1950s through the early 1990s, the Supreme Court

reviewed more cases per year than it has since then. In the Court’s 1982–1983 term, for example, the Court issued written opinions in 151 cases. In contrast, during the Court’s 2015–2016 term, the Court issued written opinions in only 81 cases.

value as a precedent. Denial simply means that the lower court’s decision remains the law in that jurisdiction.

Petitions Granted by the Court. Typically, the Court grants petitions when cases raise important constitutional questions or when the lower courts have issued con�ict- ing decisions on a signi�cant issue. �e justices, however, never explain their reasons for hearing certain cases and not others, so it is di�cult to predict which type of case the Court might select.

Concept Summary 2.2 reviews the courts in the fed- eral and state court systems.

2–4 Alternative Dispute Resolution Litigation—the process of resolving a dispute through the court system—is expensive and time consuming. Lit- igating even the simplest complaint is costly, and because of the backlog of cases pending in many courts, several years may pass before a case is actually tried. For these and other reasons, more and more businesspersons are turning to alternative dispute resolution (ADR) as a means of settling their disputes.

The great advantage of ADR is its flexibility. Methods of ADR range from the parties sitting down together and attempting to work out their differences to multinational corporations agreeing to resolve a dispute through a for- mal hearing before a panel of experts. Normally, the par- ties themselves can control how they will attempt to settle their dispute. They can decide what procedures will be used, whether a neutral third party will be present or make a deci- sion, and whether that decision will be legally binding or nonbinding. ADR also offers more privacy than court pro- ceedings and allows disputes to be resolved relatively quickly.

Today, more than 90 percent of civil lawsuits are set- tled before trial using some form of ADR. Indeed, most states either require or encourage parties to undertake ADR prior to trial. Many federal courts have instituted ADR programs as well. In this section, we examine the basic forms of ADR.

2–4a Negotiation The simplest form of ADR is negotiation, a process in which the parties attempt to settle their dispute infor- mally, with or without attorneys to represent them. Attorneys frequently advise their clients to negotiate a settlement voluntarily before they proceed to trial. Par- ties may even try to negotiate a settlement during a trial or after the trial but before an appeal.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 2 Courts and Alternative Dispute Resolution 41

Courts of appeals are reviewing courts. Generally, appellate courts do not have original jurisdiction.

The highest state court is that state’s supreme court, although it may be called by some other name.

Types of Courts

Concept Summary 2.2

● State courts —Courts of general jurisdiction can hear any case that has not been specifically designated for another court. Courts of limited jurisdiction include, among others, domestic relations courts, probate courts, municipal courts, and small claims courts. Federal courts —The federal district court is the equivalent of the state trial court. Federal courts of limited jurisdiction include the bankruptcy courts and others shown in Exhibit 2–2.

Trial CourtsTrial CourtsT

● About three-fourths of the states have intermediate appellate courts. In the federal court system, the U.S. circuit courts of appeals are the intermediate appellate courts.

Intermediate Appellate Courts

● Appeal from state supreme courts to the United States Supreme Court is possible only if a federal question is involved. The United States Supreme Court is the highest court in the federal court system and the final authority on the Constitution and federal law.

Supreme Courts

Trial courts are courts of original jurisdiction in which actions are initiated.

Negotiation traditionally involves just the parties themselves and (typically) their attorneys. The attorneys, though, are advocates—they are obligated to put their clients’ interests first.

2–4b Mediation In mediation, a neutral third party acts as a mediator and works with both sides in the dispute to facilitate a resolution. The mediator, who need not be a lawyer, usu- ally charges a fee for his or her services (which can be split between the parties). States that require parties to undergo ADR before trial often offer mediation as one of the ADR options or (as in Florida) the only option.

During mediation, the mediator normally talks with the parties separately as well as jointly, emphasizes their points of agreement, and helps them to evaluate their options. Although the mediator may propose a solution

(called a mediator’s proposal), he or she does not make a decision resolving the matter.

One of the biggest advantages of mediation is that it is less adversarial than litigation. In mediation, the media- tor takes an active role and attempts to bring the parties together so that they can come to a mutually satisfac- tory resolution. The mediation process tends to reduce the antagonism between the disputants, allowing them to resume their former relationship while minimizing hostility. For this reason, mediation is often the preferred form of ADR for disputes between business partners, employers and employees, or other parties involved in long-term relationships.

2–4c Arbitration A more formal method of ADR is arbitration, in which an arbitrator (a neutral third party or a panel of experts)

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42 UNIT ONE The Foundations

hears a dispute and imposes a resolution on the parties. Arbitration differs from other forms of ADR in that the third party hearing the dispute makes a decision for the parties. Exhibit 2–4 outlines the basic differences among the three traditional forms of ADR.

Usually, the parties in arbitration agree that the third party’s decision will be legally binding, although the parlegally binding, although the parlegally binding – ties can also agree to nonbinding arbitration. In nonbindnonbinding arbitration. In nonbindnonbinding – ing arbitration, the parties can go forward with a lawsuit if they do not agree with the arbitrator’s decision. Arbi- tration that is mandated by the courts often is not bind- ing on the parties.

In some respects, formal arbitration resembles a trial, although usually the procedural rules are much less restric- tive than those governing litigation. In a typical arbitration, the parties present opening arguments and ask for specific remedies. Both sides present evidence and may call and examine witnesses. The arbitrator then renders a decision.

The Arbitrator’s Decision The arbitrator’s decision is called an award. It is usually the final word on the mat- ter. Although the parties may appeal an arbitrator’s deci- sion, a court’s review of the decision will be much more restricted in scope than an appellate court’s review of a trial court’s decision. The general view is that because the parties were free to frame the issues and set the powers of the arbitrator at the outset, they cannot complain about

the results. A court will set aside an award only in the event of one of the following: 1. The arbitrator’s conduct or “bad faith” substantially

prejudiced the rights of one of the parties. 2. The award violates an established public policy. 3. The arbitrator exceeded her or his powers—that is,

arbitrated issues that the parties did not agree to sub- mit to arbitration.

Arbitration Clauses Almost any commercial mat- ter can be submitted to arbitration. Frequently, parties include an arbitration clause in a contract specifying that any dispute arising under the contract will be resolved through arbitration rather than through the court system. Parties can also agree to arbitrate a dispute after it arises.after it arises.after

Arbitration Statutes Most states have statutes (often based, in part, on the Uniform Arbitration Act) under which arbitration clauses will be enforced. Some state statutes compel arbitration of certain types of disputes, such as those involving public employees.

At the federal level, the Federal Arbitration Act (FAA), enacted in 1925, enforces arbitration clauses in contracts involving maritime activity and interstate com- merce. As you will see in later chapters, the courts have defined interstate commerce broadly, and so arbitration interstate commerce broadly, and so arbitration interstate commerce

Who Decides the Resolution?

Description

Neutral Third Party Present?

Type of ADRType of ADRT

The parties themselves reach a resolution.

The parties, but the mediator may suggest or propose a resolution.

The arbitrator imposes a resolution on the parties that may be either binding or nonbinding.

Negotiation Mediation Arbitration

Parties meet informally with or without their attorneys and attempt to agree on a resolution. This is the simplest and least expensive method of ADR.

A neutral third party meets with the parties and emphasizes points of agreement to bring them toward resolution of their dispute, reducing hostility between the parties.

The parties present their arguments and evidence before an arbitrator at a formal hearing. The arbitrator renders a decision to resolve the parties’ dispute.

No Yes Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Yess Yess Y

EXHIBIT 2–4 Basic Differences in the Traditional Forms of ADR

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 2 Courts and Alternative Dispute Resolution 43

agreements involving transactions only slightly con- nected to the flow of interstate commerce may fall under the FAA. The FAA established a national policy favor- ing arbitration that the United States Supreme Court has continued to reinforce.18

■ CASE IN POINT 2.8 Cleveland Construction, Inc. (CCI), was the general contractor on a project to build a grocery store in Houston, Texas. CCI hired Levco Construction, Inc., as a subcontractor. Their contract included an arbitration provision stating that any dis- putes would be resolved by arbitration in Ohio. When a dispute arose between the parties, Levco filed a suit against CCI in a Texas state court. CCI sought to com- pel arbitration in Ohio under the Federal Arbitration Act (FAA), but a Texas statute allows a party to void a con- tractual provision that requires arbitration outside Texas. Ultimately, a Texas appellate court held that the FAA preempted (took priority over) the state law. CCI could compel arbitration in Ohio.19 ■

The Issue of Arbitrability The terms of an arbitra- tion agreement can limit the types of disputes that the parties agree to arbitrate. Disputes can arise, however, when the parties do not specify limits or when the parties disagree on whether a particular matter is covered by their arbitration agreement.

When one party files a lawsuit to compel arbitration, it is up to the court to resolve the issue of arbitrability. That is, the court must decide whether the matter is one that must be resolved through arbitration. If the court finds that the subject matter in controversy is covered by the agreement to arbitrate, then it may compel arbitration.

Usually, a court will allow a claim to be arbitrated if the court finds that the relevant statute (the state arbitra- tion statute or the FAA) does not exclude such claims. No party, however, will be ordered to submit a particular dispute to arbitration unless the court is convinced that the party has consented to do so. Additionally, the courts will not compel arbitration if it is clear that the arbitra- tion rules and procedures are inherently unfair to one of the parties.

Mandatory Arbitration in the Employment Context A significant question for businesspersons has concerned mandatory arbitration clauses in employment contracts. Many employees claim they are at a disadvan- tage when they are forced, as a condition of being hired,

18. See, for example, AT&AT&AT T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011).

19. Cleveland Construction, Inc. v. Levco Construction, Inc., 359 S.W.3d 843 (Tex.App. 2012).

to agree to arbitrate all disputes and thus waive their rights under statutes designed to protect employees.

The United States Supreme Court, however, has held that mandatory arbitration clauses in employment con- tracts are generally enforceable. ■ CASE IN POINT 2.9 In a landmark decision, Gilmer v. Interstate Johnson Lane Corp.,20 the Supreme Court held that a claim brought under a federal statute prohibiting age discrimination could be subject to arbitration. The Court concluded that the employee had waived his right to sue when he agreed, as part of a required application to be a securities representative, to arbitrate “any dispute, claim, or contro- versy” relating to his employment. ■

Since the Gilmer decision, some courts have refused to enforce one-sided arbitration clauses.21 Nevertheless, the policy favoring enforcement of mandatory arbitration agreements in employment contracts remains strong.agreements in employment contracts remains strong.agreements in employment contracts remains strong.agreements in employment contracts remains strong.

■ CASE IN POINT 2.10 Stephanie Cruise was hired by Kroger Co. to work in its deli. Her job application had included a clause requiring arbitration of “employment- related disputes.” When Cruise was fired four years later, she filed a lawsuit claiming that Kroger had violated a number of laws prohibiting employment discrimina- tion. Kroger filed a motion to compel arbitration. A state appellate court concluded that the arbitration clause in the employment application established that the parties had agreed to arbitrate their “employment-related dis- putes.” Cruise’s claims fell within the meaning of that agreement, and therefore she was required to arbitrate.22 ■

2–4d Other Types of ADR The three forms of ADR just discussed are the oldest and traditionally the most commonly used forms. In addi- tion, a variety of newer types of ADR have emerged, including those described here. 1. In early neutral case evaluation, the parties select a

neutral third party (generally an expert in the subject matter of the dispute) and explain their respective positions to that person. The case evaluator assesses the strengths and weaknesses of each party’s claims.

2. In a mini-trial, each party’s attorney briefly argues the party’s case before the other party and a panel of representatives from each side who have the authority to settle the dispute. Typically, a neutral third party (usually an expert in the area being disputed) acts as

20. 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). 21. See, for example, Mohamed v. Uber Technologies, Inc., 2015 WL

3749716 (N.D.Cal. 2015); Macias v. Excel Building Services, LLC, 767 Macias v. Excel Building Services, LLC, 767 Macias v. Excel Building Services, LLC F.Supp.2d 1002 (N.D.Cal. 2011).

22. Cruise v. Kroger Co., 233 Cal.App.4th 390, 183 Cal.Rptr.3d 17 (2015). Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

44 UNIT ONE The Foundations

an adviser. If the parties fail to reach an agreement, the adviser renders an opinion as to how a court would likely decide the issue.

3. Numerous federal courts hold summary jury trials, in which the parties present their arguments and evi- dence and the jury renders a verdict. The jury’s ver- dict is not binding, but it does act as a guide to both sides in reaching an agreement during the mandatory negotiations that immediately follow the trial.

4. Other alternatives being employed by the courts include summary proceedings, which dispense with some formal court procedures, and the appointment of special masters to assist judges in deciding complex issues.

2–4e Providers of ADR Services ADR services are provided by both government agen- cies and private organizations. A major provider of ADR services is the American Arbitration Association (AAA), which handles more than 200,000 claims a year in its numerous offices worldwide. Most of the largest U.S. law firms are members of this nonprofit association.

Cases brought before the AAA are heard by an expert or a panel of experts in the area relating to the dispute and are usually settled quickly. Generally, about half of the panel members are lawyers. To cover its costs, the AAA charges a fee, paid by the party filing the claim. In addi- tion, each party to the dispute pays a specified amount for each hearing day, as well as a special additional fee in cases involving personal injuries or property loss.

Hundreds of for-profit firms around the country also provide dispute-resolution services. Typically, these firms hire retired judges to conduct arbitration hearings or oth- erwise assist parties in settling their disputes. The judges follow procedures similar to those of the federal courts and use similar rules. Usually, each party to the dispute pays a filing fee and a designated fee for a hearing session or conference.

2–4f Online Dispute Resolution An increasing number of companies and organizations are offering dispute-resolution services using the Internet. The settlement of disputes in these forums is known as online dispute resolution (ODR). The disputes resolved have most commonly involved rights to domain names (Web site addresses) or the quality of goods sold via the Internet, including goods sold through Internet auction sites.

Rules being developed in online forums may ulti- mately become a code of conduct for everyone who

does business in cyberspace. Most online forums do not automatically apply the law of any specific jurisdiction. Instead, results are often based on general, universal legal principles. As with most offline methods of dispute reso- lution, any party may appeal to a court at any time.

ODR may be best for resolving small- to medium- sized business liability claims, which may not be worth the expense of litigation or traditional ADR methods. In addition, some cities use ODR as a means of resolving addition, some cities use ODR as a means of resolving addition, some cities use ODR as a means of resolving addition, some cities use ODR as a means of resolving claims against them. ■ EXAMPLE 2.11 New York City New York City uses Cybersettle.com to resolve auto accident, sidewalk, and other personal-injury claims made against the city. Parties with complaints submit their demands, and the city submits its offers confidentially online. If an offer exceeds a demand, the claimant keeps half the difference as a bonus, plus the original claim. ■

2–5 International Dispute Resolution

Businesspersons who engage in international business transactions normally take special precautions to pro- tect themselves in the event that a party with whom they are dealing in another country breaches an agreement. Often, parties to international contracts include special clauses in their contracts providing for how disputes arising under the contracts will be resolved. Sometimes, international treaties (formal agreements among several nations) even require parties to arbitrate any disputes.

2–5a Forum-Selection and Choice-of-Law Clauses

Parties to international transactions often include forum- selection and choice-of-law clauses in their contracts. These clauses designate the jurisdiction (court or coun- try) where any dispute arising under the contract will be litigated and which nation’s law will be applied.

When an international contract does not include such clauses, any legal proceedings arising under the contract will be more complex and attended by much more uncertainty. For instance, litigation may take place in two or more countries, with each country applying its own national law to the particular transactions.

Furthermore, even if a plaintiff wins a favorable judg- ment in a lawsuit litigated in the plaintiff ’s country, the defendant’s country could refuse to enforce the court’s judgment. The judgment may be enforced in the defen- dant’s country for reasons of courtesy. The United States,

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CHAPTER 2 Courts and Alternative Dispute Resolution 45

Terms and Concepts alternative dispute resolution

(ADR) 40 arbitration 41 arbitration clause 42 award 42 bankruptcy court 28 concurrent jurisdiction 30 diversity of citizenship 28 early neutral case evaluation 43 exclusive jurisdiction 30

federal question 28 in personam jurisdiction 27 in rem jurisdiction 27 judicial review 26 jurisdiction 27 litigation 40 long arm statute 27 mediation 41 mini-trial 43 negotiation 40

online dispute resolution (ODR) 44 probate court 28 question of fact 36 question of law 36 rule of four 40 small claims court 36 standing to sue 33 summary jury trial 44 venue 33 writ of certiorari 40certiorari 40certiorari

Debate This … In this age of the Internet, when people communicate via e-mail, texts, tweets, Facebook, and Skype, is the concept of jurisdiction losing its meaning?

Reviewing: Courts and Alternative Dispute Resolution

Stan Garner resides in Illinois and promotes boxing matches for SuperSports, Inc., an Illinois corporation. Garner created the concept of “Ages” promotion—a three-fight series of boxing matches pitting an older fighter (George Foreman) against a younger fighter. The concept had titles for each of the three fights, including “Battle of the Ages.” Garner contacted Foreman and his manager, who both reside in Texas, to sell the idea, and they arranged a meeting in Las Vegas, Nevada. During negotiations, Foreman’s manager signed a nondisclosure agreement prohibiting him from disclosing Garner’s promotional concepts unless the parties signed a contract. Nevertheless, after negotiations fell through, Foreman used Garner’s “Battle of the Ages” concept to promote a subsequent fight. Garner filed a suit against Foreman and his manager in a federal district court located in Illinois, alleging breach of contract. Using the informa- tion presented in the chapter, answer the following questions. 1. On what basis might the federal district court in Illinois exercise jurisdiction in this case? 2. Does the federal district court have original or appellate jurisdiction? 3. Suppose that Garner had filed his action in an Illinois state court. Could an Illinois state court have exercised per-

sonal jurisdiction over Foreman or his manager? Why or why not? 4. Now suppose that Garner had filed his action in a Nevada state court. Would that court have had personal jurisdic-

tion over Foreman or his manager? Explain.

for instance, will generally enforce a foreign court’s deci- sion if it is consistent with U.S. national law and policy. Other nations, however, may not be as accommodat- ing as the United States, and the plaintiff may be left empty-handed.

2–5b Arbitration Clauses International contracts also often include arbitration clauses that require a neutral third party to decide any contract disputes. Many of the institutions that offer arbitration, such as the International Chamber of Com- merce or the Hong Kong International Arbitration Cen- tre, have formulated model clauses for parties to use. In

international arbitration proceedings, the third party may be a neutral entity, a panel of individuals representing both parties’ interests, or some other group or organization.

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards23 has been implemented in more than 145 countries, including the United States. This convention assists in the enforcement of arbitration clauses, as do provisions in specific treaties among nations. The American Arbitration Association provides arbitration services for international as well as domestic disputes.

23. June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997 (the “New York Convention”).

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46 UNIT ONE The Foundations

Issue Spotters 1. Sue uses her smartphone to purchase a video security

system for her architectural firm from Tipton, Inc., a company located in a different state. The system arrives a month after the projected delivery date, is of poor quality, and does not function as advertised. Sue files a suit against Tipton in a state court. Does the court in Sue’s state have jurisdiction over Tipton? What factors will the court consider in determining jurisdiction? (See Basic Judicial Requirements.)

2. The state in which Sue resides requires that her dispute with Tipton be submitted to mediation or nonbinding arbitration. If the dispute is not resolved, or if either party disagrees with the decision of the mediator or arbitrator, will a court hear the case? Explain. (See Alternative Dispute Resolution.)

• Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios 2–1. Standing. Jack and Maggie Turton bought a house in Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill accepted many kinds of trash that cause harm to the environment, including major appliances, animal carcasses, containers with hazardous content warnings,

leaking car batteries, and waste oil. The Turtons complained to the county, but the county did nothing. The Turtons then filed a lawsuit against the county alleging violations of federal environmental laws pertaining to groundwater contamination and other pollution. Do the Turtons have standing to sue? Why or why not? (See Basic Judicial Requirements.)

Business Case Problems 2–2. Venue. Brandy Austin used powdered infant for- mula manufactured by Nestlé USA, Inc., to feed her infant daughter. Austin claimed that a can of the formula was con- taminated with Enterobacter sakazakii bacteria, causing severe Enterobacter sakazakii bacteria, causing severe Enterobacter sakazakii injury to the infant. �e bacteria can cause infections of the bloodstream and central nervous system—in particular, men- ingitis (in�ammation of the tissue surrounding the brain or spinal cord). Austin �led an action against Nestlé in Henne- pin County District Court in Minnesota. Nestlé argued for a change of venue because the alleged harm had occurred in South Carolina. Austin is a South Carolina resident and had given birth to her daughter in that state. Should the case be transferred to a South Carolina venue? Why or why not? [Austransferred to a South Carolina venue? Why or why not? [Austransferred to a South Carolina venue? Why or why not? [ – tin v. Nestlé USA, Inc., 677 F.Supp.2d 1134 (D.Minn. 2009)] (See Basic Judicial Requirements.) 2–3. Arbitration. PRM Energy Systems owned patents licensed to Primenergy to use in the United States. �eir contract stated that “all disputes” would be settled by arbitra- tion. Kobe Steel of Japan was interested in using the technol- ogy represented by PRM’s patents. Primenergy agreed to let Kobe use the technology in Japan without telling PRM. When PRM learned about the secret deal, the �rm �led a suit against Primenergy for fraud and theft. Does this dispute go to arbitra- tion or to trial? Why? [PRM Energy Systems v. Primenergy, 592 F.3d 830 (8th Cir. 2010)] (See Alternative Dispute Resolution.) 2–4. Spotlight on the National Football League— Arbitration. Bruce Matthews played football for the Tennes-

see Titans. As part of his contract, he agreed to submit any dispute to arbitration. He also agreed that Tennessee law would determine all matters related to workers’ compensation. After Matthews

retired, he �led a workers’ compensation claim in California. �e arbitrator ruled that Matthews could pursue his claim in California but only under Tennessee law. Should this award be set aside? Explain. [National Football League Players Association v. National Football League Management Council, 2011 WL 1137334 (S.D.Cal. 2011)] (See Alternative Dispute Resolution.) 2–5. Minimum Contacts. Seal Polymer Industries sold two freight containers of latex gloves to Med-Express, Inc., a company based in North Carolina. When Med-Express failed to pay the $104,000 owed for the gloves, Seal Polymer sued in an Illinois court and obtained a judgment against Med- Express. Med-Express argued that it did not have minimum contacts with Illinois because it was incorporated under North Carolina law and had its principal place of business in North Carolina. �erefore, the Illinois judgment based on personal jurisdiction was invalid. Was this argument alone su�cient to prevent the Illinois judgment from being collected against Med-Express in North Carolina? Why or why not? [Seal Poly- mer Industries v. Med-Express, Inc., 725 S.E.2d 5 (N.C.App. 2012)] (See Basic Judicial Requirements.) 2–6. Arbitration. Horton Automatics and the Industrial Division of the Communications Workers of America, the union that represented Horton’s workers, negotiated a col- lective bargaining agreement. If an employee’s discharge for a workplace-rule violation was submitted to arbitration, the agreement limited the arbitrator to determining whether the rule was reasonable and whether the employee had violated it. When Horton discharged employee Ruben de la Garza, the union appealed to arbitration. �e arbitrator found that de la Garza had violated a reasonable safety rule, but “was not totally convinced” that Horton should have treated the

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CHAPTER 2 Courts and Alternative Dispute Resolution 47

violation more seriously than other rule violations. �e arbi- trator ordered de la Garza reinstated. Can a court set aside this order? Explain. [Horton Automatics v. �e Industrial Division of the Communications Workers of America, AFL-CIO, 2013 WL 59204 (5th Cir. 2013)] (See Alternative Dispute Resolution.) 2–7. Business Case Problem with Sample Answer— Corporate Contacts. LG Electronics, Inc., a South Korean

company, and nineteen other foreign companies participated in the global market for cathode ray tube (CRT) products. CRTs were integrated as components in consumer goods, including televi-

sion sets, and were sold for many years in high volume in the United States, including the state of Washington. �e state �led a suit in a Washington state court against LG and the others, alleging a conspiracy to raise prices and set production levels in the market for CRTs in violation of a state consumer protection statute. �e defendants �led a motion to dismiss the suit for lack of personal jurisdiction. Should this motion be granted? Explain. [State of Washington v. LG Electronics, Inc., 341 P.3d 346 (Wash.App., Div. 1 2015)] (See Basic Judi- cial Requirements.) • For a sample answer to Problem 2–7, go to Appendix E at

the end of this text.

2–8. Appellate, or Reviewing, Courts. Angelica West- brook was employed as a collector for Franklin Collection Service, Inc. During a collection call, Westbrook told a debtor that a $15 processing fee was an “interest” charge. �is vio- lated company policy. Westbrook was �red. She �led a claim for unemployment bene�ts, which the Mississippi Depart- ment of Employment Security (MDES) approved. Franklin objected. At an MDES hearing, a Franklin supervisor testi- �ed that she had heard Westbrook make the false statement, although she admitted that there had been no similar incidents

with Westbrook. Westbrook denied making the statement, but added that if she had said it, she did not remember it. �e agency found that Franklin’s reason for terminating West- brook did not amount to the misconduct required to disqual- ify her for bene�ts and upheld the approval. Franklin appealed to a state intermediate appellate court. Is the court likely to uphold the agency’s �ndings of fact? Explain. [Franklin Col-Franklin Col-Franklin Col lection Service, Inc. v. Mississippi Department of Employment Security, 184 So.3d 330 (Miss.App. 2016)] (See �e State and Federal Court Systems.) 2–9. A Question of Ethics—Agreement to Arbitrate.

Nellie Lumpkin, who su�ered from various illnesses, including dementia, was admitted to the Picayune Convalescent Center, a nursing home. Because of her mental condition, her daughter, Beverly

McDaniel, �lled out the admissions paperwork and signed the admissions agreement. It included a clause requiring parties to submit to arbitration any disputes that arose. After Lumpkin left the center two years later, she sued, through her husband, for negligent treatment and malpractice during her stay. �e center moved to force the matter to arbitration. �e trial court held that the arbitration agreement was not enforceable. �e center appealed. [Covenant Health [Covenant Health [ & Rehabilitation of Picayune, LP v. Lumpkin, 23 So.3d 1092 (Miss.App. 2009)] (See Alter- native Dispute Resolution.) (a) Should a dispute involving medical malpractice be forced

into arbitration? This is a claim of negligent care, not a breach of a commercial contract. Is it ethical for medical facilities to impose such a requirement? Is there really any bargaining over such terms? Discuss fully.

(b) Should a person with limited mental capacity be held to an arbitration clause agreed to by the next of kin who signed on behalf of that person? Why or why not?

Legal Reasoning Group Activity 2–10. Access to Courts. Assume that a statute in your state requires that all civil lawsuits involving damages of less than $50,000 be arbitrated. Such a case can be tried in court only if a party is dissatis�ed with the arbitrator’s decision. �e stat- ute also provides that if a trial does not result in an improve- ment of more than 10 percent in the position of the party who demanded the trial, that party must pay the entire cost of the arbitration proceeding. (See Alternative Dispute Resolution.)

(a) One group will argue that the state statute violates liti- gants’ rights of access to the courts and trial by jury.

(b) Another group will argue that the statute does not violate litigants’ right of access to the courts.

(c) A third group will evaluate how the determination on right of access would be changed if the statute was part of a pilot program that affected only a few judicial districts in the state.

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48

CHAPTER 3

3–1 Procedural Rules The parties to a lawsuit must comply with the procedural rules of the court in which the lawsuit is filed. Although people often think that substantive law determines the outcome of a case, procedural law can have a significant impact on a person’s ability to pursue a legal claim. Pro- cedural rules provide a framework for every dispute and specify what must be done at each stage of the litigation process.

Procedural rules are complex, and they vary from court to court and from state to state. There is a set of federal rules of procedure as well as various sets of rules for state courts. Additionally, the applicable procedures will depend on whether the case is a civil or criminal proceed- ing. All civil trials held in federal district courts are gov- erned by the Federal Rules of Civil Procedure (FRCP).2

3–1a Stages of Litigation Broadly speaking, the litigation process has three phases: pretrial, trial, and posttrial. Each phase involves spe- cific procedures, as discussed throughout this chapter. Although civil lawsuits may vary greatly in terms of com- plexity, cost, and detail, they typically progress through the stages charted in Exhibit 3–1.

2. The United States Supreme Court has authority to establish these rules, as spelled out in 28 U.S.C. Sections 2071–2077. Generally, though, the federal judiciary appoints committees that make recommendations to the Supreme Court. The Court then publishes any proposed changes in the rules and allows for public comment before finalizing the rules.

To illustrate the procedures involved in a civil lawsuit, we will use a simple hypothetical case. The case arose from an automobile accident, which occurred when a car driven by Antonio Carvello, a resident of New Jer- sey, collided with a car driven by Jill Kirby, a resident of New York. The accident took place at an intersection in New York City. Kirby suffered personal injuries, which caused her to incur medical and hospital expenses as well as lost wages for four months. In all, she calculated that the cost to her of the accident was $500,000.3 Carvello and Kirby have been unable to agree on a settlement, and Kirby now must decide whether to sue Carvello for the $500,000 compensation she feels she deserves.

3–1b Hire an Attorney As mentioned, rules of procedure often affect the out- come of a dispute—a fact that highlights the importance of obtaining the advice of counsel. The first step taken by almost anyone contemplating a lawsuit is to seek the guidance of a licensed attorney.

In the hypothetical Kirby-Carvello case, assume that Kirby consults with a lawyer. The attorney will advise her regarding what she can expect in a lawsuit, her prob- ability of success at trial, and the procedures that will be involved. If more than one court would have jurisdiction over the matter, the attorney will also discuss the advan- tages and disadvantages of filing in a particular court. In addition, the attorney will indicate how long it will take

3. For simplicity, we are ignoring damages for pain and suffering and for per- manent disabilities, which plaintiffs in personal-injury cases often seek.

American and English courts fol-low the adversarial system of justiceAjusticeA . Although parties are allowed to represent themselves in court (called pro se representation),1

1. This right was definitively established in Faretta v. California, 422 U.S. 806, 95 S.Ct. 2525, 45 L.Ed.2d 562 (1975).

most parties to lawsuits hire attorneys to represent them. Each lawyer acts as his or her client’s advocate. Each law- yer presents his or her client’s version of the facts in such a way as to con- vince the judge (or the judge and jury, in a jury trial) that this version is cor-in a jury trial) that this version is cor-in a jury trial) that this version is cor rect. Most of the judicial procedures

that you will read about are rooted in the adversarial framework of the American legal system.

Court Procedures

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CHAPTER 3 Court Procedures 49

to resolve the dispute through litigation in a particular court and provide an estimate of the costs involved.

The attorney will also inform Kirby of the legal fees that she will have to pay in an attempt to collect damages from the defendant, Carvello. Attorneys base their fees on such factors as the difficulty of the matter at issue, the attorney’s experience and skill, and the amount of time involved. In the United States, legal fees range from $200 to $700 per hour or even higher (the average fee is between $200 and $450 per hour). The client normally must also pay various expenses related to the case (called “out-of- pocket” costs), such as court filing fees, travel expenses, and the costs of expert witnesses and investigators.

Types of Attorneys’ Fees For a particular legal mat- ter, an attorney may charge one type of fee or a combina- tion of several types. 1. Fixed fees may be charged for the performance of such Fixed fees may be charged for the performance of such Fixed fees

services as drafting a simple will. 2. Hourly fees may be charged for matters that will Hourly fees may be charged for matters that will Hourly fees

involve an indeterminate period of time. The amount of time required to bring a case to trial, for instance, probably cannot be precisely estimated in advance.

3. Contingency fees are fixed as a percentage (usually 33 percent) of a client’s recovery in certain types of lawsuits, such as a personal-injury lawsuit.4 If the

4. Contingency-fee arrangements are typically prohibited in criminal cases, divorce cases, and cases involving the distribution of assets after death.

lawsuit is unsuccessful, the attorney receives no fee, but the client will have to reimburse the attorney for all out-of-pocket costs incurred.

Because Kirby’s claim involves a personal injury, her lawyer will likely take the case on a contingency-fee basis. In some cases, the winning party may be able to recover at least some portion of her or his attorneys’ fees from the losing party.

Settlement Considerations Once an attorney has been retained, the attorney is required to pursue a resolu- tion of the matter on the client’s behalf. Nevertheless, the amount of resources an attorney will spend on a given case is affected by the time and funds the client wishes to devote to the process.

If the client is willing to pay for a lengthy trial and one or more appeals, the attorney may pursue those actions. Often, however, after learning of the substantial costs that litigation entails, a client may decide to pursue a settlement of the claim. Attempts to settle the case may be ongoing throughout the litigation process.

Another important consideration in deciding whether to pursue litigation is the defendant’s ability to pay the damages sought. Even if Kirby is awarded damages, it may be difficult to enforce the court’s judgment if the amount exceeds the limits of Carvello’s automobile insur- ance policy. (We will discuss the problems involved in enforcing a judgment later in this chapter.)

Trial and perhaps posttrial motions and/or an appeal

Defendant’s attorney files an answer or a motion to dismiss

Pretrial discovery and more motions, pretrial

conference

The party hires a lawyer, lawyer, lawyer who files a

complaint and notifies (serves) the defendant

Accident, breach of contract, or other event

EXHIBIT 3–1 Stages in a Typical Lawsuit

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50 UNIT ONE The Foundations

3–2 Pretrial Procedures The pretrial litigation process involves the filing of the pleadings, the gathering of evidence (called discovery), and discovery), and discovery possibly other procedures, such as a pretrial conference and jury selection.

3–2a The Pleadings The complaint and complaint and complaint answer (and other legal documents disanswer (and other legal documents disanswer – cussed below) are known as the pleadings. The pleadings inform each party of the other’s claims, reveal the facts, and specify the issues (disputed questions) involved in the case. Because the rules of procedure vary depending on the jurisdiction of the court, the style and form of the plead- ings may be different from those shown in this chapter.

The Plaintiff’s Complaint Kirby’s action against Carvello commences when her lawyer files a complaint5 with the clerk of the appropriate court. Complaints can be lengthy or brief, depending on the complexity of the case and the rules of the jurisdiction. The complaint con- tains statements or allegations concerning the following: 1. Jurisdiction. Facts showing that the particular court

has subject-matter and personal jurisdiction. 2. Legal theory. The facts establishing the plaintiff ’s

claim and basis for relief. 3. Remedy. The remedy (such as an amount of damages)

that the plaintiff is seeking. Exhibit 3–2 illustrates how a complaint in the Kirby-

Carvello case might appear. The complaint asserts facts indicating that the federal district court has subject- matter jurisdiction because of diversity of citizenship. It then gives a brief statement of the facts of the accident and alleges that Carvello negligently drove his vehicle through a red light, striking Kirby’s car. The complaint alleges that Carvello’s actions caused Kirby serious per- sonal injury and property damage. The complaint goes on to state that Kirby is seeking $500,000 in damages. (In some state civil actions, the plaintiff need not specify the amount of damages sought.)

Service of Process. Before the court can exercise personal jurisdiction over the defendant (Carvello)—in e�ect, before the lawsuit can begin—the court must have proof that the defendant was noti�ed of the lawsuit. Formally notifying the defendant of a lawsuit is called service of process.

5. Sometimes, the document filed with the court is called a petition or a declaration instead of a complaint.

The plaintiff must deliver, or serve, a copy of the complaint and a summons (a notice requiring the defen- dant to appear in court and answer the complaint) to the defendant. The summons notifies Carvello that he must file an answer to the complaint within a specified time period (twenty days in the federal courts) or suf-time period (twenty days in the federal courts) or suf-time period (twenty days in the federal courts) or suf fer a default judgment against him. A default judgment in Kirby’s favor would mean that she would be awarded the damages alleged in her complaint because Carvello failed to respond to the allegations. A typical summons is shown in Exhibit 3–3.

Method of Service. How service of process occurs depends on the rules of the court or jurisdiction in which the lawsuit is brought. Under the Federal Rules of Civil Procedure, anyone who is at least eighteen years of age and is not a party to the lawsuit can serve process in fed- eral court cases. In state courts, the process server is often a county sheri� or an employee of an independent com- pany that provides process service in the local area.

Usually, the server hands the summons and complaint to the defendant personally or leaves it at the defendant’s residence or place of business. In some states, process can be served by mail if the defendant consents (accepts service). When the defendant cannot be reached, special rules provide for alternative means of service, such as publishing a notice in the local newspaper.

In some situations, courts allow service of process via e-mail, as long as it is reasonably calculated to pro- vide notice and an opportunity to respond. Today, some judges have even allowed defendants to be served legal documents via social media, as discussed in this chapter’s Digital Update feature.

In cases involving corporate defendants, the summons and complaint may be served on an officer or on a regis- tered agent (representative) of the corporation. The name tered agent (representative) of the corporation. The name tered agent of a corporation’s registered agent can usually be obtained from the secretary of state’s office in the state where the company incorporated its business (and, frequently, from the secretary of state’s office in any state where the corpo- ration does business).

Waiver of Formal Service of Process. In many instances, the defendant is already aware that a lawsuit is being �led and is willing to waive (give up) her or his right to be served personally. �e Federal Rules of Civil Procedure (FRCP) and many states’ rules allow defen- dants to waive formal service of process, provided that certain procedures are followed.

In the Kirby case, for example, Kirby’s attorney could mail to defendant Carvello a copy of the complaint, along with “Waiver of Service of Summons” forms for

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CHAPTER 3 Court Procedures 51

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

JILL KIRBY

ANTONIO CARVELLO

COMPLAINT Plaintiff,

Defendant.

The plaintiff brings this cause of action against the defendant, alleging as follows:

WHEREFORE, the plaintiff demands judgment against the defendant for the sum of $500,000 plus interest at the maximum legal rate and the costs of this action.

1/3/18

By

Joseph RoeJoseph RoeJoseph Roe Attorney for Plaintiff 100 Main Street New York, New York

CIVIL NO. 9-1047

v.

1. This action is between the plaintiff, who is a resident of the State of New York, and the defendant, who is a resident of the State of New Jersey. There is diversity of citizenship between the parties.

2. The amount in controversy, exclusive of interest and costs, exceeds the sum of $75,000.

3. On September 10th, 2017, the plaintiff, Jill Kirby, was exercising good driving habits and reasonable care in driving her car through the intersection of Boardwalk and Pennsylvania Avenue, New York City, New York, when the defendant, Antonio Carvello, negligently drove his vehicle through a red light at the intersection and collided with the plaintiff’s vehicle.

4. As a result of the collision, the plaintiff suffered severe physical injury, which prevented her from working, and property damage to her car.

EXHIBIT 3–2 A Typical Complaint

Carvello to sign. If Carvello signs and returns the forms within thirty days, formal service of process is waived.

Moreover, under the FRCP, defendants who agree to waive formal service of process receive additional time to respond to the complaint (sixty days, instead of twenty days). Some states provide similar incentives to encour- age defendants to waive formal service of process and thereby reduce associated costs and foster cooperation between the parties.

The Defendant’s Response Typically, the defen- dant’s response to the complaint takes the form of an answer. In an answer, the defendant either admits or denies each of the allegations in the plaintiff ’s complaint and may also set forth defenses to those allegations.

Under the federal rules, any allegations that are not denied by the defendant will be deemed by the court to have been admitted. If Carvello admits to all of Kirby’s allegations in his answer, a judgment will be entered for

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52 UNIT ONE The Foundations

Kirby. If Carvello denies Kirby’s allegations, the matter will proceed further.

Affirmative Defenses. Carvello can also admit the truth of Kirby’s complaint but raise new facts to show that he should not be held liable for Kirby’s damages. �is is called raising an a�rmative defense.

Defendants in both civil and criminal cases can raise affirmative defenses. For example, Carvello could assert Kirby’s own negligence as a defense by alleging that Kirby was driving negligently at the time of the accident. In some states, a plaintiff ’s contributory negligence operates as a complete defense. In most states, however, the plain- tiff ’s own negligence constitutes only a partial defense.

Counterclaims. Carvello could also deny Kirby’s alle- gations and set forth his own claim that the accident occurred as a result of Kirby’s negligence and therefore she

owes Carvello for damage to his car. �is is appropriately called a counterclaim. If Carvello �les a counterclaim, Kirby will have to submit an answer to the counterclaim.

3–2b Dismissals and Judgments before Trial

Many actions for which pleadings have been filed never come to trial. The parties may, for instance, negotiate a settlement of the dispute at any stage of the litigation process. There are also numerous procedural avenues for disposing of a case without a trial. Many of them involve one or the other party’s attempts to get the case dismissed through the use of various motions.

A motion is a procedural request submitted to the court by an attorney on behalf of her or his client. When a motion is filed with the court, the filing party must also send to, or personally serve, the opposing party a notice of

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

JILL KIRBY

ANTONIO CARVELLO

SUMMONS Plaintiff,

Defendant.

To the above-named Defendant:

You are hereby summoned and required to serve upon Joseph Roe, plaintiff’s attorney, whose address is 100 Main Street, New York, NY, an answer to the complaint which is herewith served upon you, within 20 days after service of this summons upon you, exclusive of the day of service. If you fail to do so, judgment by default will be taken against you for the relief demanded in the complaint.

C. H. Hynek

CLERK

BY DEPUTY CLERK

January 3, 2018

DATE

CIVIL ACTION, FILE NO. 9-1047

v.

EXHIBIT 3–3 A Typical Summons

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CHAPTER 3 Court Procedures 53

motion. The notice of motion informs the opposing party that the motion has been filed. Pretrial motions include the motion to dismiss, the motion for judgment on the pleadings, and the motion for summary judgment, as well as the other motions listed in Exhibit 3–4.

Motion to Dismiss Either party can file a motion to dismiss asking the court to dismiss the case for the reasons stated in the motion. Normally, though, it is the defendant who requests dismissal.

A defendant can file a motion to dismiss if the plain- tiff ’s complaint fails to state a claim for which relief (a remedy) can be granted. Such a motion asserts that even if the facts alleged in the complaint are true, they

do not give rise to any legal claim against the defendant. For example, if the allegations in Kirby’s complaint do not constitute negligence on Carvello’s part, Carvello can move to dismiss the case for failure to state a claim. Defendant Carvello could also file a motion to dismiss on the grounds that he was not properly served, that the court lacked jurisdiction, or that the venue was improper.

If the judge grants the motion to dismiss, the plain- tiff generally is given time to file an amended com- plaint. If the judge denies the motion, the suit will go forward, and the defendant must then file an answer. Note that if Carvello wishes to discontinue the suit because, for example, an out-of-court settlement has been reached, he can likewise move for dismissal. The

Using Social Media for Service of Process

Historically, when process servers failed to reach a defendant at home, they attempted to serve process at the defendant’s workplace, by mail, and by publication. In our digital age, does publication via social media qualify as legitimate service of process?

Can You Serve a Divorce Summons Through a Private Message on a Facebook Account?

Facebook has well over 1.6 billion active users per month. Assume that a man has a Facebook account and so does his spouse. He has moved out and is inten- tionally avoiding service of a divorce summons. Even a private investigator has not been able to deliver that summons. What to do? According to a New York state court ruling, the lawyer for the woman can serve the divorce summons through a private message from her Facebook account. “The past decade has . . . seen the advent and ascendancy of social media. . . . Thus, it would appear that the next frontier in the developing law of the service of process over the Internet is the use of social media sites as forums through which a sum- mons can be delivered.”a

An Increasing Use of Social Media for Service of Process

More and more courts are allowing service of process via Facebook and other social media. One New York City family court judge ruled that a divorced man could

serve his ex-wife through her active Facebook account. She had moved out of the house and provided no forwarding address. A Dallas district judge authorized service of process via social media, and other judges in that state have agreed with the ruling. A bill pending in the Texas state legislature would allow ser- vice via social media whenever a plaintiff can

authenticate the social media account. Other states are considering similar legislation.

Not All Courts Agree, Though

In spite of these examples, the courts have not uni- formly approved of using social media to serve process. In one federal district court case, the court pointed out the relative simplicity of creating a fake Facebook account and the court’s resulting inability to verify the true owner of that account.b In another case, involv- ing the Federal Trade Commission (FTC), the court did allow service of process via Facebook, but noted that “if the FTC were proposing to serve the defendants only by means of Facebook, as opposed to using Facebook as a supplemental means of service, a substantial ques- tion would arise whether that service comports with due process.”c

Critical Thinking In our connected world, is there any way a defendant could avoid service of process via social media?

DIGITAL UPDATE

a. Baido v. Blood-Dzraqu, 48 Misc.3d 309, 5 N.Y.S.3d 709 (2015).

b. Fortunato v. Chase Bank USA, 2011 WL 5574884 (S.D.N.Y. 2011) and 2012 WL 2086950 (S.D.N.Y. 2012).

c. FTC v. PCCare247, Inc., 2013 WL 841037 (S.D.N.Y. 2013).

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54 UNIT ONE The Foundations

Motion to Strike A defendant’s motion asking the court to strike (delete or remove) certain paragraphs from the complaint to better clarify the issues in dispute

Motion to Make More Definite or Certain

A motion by the defendant when the complaint is vague that asks the court to compel the plaintiff to clarify the cause of action

Motion for Judgment on the Pleadings

A motion by either party asking the court to enter judgment in his or her favor based on the pleadings because there are no facts in dispute

Motion to Compel Discovery

A motion asking the court to force the nonmoving party to comply with a discovery request

Motion for Summary Judgment

A motion asking the court to enter a judgment in his or her favor without a trial

A motion (normally filed by the defendant) that asks the court to dismiss the case for a specified reason, such as lack of personal jurisdiction or failure to state a claim

Motion to Dismiss

EXHIBIT 3–4 Pretrial Motions

court can also dismiss a case on its own motion. In the following case, one party filed a complaint against two others, alleging a breach of contract. The defendants

filed a motion to dismiss on the ground that the venue was improper. The court denied the motion, and the defendants appealed.

In the Language of the Court CORTIÑAS, J. [Judge]

* * * * Espresso Disposition Corporation

1 and Rowland Coffee Roasters, Inc. (collectively “Appellants”) seek review of the trial court’s order denying their motions to dismiss [Santana Sales & Marketing Group, Inc.’s (“Appellee’s”)]

third amended complaint. Appellants claim that the trial court erred in deny- ing their motions to dismiss because the plain and unambiguous language in the parties’ * * * agreement contains a man- datory forum selection clause [a provi- sion in a contract designating the court, jurisdiction, or tribunal that will decide any disputes arising under the contract]

requiring that all law- suits brought under the agreement shall be in Illinois.

Espresso Disposition Corporation 1 and Santana and Associates entered into the * * * agreement in 2002. The agree- ment provides for a mandatory forum selection clause in paragraph 8. The pro- vision states:

Case Analysis 3.1 Espresso Disposition Corp. 1 v. Santana Sales & Marketing Group, Inc. Espresso Disposition Corp. 1 v. Santana Sales & Marketing Group, Inc. Espresso Disposition Corp. 1 v.

Florida Court of Appeal, Third District, 105 So.3d 592 (2013).

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CHAPTER 3 Court Procedures 55

The venue with respect to any action pertaining to this Agree- ment shall be the State of Illinois. The laws of the State of Illinois shall govern the application and interpretation of this Agreement.

However, Appellee filed a lawsuit against Appellants alleging a breach of the agreement in Miami–Dade County, Florida. In fact, Appellee filed four subsequent complaints—an initial complaint, amended complaint, second amended complaint, and third amended complaint—after each and every previ- ous pleading’s dismissal was based upon venue as provided for in the agreement’s mandatory forum selection clause. Appellee’s third amended complaint alleges the forum selection clause was a mistake that was made at the time the agreement was drafted. Additionally, Appellee attached an affidavit [a sworn statement] which states that, in drafting the agreement, Appellee * * * copied a form version of an agreement between different parties, and by mistake, forgot to change the venue provision from Illi- nois to Florida. In response, Appellants filed their motions to dismiss the third amended complaint, which the trial court denied.

Florida appellate courts interpret a contractual forum selection clause under a de novo standard of review. [The courts review the issue anew, as if the lower courts had not ruled on the issue.] Likewise, as the trial court’s order denying appellant’s motion to dismiss is based on the interpretation of the contractual forum selection clause, this court’s standard of review is de novo. Therefore, the narrow issue before this court is whether the * * *

agreement provides for a mandatory forum selection clause that is enforce- able under Florida law.

Florida courts have long recognized that forum selection clauses such as the one at issue here are presumptively valid. This is because forum selection clauses provide a degree of certainty to business contracts by obviating [preventing] juris- dictional struggles and by allowing parties to tailor the dispute resolution mechanism to their particular situation. Moreover, forum selection clauses reduce litigation over venue, thereby conserving judicial resources, reducing business expenses, and lowering consumer prices. [Emphasis added.]

Because Florida law presumes that forum selection clauses are valid and enforceable, the party seeking to avoid enforcement of such a clause must estab- lish that enforcement would be unjust or unreasonable. Under Florida law, the clause is only considered unjust or unreasonable if the party seeking avoid- ance establishes that enforcement would result in no forum at all. There is abso- lutely no set of facts that Appellee could plead and prove to demonstrate that Illinois state courts do not exist. Illinois became the twenty-first state in 1818, and has since established an extensive system of state trial and appellate courts. Clearly, Appellee failed to establish that enforcement would be unreasonable since the designated forum—Illinois— does not result in Appellee’s having “no forum at all.”

Further, as we have said on a number of occasions, if a forum selection clause unambiguously mandates that litigation be subject to an agreed upon forum, then it is error for the trial court to ignore the clause. Generally, the clause

is mandatory where the plain language used by the parties indicates exclusiv- ity. Importantly, if the forum selection clause states or clearly indicates that any litigation must or shall be initiated in a specified forum, then it is mandatory. Here, the agreement’s plain language provides that the venue for any action relating to a controversy under the agreement * * * “shall be the State of Illinois.” The clear language unequivo- cally renders the forum selection clause mandatory.

Appellee would have us create an exception to our jurisprudence on mandatory forum selection clauses based on their error in cutting and pasting the clause from another agree- ment. Of course, the origin of “cutting and pasting” comes from the tradi- tional practice of manuscript-editing whereby writers used to cut paragraphs from a page with editing scissors, that had blades long enough to cut an 811⁄⁄1⁄11⁄1⁄2⁄2⁄2⁄2⁄ inch-wide page, and then physically pasted them onto another page. Today, the cut, copy, and paste functions contained in word processing software render unnecessary the use of scissors or glue. However, what has not been eliminated is the need to actually read and analyze the text being pasted, especially where it is to have legal sig- nificance. Thus, in reviewing the man- datory selection clause which Appellant seeks to enforce, we apply the legal maxim “be careful what you ask for” and enforce the pasted forum.

Accordingly, we reverse [the] trial court’s denial of the motions to dismiss Appellee’s third amended complaint on the basis of improper venue, and remand for entry of an order of dismissal.

Case 3.1 Continued

Legal Reasoning Questions

1. Compare and contrast a motion to dismiss with other pretrial motions. Identify their chief differences. 2. Why did the appellants in this case file a motion to dismiss? 3. What is the effect of granting a motion to dismiss?

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56 UNIT ONE The Foundations

Background and Facts Twenty-First Century Bean Processing hired Anthony Lewis, a forty-seven- year-old African American male, for a warehouse position, subject to a thirty-day probationary period. At the end of the period, Twenty-First Century evaluated Lewis’s performance to determine whether he would remain an employee. The employer decided not to retain Lewis, who then filed a suit in a federal district court against Twenty-First Century. Lewis alleged discrimination on the basis of race and age in violation of Title VII of the Civil Rights Act and the Age Discrimination in Employment Act. Twenty-First Century filed a motion for summary judgment. As evidence, the employer presented proof concerning Lewis’s job performance during the probationary period. The court granted the motion. Lewis appealed.

In the Language of the Court Robert E. BACHARACH, Circuit Judge.BACHARACH, Circuit Judge.BACHARACH

* * * * When a plaintiff alleges discrimination but offers no direct evidence of discrimination, the plaintiff bears

the initial burden to establish a prima facie case of discrimination. [This requires a showing that (1) the plaintiff is a member of a protected class—a person defined by certain criteria, including race or age; (2) the plaintiff applied and was qualified for the job at issue; (3) the plaintiff was rejected by the employer; and (4) the employer filled the position with someone not in a protected class.] If a plaintiff

Lewis v. Twenty-First Century Bean Processing United States Court of Appeals, Tenth Circuit, __ F.3d __, 2016 WL 66334 (2016).

Case 3.2

Motion for Judgment on the Pleadings At the close of the pleadings, either party may make a motion for judgment on the pleadings. This motion asks the court to decide the issue solely on the pleadings without proceeding to trial.

The judge will grant the motion only when there is no dispute over the facts of the case and the sole issue to be resolved is a question of law. For example, in the Kirby- Carvello case, if Carvello had admitted to all of Kirby’s allegations in his answer and had raised no affirmative defenses, Kirby could file a motion for judgment on the pleadings.

In deciding a motion for judgment on the pleadings, the judge may consider only the evidence contained in the pleadings. In contrast, in a motion for summary judg- ment, discussed next, the court may consider evidence outside the pleadings, such as sworn statements and other materials that would be admissible as evidence at trial.

Motion for Summary Judgment Either party can file a motion for summary judgment, which asks the court to grant a judgment in that party’s favor without a trial. The motion can be made before or during the trial. As with a motion for judgment on the pleadings, a court

will grant a motion for summary judgment only if no facts are in dispute and the only question is how the law applies to the facts. In determining whether no facts are in contention, the court considers the evidence in the light most favorable to the other party.

To support a motion for summary judgment, a party can submit evidence obtained at any point before the trial that refutes the other party’s factual claim. The evidence may consist of affidavits (sworn statements by parties or witnesses) or copies of documents, such as contracts, e-mails, and letters obtained through the course of dis- covery (discussed next).

Of course, the evidence must be admissible evidence—that is, evidence that the court would allow to be presented during the trial. As mentioned, the use of additional evidence is one feature that distinguishes the motion for summary judgment from the motion to dismiss and the motion for judgment on the pleadings.

On appeal of a court’s grant or denial of a motion for summary judgment, the appellate court engages in de novo review—that is, it applies the same standard that the trial court applied. In the following case, an appellate court took a fresh look at the evidence that had been presented with a motion for summary judgment granted by the lower court.

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CHAPTER 3 Court Procedures 57

establishes a prima facie case, the burden shifts to the defendant to articulate a * * * nondiscriminatory reason for its actions. If the defendant satisfies that burden, the employee would bear the burden to prove the defendant’s actions were discriminatory, which the employee could do by showing defendant’s proffered reason is a pretext for illegal discrimination. [Emphasis added.]

* * * * Mr. Lewis alleges age discrimination under the Age Discrimination in Employment Act. * * * Mr.

Lewis had not presented any direct evidence of discrimination [and] the court determined that Mr. Lewis had not established a prima facie case because he had failed to provide evidence that his work was prima facie case because he had failed to provide evidence that his work was prima facie satisfactory. In our view, that conclusion was proper. Therefore, we affirm the district court’s grant of summary judgment to Twenty-First Century on the age discrimination claim.

* * * * Mr. Lewis also alleges race discrimination under Title VII of the Civil Rights Act. Again finding no

direct evidence of discrimination, * * * the court assumed without deciding that Mr. Lewis had estab- lished a prima facie case of race discrimination. Thus, the burden shifted to Twenty-First Century to prima facie case of race discrimination. Thus, the burden shifted to Twenty-First Century to prima facie show a nondiscriminatory reason for terminating Mr. Lewis.

As evidence of a non-discriminatory purpose, Twenty-First Century pointed out that Mr. Lewis had missed too many work days, slept at work, used his personal cellphone at work, and reacted argumenta- tively when warned about his cellphone usage. After finding that any one of these policy violations could serve as a nondiscriminatory reason for the firing, the court placed the burden on Mr. Lewis to show * * * that Twenty-First Century’s explanation was pretextual [not legitimate]. The district court con- cluded that Mr. Lewis was unable to meet this burden, and we agree.

Decision and Remedy The U.S. Court of Appeals for the Tenth Circuit affirmed the lower court’s sum- mary judgment. Of the twenty-five work days in the probationary period, Lewis was absent for four days, found sleeping twice, and seen several times texting and talking on his personal phone. When informed that this use of a phone was against company policy, Lewis argued with his superior.

Critical Thinking • Legal Environment Should motions for summary judgment and other pretrial motions be abolished so

that all lawsuits proceed to trial? Why or why not? • What If the Facts Were Different? Suppose that at this stage of the litigation, Twenty-First Century

had not been able to provide evidence in support of its asserted reason for Lewis’s firing. What would have been the result? Why?

Case 3.2 Continued

3–2c Discovery Before a trial begins, the parties can use a number of procedural devices to obtain information and gather evi- dence about the case. Kirby, for example, will want to know how fast Carvello was driving. She will also want to learn whether he had been drinking, was under the influ- ence of medication, and was wearing corrective lenses if required by law to do so while driving.

The process of obtaining information from the opposing party or from witnesses prior to trial is known as discovery. Discovery includes gaining access to wit- nesses, documents, records, and other types of evidence.

In federal courts, the parties are required to make initial disclosures of relevant evidence to the opposing party. A court can impose sanctions on a party who fails to respond to discovery requests.

Discovery prevents surprises at trial by giving both parties access to evidence that might otherwise be hid- den. This allows the litigants to learn as much as they can about what to expect at a trial before they reach the courtroom. Discovery also serves to narrow the issues so that trial time is spent on the main questions in the case. The following case shows how vital discovery can be to the outcome of litigation.

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58 UNIT ONE The Foundations

Background and Facts Phillips Brothers, LP (limited partnership), Harry Simmons, and Ray Win- stead were the owners of Kilby Brake Fisheries, LLC (limited liability company), a catfish farm in Missis- sippi. For nearly eight years, Winstead operated a hatchery for the firm. During this time, the hatchery had only two profitable years. Consequently, Winstead was fired. He filed a suit in a Mississippi state court against Kilby Brake and its other owners, alleging a “freeze-out.” (A freeze-out occurs when a majority of the owners of a firm exclude other owners from certain benefits of participating in the firm.)

The defendants filed a counterclaim of theft. To support this claim, the defendants asked the court to allow them to obtain documents from Winstead regarding his finances, particularly income from his Winstead Cattle Company. The court refused this request. A jury awarded Winstead more than $1.7 million, and the defendants appealed.

In the Language of the Court WALLER, Chief Justice for the Court.

* * * * During discovery, Winstead produced his tax returns from 2006 to 2009, which showed substantial

income as coming from the Winstead Cattle Company. The only other income listed on Winstead’s tax returns was from Kilby Brake * * * . Winstead had also produced [other documents showing income] from a fish farmer named Scott Kiker, which did not appear on his tax returns. [The documents suppos- edly involved income from sales of cattle.] Kilby Brake’s theory was the entries for “cattle” represented income from sales of Kilby Brake fish Winstead was brokering and thus, it sought to compel [discovery] of all of the Winstead Cattle Company’s financial records. Winstead [testified] in his deposition and again at trial that the Winstead Cattle Company did no actual business, and it was simply his hunting camp. The trial court denied Kilby Brake’s motion to compel discovery into Winstead’s finances.

* * * [Winstead was questioned about the forms he] had produced in discovery showing income from Kiker. Winstead testified that he would often act as a middle man if he knew of a farmer who was in need of fish and another who had fish for sale, taking a commission for brokering the deal.

* * * * * * * Kiker testified that he had received a load of fish from Kilby Brake [but that] there was no

paperwork on the transaction [and] that he sold this load of fish, gave Winstead a commission and did not pay Kilby Brake for the sales.

From the evidence noted above, we find the trial court’s refusal to allow both discovery into the finances of Winstead and questions concerning Winstead Cattle Company on his tax return prevented Kilby Brake and the jury from finding out whether Winstead was selling fish from Kilby Brake and disguising it on his income tax returns * * * . Importantly, the decisions by the trial court denied Kilby Brake the ability to present tax returns * * * . Importantly, the decisions by the trial court denied Kilby Brake the ability to present tax returns its case as to what happened to the fish. The record shows there were years in which Winstead received substantial income from brokering fish sales, almost $20,000 in one year. He [testified] that Winstead Cattle Company did no business and was simply his hunting camp, yet it made significant amounts of money. [Emphasis added.]

Decision and Remedy The Mississippi Supreme Court reversed the lower court’s decision to deny dis- covery of information concerning Winstead’s outside finances, especially regarding income from Winstead Cattle Company. The state supreme court remanded the case for a new trial.

Critical Thinking • Ethical Does Winstead have an ethical duty to comply with the defendants’ discovery request? Discuss. • Legal Environment Did the defendants have a legitimate basis to make a discovery request for infor-

mation regarding Winstead’s outside income? Explain.

Brothers v. Winstead Supreme Court of Mississippi, 129 So.3d 906 (2014).

Case 3.3

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CHAPTER 3 Court Procedures 59

Discovery Rules The FRCP and similar state rules set forth the guidelines for discovery activity. Generally, discovery is allowed regarding any matter that is relevant to the claim or defense of any party. Discovery rules also attempt to protect witnesses and parties from undue harassment, and to prevent privileged or confidential material from being disclosed. Only information that is relevant to the case at hand—or likely to lead to the dis- covery of relevant information—is discoverable.

If a discovery request involves privileged or confiden- tial business information, a court can deny the request and can limit the scope of discovery in a number of ways. For instance, a court can require the party to submit the materials to the judge in a sealed envelope so that the judge can decide if they should be disclosed to the oppos- ing party.

Depositions Discovery can involve the use of deposi- tions. A deposition is sworn testimony by a party to the lawsuit or by any witness, recorded by an authorized court official. The person deposed gives testimony and answers questions asked by the attorneys from both sides. The questions and answers are recorded, sworn to, and signed. These answers, of course, will help the attorneys prepare their cases.

Depositions also give attorneys the opportunity to ask immediate follow-up questions and to evaluate how their witnesses will conduct themselves at trial. In addi- tion, depositions can be employed in court to impeach (challenge the credibility of ) a party or a witness who changes his or her testimony at the trial. Finally, a depo- sition can be used as testimony if the witness is not avail- able at trial.

Interrogatories Discovery can also involve inter- rogatories—written questions for which written answers rogatories—written questions for which written answers rogatories— are prepared and then signed under oath. The main dif-are prepared and then signed under oath. The main dif-are prepared and then signed under oath. The main dif ference between interrogatories and written depositions is that interrogatories are directed to a party to the law- suit (the plaintiff or the defendant), not to a witness. The party usually has thirty days to prepare answers.

The party’s attorney often drafts the answers to inter- rogatories in a manner calculated to give away as little information as possible. Whereas depositions elicit can- did answers not prepared in advance, interrogatories are designed to obtain accurate information about spe- cific topics, such as how many contracts were signed and when. The scope of interrogatories is also broader because parties are obligated to answer questions, even if that means disclosing information from their records and files. As with discovery requests, a court can impose sanctions on a party who fails to answer interrogatories.

■ CASE IN POINT 3.1 Ronald J. Hass (doing business as Valley Corp. and R. J. Hass Corp.) was a contractor who built a home for Ty and Karen Levine. Probuild- ers Specialty Insurance Co. provided commercial liabil- ity insurance for the contractor. Later, when the Levines sued Hass and his company for shoddy and incomplete work, Hass blamed the subcontractors. Probuilders pro- vided Hass with legal representation, but the Levines won a judgment for more than $2 million. Then Probuilders sued Hass and his company, claiming that he had made misrepresentations to them regarding the facts of the case and seeking to avoid paying the judgment. Hass filed a counterclaim against Probuilders.

A dispute arose between Probuilders and Hass con- cerning discovery. Hass refused to respond fully to inter- rogatories and other discovery requests, and refused to give a deposition. Probuilders filed a motion to compel, and the court ordered Hass to respond to the discovery requests. Although Probuilders sent letters specifying what was needed, Hass continued to be evasive. The court imposed sanctions on Hass more than once. Ulti- mately, the court found that Hass had acted willfully and in bad faith, and recommended that his answers and counterclaim against Probuilders be dismissed.6 ■

Requests for Admissions One party can serve the other party with a written request for an admission of the truth of matters relating to the trial. Any fact admitted under such a request is conclusively established as true for the trial. For example, Kirby can ask Carvello to admit that his driver’s license was suspended at the time of the accident. A request for admission shortens the trial because the parties will not have to spend time proving facts on which they already agree.

Requests for Documents, Objects, and Entry upon Land A party can gain access to documents and other items not in her or his possession in order to inspect and examine them. Carvello, for example, can gain permission to inspect and copy Kirby’s car repair bills. Likewise, a party can gain “entry upon land” to inspect the premises.

Requests for Examinations When the physical or mental condition of one party is in question, the oppos- ing party can ask the court to order a physical or mental examination by an independent examiner. If the court agrees to make the order, the opposing party can obtain the results of the examination. Note that the court will

6. Probuilders Specialty Insurance Co. v. Valley Corp., 2012 WL 6045753 (N.D.Cal. 2012).

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60 UNIT ONE The Foundations

make such an order only when the need for the informa- tion outweighs the right to privacy of the person to be examined.

Electronic Discovery Any relevant material, includ- ing information stored electronically, can be the object of a discovery request. The federal rules and most state rules (as well as court decisions) specifically allow indi- viduals to obtain discovery of electronic “data compila- tions.” Electronic evidence, or e-evidence, consists of all computer-generated or electronically recorded infor- mation, such as e-mail, voice mail, tweets, blogs, social media posts, spreadsheets, documents, and other data stored electronically.

E-evidence can reveal significant facts that are not discoverable by other means. Computers, smartphones, cameras, and other devices automatically record certain information about files—such as who created the file and when, and who accessed, modified, or transmit- ted it—on their hard drives. This information is called metadata, which can be thought of as “data about data.” Metadata can be obtained only from the file in its elec- tronic format—not from printed-out versions.

■ EXAMPLE 3.2 In 2012, John McAfee, the program- mer responsible for creating McAfee antivirus software, was wanted for questioning in the murder of his neigh- bor in Belize. McAfee left Belize and was on the run from police, but he allowed a journalist to come with him and photograph him. When the journalist posted photos of McAfee online, some metadata were attached to a photo. The police used the metadata to pinpoint the latitude and longitude of the image and subsequently arrested McAfee in Guatemala. ■

E-Discovery Procedures. �e Federal Rules of Civil Pro- cedure deal speci�cally with the preservation, retrieval, and production of electronic data. Although traditional interrogatories and depositions are still used to �nd out whether e-evidence exists, a party usually must hire an expert to retrieve the evidence in its electronic format. �e expert uses software to reconstruct e-mail, text, and other exchanges to establish who knew what and when they knew it. �e expert can even recover computer �les that the user thought had been deleted.

Advantages and Disadvantages. Electronic discovery has signi�cant advantages over paper discovery. Electronic versions of documents, e-mail, and text messages can pro- vide useful—and often quite damaging—information about how a particular matter progressed over several weeks or months. E-discovery can uncover the prover- bial smoking gun that will win the lawsuit. But it is also

time consuming and expensive, especially when lawsuits involve large �rms with multiple o�ces. Indeed, many �rms are �nding it di�cult to ful�ll their duty to preserve electronic evidence from a vast number of sources.

A party that fails to preserve e-evidence may find itself at such a disadvantage that it will settle a dispute rather at such a disadvantage that it will settle a dispute rather at such a disadvantage that it will settle a dispute rather at such a disadvantage that it will settle a dispute rather than continue litigation. ■ CASE IN POINT 3.3 Advanced Micro Devices, Inc. (AMD), sued Intel Corporation, one of the world’s largest microprocessor suppliers, for vio- lating antitrust laws. Immediately after the lawsuit was filed, Intel began collecting and preserving the electronic evidence on its servers and instructed its employees to retain documents and e-mails related to competition with AMD. Nevertheless, many employees saved only copies of the e-mails that they had received and not e-mails that they had sent. In addition, Intel did not stop its automatic e-mail deletion system, causing other infor- mation to be lost. In the end, although Intel produced data equivalent to “somewhere in the neighborhood of a pile 137 miles high” in paper, its failure to preserve e-discovery led it to settle the dispute.7 ■

3–2d Pretrial Conference After discovery has taken place and before the trial begins, the attorneys may meet with the trial judge in a pretrial conference, or hearing. Usually, the confer- ence consists of an informal discussion between the judge and the opposing attorneys after discovery has taken place. The purpose is to explore the possibility of a settlement without trial and, if this is not possible, to identify the matters in dispute and to plan the course of the trial. In particular, the parties may attempt to establish ground rules to restrict the number of expert witnesses or discuss the admissibility or costs of certain types of evidence.

3–2e The Right to a Jury Trial The Seventh Amendment to the U.S. Constitution guar- antees the right to a jury trial for cases at law in federal courts when the amount in controversy exceeds $20. Most states have similar guarantees in their own consti- tutions (although the threshold dollar amount is higher than $20).

The right to a trial by jury need not be exercised, and many cases are tried without a jury. In most states and in federal courts, one of the parties must request a jury, or the judge presumes the parties waive this right. If there

7. In re Intel Corp. Microprocessor Antitrust Litigation, 2008 WL 2310288 (D.Del. 2008).

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CHAPTER 3 Court Procedures 61

is no jury, the judge determines the truth of the facts alleged in the case.

3–2f Jury Selection Before a jury trial commences, a panel of jurors must be selected. Although some types of trials require twelve- person juries, most civil matters can be heard by six- person juries. The jury selection process is known as voir dire.8 In most jurisdictions, attorneys for the plaintiff and the defendant ask prospective jurors oral questions to determine whether they are biased or have any connec- tion with a party to the action or with a prospective wit- ness. In some jurisdictions, the judge may do all or part of the questioning based on written questions submitted by counsel for the parties.

During voir dire, a party may challenge a certain num- ber of prospective jurors peremptorily—that is, ask that an peremptorily—that is, ask that an peremptorily individual not be sworn in as a juror without providing any reason. Alternatively, a party may challenge a pro- spective juror for cause—that is, provide a reason why an for cause—that is, provide a reason why an for cause individual should not be sworn in as a juror. If the judge grants the challenge, the individual is asked to step down. A prospective juror, however, may not be excluded by the use of discriminatory challenges, such as those based on racial criteria or gender.

See Concept Summary 3.1 for a review of pretrial procedures.

3–3 The Trial Various rules and procedures govern the trial phase of the litigation process. There are rules governing what kind of evidence will or will not be admitted during the trial, as well as specific procedures that the participants in the lawsuit must follow. For instance, a trial judge may instruct jurors not to communicate with anyone about the case or order reporters not to use social media to comment on the case while in the courtroom.

3–3a Opening Statements At the beginning of the trial, both attorneys are allowed to make opening statements setting forth the facts that they expect to prove during the trial. The opening state- ment provides an opportunity for each lawyer to give a

8. Pronounced vwahr deehr. These verbs, based on Old French, mean “to speak the truth.” In legal language, the phrase refers to the process of questioning jurors to learn about their backgrounds, attitudes, and simi- lar attributes.

brief version of the facts and the supporting evidence that will be used during the trial. Then the plaintiff ’s case is presented. In our hypothetical case, Kirby’s lawyer would introduce evidence (relevant documents, exhibits, and the testimony of witnesses) to support Kirby’s position.

3–3b Rules of Evidence Whether evidence will be admitted in court is deter- mined by the rules of evidence. These are a series of rules that the courts have created to ensure that any evidence presented during a trial is fair and reliable. The Federal Rules of Evidence govern the admissibility of evidence in federal courts.

Evidence Must Be Relevant to the Issues Evi- dence will not be admitted in court unless it is relevant to the matter in question. Relevant evidence is evidence that tends to prove or disprove a fact in question or to establish the degree of probability of a fact or action. For instance, evidence that the defendant was in another per- son’s home when the victim was shot would be relevant, because it would tend to prove that the defendant was not the shooter.

Hearsay Evidence Is Not Admissible Generally, hearsay is not admissible as evidence. Hearsay is testi- mony someone gives in court about a statement made by someone else who was not under oath at the time of the statement. Literally, it is what someone heard someone else say. If a witness in the Kirby-Carvello case testified in court concerning what he or she heard another observer say about the accident, for example, that testimony would be hearsay. Admitting hearsay into evidence carries many risks because, even though it may be relevant, there is no way to test its reliability.

3–3c Examination of Witnesses and Potential Motions

Because Kirby is the plaintiff, she has the burden of prov- ing that her allegations are true. Her attorney begins the presentation of Kirby’s case by calling the first witness for the plaintiff and examining, or questioning, the witness. (For both attorneys, the types of questions and the man- ner of asking them are governed by the rules of evidence.) This questioning is called direct examination.

After Kirby’s attorney is finished, the witness is subject to cross-examination by Carvello’s attorney. Then Kirby’s attorney has another opportunity to ques- tion the witness in redirect examination, and Carvello’s

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62 UNIT ONE The Foundations

ETHICS TODAY

Pretrial Procedures

The Pleadings The plaintiff’s complaint—The plaintiff’s statement of the cause of action andThe plaintiff’s complaint—The plaintiff’s statement of the cause of action andThe plaintiff’s complaint the parties involved, filed with the court by the plaintiff’s attorney. After the filing, the defendant is notified of the suit through service of process. The defendant’s response—The defendant’s response to the plaintiff’sThe defendant’s response—The defendant’s response to the plaintiff’sThe defendant’s response complaint may take the form of an answer, in which the defendant admits or denies the plaintiff’s allegations. The defendant may also raise an affirmative defense and/or assert a counterclaim.

Concept SuETHICS TODAConcept SuETHICS TODAmmarETHICS TODAmmarETHICS TODAy ETHICS TODAy ETHICS TODAETHICS TODAYETHICS TODAy ETHICS TODAYETHICS TODA 3.1

Pretrial Motions Motion to dismiss—See Exhibit 3–4Motion to dismiss—See Exhibit 3–4Motion to dismiss— . Motion for judgment on the pleadings—May be made by either party and will—May be made by either party and will— be granted only if no facts are in dispute and only questions of law are at issue. Motion for summary judgment—See Exhibit 3–4.Motion for summary judgment—See Exhibit 3–4.Motion for summary judgment

Pretrial Conference A pretrial hearing, at the request of either party or the court, to identify the matters in dispute after discovery has taken place and to explore the possibility of settling the dispute without a trial. If no settlement is possible, the parties plan the course of the trial.

Jury Selection In a jury trial, the selection of members of the jury from a pool of prospective jurors. During a process known as voir dire, the attorneys for both sides may challenge prospective jurors either for cause or peremptorily (for no cause).

Discovery

Depositions (sworn testimony by either party or any witness). Interrogatories (in which parties to the action write answers to questions with the aid of their attorneys). Requests for admissions, documents, examinations, or other information relating to the case. Requests for electronically recorded information, such as e-mail, text messages, voice mail, and other data.

The process of gathering evidence concerning the case, which may involve the following:

attorney may follow the redirect examination with a recross-examination. When both attorneys have finished with the first witness, Kirby’s attorney calls the succeed- ing witnesses in the plaintiff ’s case. Each witness is sub- ject to examination by the attorneys in the manner just described.

Expert Witnesses As part of their cases, both the plaintiff and the defendant may present testimony from one or more expert witnesses, such as forensic scientists, physicians, and psychologists. An expert witness is a person expert witness is a person expert witness who, by virtue of education, training, skill, or experience, has scientific, technical, or other specialized knowledge

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CHAPTER 3 Court Procedures 63

in a particular area beyond that of an average person. In Kirby’s case, her attorney might hire an accident recon- struction specialist to establish Carvello’s negligence or a physician to testify to the extent of Kirby’s injuries.

Normally, witnesses can testify only about the facts of a case—that is, what they personally observed. When wit- nesses are qualified as experts in a particular field, however, they can offer their opinions and conclusions about the evidence in that field. Because numerous experts are avail- able for hire and expert testimony is powerful and effective with juries, there is tremendous potential for abuse. There- fore, judges act as gatekeepers to ensure that the experts are qualified. If a party believes that the opponent’s expert wit- ness is not a qualified expert in the relevant field, that party can make a motion to prevent the witness from testifying.can make a motion to prevent the witness from testifying.can make a motion to prevent the witness from testifying.can make a motion to prevent the witness from testifying.9

■ CASE IN POINT 3.4 Yvette Downey bought a children’s bedroom set from Bob’s Discount Furniture Holdings, Inc. She later discovered that it was infested with bed bugs, which had spread throughout her home. Downey spoke with Edward Gordinier, a licensed and experienced exterminator, who identified the bedroom set as the source of the problem. Although Bob’s retrieved the bedroom set and refunded the purchase price, it refused to pay for the costs of extermination or any other damages. Downey sued.

Before the trial, Downey’s attorney named Gordinier as a witness but did not submit a written report describ- ing his anticipated testimony or specifying his qualifi- cations. The defendants filed a motion to prevent his testimony. The district court refused to allow Gordinier to testify, but that decision was reversed on appeal. The appellate court concluded that Gordinier was not the type of expert who regularly was hired by plaintiffs to testify in court, in which case a report would have been required. Gordinier was simply an expert on bugs, and he was allowed to give his opinion on the infestation.10 ■

Possible Motion and Judgment At the conclusion of the plaintiff ’s case, the defendant’s attorney may ask the judge to direct a verdict for the defendant on the ground that the plaintiff has presented no evidence to support her or his claim. This is called a motion for a judgment as a matter of law (or a matter of law (or a matter of law motion for a directed verdict in state motion for a directed verdict in state motion for a directed verdict courts). In considering the motion, the judge looks at the evidence in the light most favorable to the plaintiff and grants the motion only if there is insufficient evidence to raise an issue of fact. (Motions for directed verdicts at this stage of a trial are seldom granted.)

9. See Edward J. Imwinkelried, The Methods of Attacking Scientific Evi- dence, 5th ed. (2014).

10. Downey v. Bob’s Discount Furniture Holdings, Inc., 633 F.3d 1 (1st Cir. 2011).

Defendant’s Evidence The defendant’s attorney then presents the evidence and witnesses for the defen- dant’s case. Witnesses are called and examined by the defendant’s attorney. The plaintiff ’s attorney has the right to cross-examine them, and there may be a redirect exami- nation and possibly a recross-examination.

At the end of the defendant’s case, either attorney can move for a directed verdict. Again, the test is whether the jury can, through any reasonable interpretation of the evidence, find for the party against whom the motion has been made. After the defendant’s attorney has finished introducing evidence, the plaintiff ’s attorney can present a rebuttal by offering additional evidence that refutes the defendant’s case. The defendant’s attorney can, in turn, refute that evidence in a rejoinder.

3–3d Closing Arguments, Jury Instructions, and Verdict

After both sides have rested their cases, each attorney presents a closing argument. In the closing argument, each attorney summarizes the facts and evidence pre- sented during the trial and indicates why the facts and evidence support his or her client’s claim. In addition to generally urging a verdict in favor of the client, the clos- ing argument typically reveals the shortcomings of the points made by the opposing party during the trial.

Jury Instructions Attorneys usually present closing arguments whether or not the trial was heard by a jury. If it was a jury trial, the attorneys will have met with the judge before the closing arguments to determine how the jury will be instructed on the law. The attorneys can refer to these instructions in their closing arguments. After closing arguments are completed, the judge instructs the jury in the law that applies to the case (these instructions are often called charges). The jury then retires to the jury charges). The jury then retires to the jury charges room to deliberate a verdict.

Juries are instructed on the standard of proof they must apply to the case. In most civil cases, the standard of proof is a preponderance of the evidence.11 In other words, the plaintiff (Kirby in our hypothetical case) need only show that her factual claim is more likely to be true than the defendant’s. (In a criminal trial, the prosecution has a higher standard of proof to meet—it must prove its case beyond a reasonable doubt.)

11. Note that some civil claims must be proved by “clear and convincing evidence,” meaning that the evidence must show that the truth of the party’s claim is highly probable. This standard is often applied in situa-highly probable. This standard is often applied in situa-highly tions that present a particular danger of deception, such as allegations of fraud.

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64 UNIT ONE The Foundations

Verdict Once the jury has reached a decision, it issues a verdict in favor of one party. The verdict specifies the verdict in favor of one party. The verdict specifies the verdict jury’s factual findings. In some cases, the jury also decides on the amount of the award (the compensation to be award (the compensation to be award paid to the prevailing party). After the announcement of the verdict, which marks the end of the trial itself, the jurors are dismissed.

See Concept Summary 3.2 for a review of trial procedures.

3–4 Posttrial Motions After the jury has rendered its verdict, either party may make a posttrial motion. The prevailing party usually requests that the court enter a judgment in accordance with the verdict. The nonprevailing party frequently files one of the motions discussed next.

3–4a Motion for a New Trial At the end of the trial, the losing party may make a motion to set aside the adverse verdict and any judgment and to hold a new trial. After looking at all the evidence, the judge will grant the motion for a new trial only if she or he believes that the jury was in error and that it is not appropriate to grant judgment for the other side.

Usually, a new trial is granted only when the jury ver- dict is obviously the result of a misapplication of the law or a misunderstanding of the evidence presented at trial. A new trial can also be granted on the grounds of newly discovered evidence, misconduct by the participants dur- ing the trial (such as when a juror has made prejudicial and inflammatory remarks), or an error by the judge.

3–4b Motion for Judgment N.O.V. If Kirby wins and if Carvello’s attorney has previously moved for a judgment as a matter of law, then Carvello’s

Trial Procedure

● Plaintiff’s introduction and direct examination of witnesses, cross-examination by defendant’s attorney, possible redirect examination by plaintiff’s attorney, and possible recross-examination by defendant’s attorney. Both the plaintiff and the defendant may present testimony from one or more expert witnesses. At the close of the plaintiff’s case, the defendant may make a motion for a directed verdict (or for judgment as a matter of law). If granted by the court, this motion will end the trial before the defendant presents witnesses. Defendant’s introduction and direct examination of witnesses, cross- examination by plaintiff’s attorney, possible redirect examination by defendant’s attorney, and possible recross-examination by plaintiff’s attorney. Possible rebuttal of defendant’s argument by plaintiff’s attorney, who presents more evidence. Possible rejoinder by defendant’s attorney to meet that evidence.

Concept Summary 3.2

Examination of Witnesses

● The judge instructs (or charges) the jury as to how the law applies to the issue, and the jury retires to deliberate. When the jury renders its verdict, the trial comes to an end.

Closing Arguments, Jury Instructions, and Verand Verand V dict

● Each party’s attorney is allowed to present an opening statement indicating what the attorney will attempt to prove during the course of the trial.

Opening Statements

Each party’s attorney argues in favor of a verdict for his or her client.

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CHAPTER 3 Court Procedures 65

attorney can make a second motion for a judgment as a matter of law (the terminology used in federal courts). State courts may use different terms for these motions.

In many state courts, if the defendant’s attorney moved earlier for a directed verdict, he or she may now make a motion for judgment n.o.v.—from the Latin non obstante veredicto, meaning “notwithstanding the verdict.” Such a motion will be granted only if the jury’s verdict was unreasonable and erroneous.

If the judge grants the motion, then the jury’s ver- dict will be set aside, and a judgment will be entered in favor of the opposing party (Carvello). If the motion is denied, Carvello may then appeal the case. (Kirby may also appeal the case, even though she won at trial. She might appeal, for example, if she received a smaller mon- etary award than she had sought.)

3–5 The Appeal Either party may appeal not only the jury’s verdict but also the judge’s ruling on any pretrial or posttrial motion. Many of the appellate court cases that appear in this text involve appeals of motions for summary judgment or other motions that were denied by trial court judges.

Note that a party must have legitimate grounds to file an appeal (some legal error) and that few trial court decisions are reversed on appeal. Moreover, the expenses associated with an appeal can be considerable.

3–5a Filing the Appeal If Carvello decides to appeal the verdict in Kirby’s favor, then his attorney must file a notice of appeal with the notice of appeal with the notice of appeal clerk of the trial court within a prescribed period of time. Carvello then becomes the appellant or appellant or appellant petitioner. The clerk of the trial court sends to the reviewing court (usu- ally an intermediate court of appeals) the record on appeal. record on appeal. record on appeal The record contains all the pleadings, motions, and other documents filed with the court and a complete written transcript of the proceedings, including testimony, argu- ments, jury instructions, and judicial rulings.

Carvello’s attorney will file an appellate brief with the brief with the brief reviewing court. The brief is a formal legal document out- lining the facts and issues of the case, the judge’s rulings or jury’s findings that should be reversed or modified, the applicable law, and arguments on Carvello’s behalf (cit- ing applicable statutes and relevant cases as precedents). The attorney for the appellee (Kirby, in our hypothetical appellee (Kirby, in our hypothetical appellee case) usually files an answering brief. Carvello’s attorney can file a reply, although it is not required. The reviewing court then considers the case.

3–5b Appellate Review A court of appeals does not hear any evidence. Rather, it reviews the record for errors of law. Its decision concern- ing a case is based on the record on appeal and the briefs and arguments. The attorneys present oral arguments, after which the case is taken under advisement. The court then issues a written opinion. In general, appellate courts do not reverse findings of fact unless the findings are unsupported or contradicted by the evidence.

An appellate court has the following options after reviewing a case:

1. The court can affirm the trial court’s decision. (Most decisions are affirmed.)

2. The court can reverse the trial court’s judgment if it reverse the trial court’s judgment if it reverse concludes that the trial court erred or that the jury did not receive proper instructions.

3. The appellate court can remand (send back) the case remand (send back) the case remand to the trial court for further proceedings consistent with its opinion on the matter.

4. The court might also affirm or reverse a decision in part. For example, the court might affirm the jury’s finding that Carvello was negligent but remand the case for further proceedings on another issue (such as the extent of Kirby’s damages).

5. An appellate court can also modify a lower court’s modify a lower court’s modify decision. If the appellate court decides that the jury awarded an excessive amount in damages, for exam- ple, the court might reduce the award to a more appropriate, or fairer, amount.

3–5c Higher Appellate Courts If the reviewing court is an intermediate appellate court, the losing party may decide to appeal the decision to the state’s highest court, usually called its supreme court. Although the losing party has a right to ask (petition) a higher court to review the case, the party does not have a right to have the case heard by the higher appellate court. Appellate courts normally have discretionary power and can accept or reject an appeal. Like the United States Supreme Court, state supreme courts generally deny most petitions for appeal.

If the petition for review is granted, new briefs must be filed before the state supreme court, and the attorneys may be allowed or requested to present oral arguments. Like the intermediate appellate courts, the state supreme court can reverse or affirm the lower appellate court’s decision or remand the case. At this point, the case typi- cally has reached its end (unless a federal question is at issue and one of the parties has legitimate grounds to seek review by a federal appellate court).

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66 UNIT ONE The Foundations

Concept Summary 3.3 reviews the options that the parties may pursue after the trial.

3–6 Enforcing the Judgment The uncertainties of the litigation process are com- pounded by the lack of guarantees that any judgment will be enforceable. Even if the jury awards Kirby the full amount of damages requested ($500,000), for example, Carvello’s auto insurance coverage might have lapsed. If so, the company would not pay any of the damages. Alternatively, Carvello’s insurance policy might be lim- ited to $250,000, meaning that Carvello personally would have to pay the remaining $250,000.

3–6a Requesting Court Assistance in Collecting the Judgment

If the defendant does not have the funds available to pay the judgment, the plaintiff can go back to the court and request that the court issue a writ of execution. A writ

of execution is an order directing the sheriff to seize and sell the defendant’s nonexempt assets, or property (cer- tain assets are exempted by law from creditors’ actions). The proceeds of the sale are then used to pay the damages owed, and any excess proceeds are returned to the defen- dant. Alternatively, the nonexempt property itself could be transferred to the plaintiff in lieu of an outright pay- ment. (Creditors’ remedies, discussed elsewhere in this text, may also be available.)

3–6b Availability of Assets The problem of collecting a judgment is less pronounced when a party is seeking to satisfy a judgment against a defendant with substantial assets that can be easily located, such as a major corporation. Usually, one of the factors considered by the plaintiff and his or her attorney before a lawsuit is initiated is whether the defendant has sufficient assets to cover the amount of damages sought. In addition, during the discovery process, attorneys rou- tinely seek information about the location of the defen- dant’s assets that might potentially be used to satisfy a judgment.

Posttrial Options

● Filing the appeal—The appealing party must file a notice of appeal with theFiling the appeal—The appealing party must file a notice of appeal with theFiling the appeal clerk of the trial court, who forwards the record on appeal to the appellate court. Attorneys file appellate briefs. Appellate review—The appellate court does not hear evidence but bases itAppellate review—The appellate court does not hear evidence but bases itAppellate review s opinion, which it issues in writing, on the record on appeal and the attorneys’ briefs and oral arguments. The court may affirm or reverse all (or part) of the trial court’s judgment and/or remand the case for further proceedings consistent with its opinion. Most decisions are affirmed on appeal. Further review—In some cases, further review may be sought from a higherFurther review—In some cases, further review may be sought from a higherFurther review appellate court, such as a state supreme court. If a federal question is involved, the case may ultimately be appealed to the United States Supreme Court.

Concept Summary 3.3

The Appeal

●Posttrial Motions Motion for a new trial—If the judge believes that the jury was in error but is notMotion for a new trial—If the judge believes that the jury was in error but is notMotion for a new trial convinced that the losing party should have won, the motion normally is granted. It can also be granted on the basis of newly discovered evidence, misconduct by the participants during the trial, or error by the judge. Motion for judgment n.o.v. (“notwithstanding the verdict”)—The party making the motion must have filed a motion for a directed verdict at the close of the presentation of evidence during the trial. The motion will be granted if the judge is convinced that the jury was in error.

Either party can appeal the trial court’s judgment to an appropriate court of appeals.

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CHAPTER 3 Court Procedures 67

Terms and Concepts a�davit 56 a�rmative defense 52 answer 51 brief 65 closing argument 63 complaint 50 counterclaim 52 cross-examination 61 default judgment 50 deposition 59 direct examination 61 discovery 57 e-evidence 60 Federal Rules of Civil Procedure

(FRCP) 48

hearsay 61 impeach 59 interrogatories 59 metadata 60 motion 52 motion for a directed verdict 63 motion for a judgment as a matter

of law 63 motion for a new trial 64 motion for judgment n.o.v. 65 motion for judgment on the

pleadings 56 motion for summary judgment 56 motion to dismiss 53 opening statement 61

pleadings 50 pretrial conference 60 pretrial motion 53 rebuttal 63 rejoinder 63 relevant evidence 61 rules of evidence 61 service of process 50 summons 50 verdict 64 voir dire 61voir dire 61voir dire writ of execution 66

Debate This … Some consumer advocates argue that attorneys’ high contingency fees—sometimes reaching 40 percent—unfairly deprive winning plaintiffs of too much of their awards. Should the government cap contingency fees at, say, 20 percent of the award? Why or why not?

Reviewing: Court Procedures

Ronald Metzgar placed his fifteen-month-old son, Matthew, awake and healthy, in his playpen. Ronald left the room for five minutes and on his return found Matthew lifeless. A toy block had lodged in the boy’s throat, causing him to choke to death. Ronald called 911, but efforts to revive Matthew were to no avail. There was no warning of a choking hazard on the box containing the block. Matthew’s parents hired an attorney and sued Playskool, Inc., the manufac- turer of the block, alleging that the manufacturer had been negligent in failing to warn of the block’s hazard. Playskool filed a motion for summary judgment, arguing that the danger of a young child’s choking on a small block was obvious. Using the information presented in the chapter, answer the following questions. 1. Suppose that the attorney the Metzgars hired agreed to represent them on a contingency-fee basis. What does that

mean? 2. How would the Metzgars’ attorney likely have served process (the summons and complaint) on Playskool, Inc.? 3. Should Playskool’s request for summary judgment be granted? Why or why not? 4. Suppose that the judge denied Playskool’s motion and the case proceeded to trial. After hearing all the evidence,

the jury found in favor of the defendant. What options do the plaintiffs have at this point if they are not satisfied with the verdict?

Issue Spotters 1. At the trial, after Sue calls her witnesses, offers her evi-

dence, and otherwise presents her side of the case, Tom has at least two choices between courses of actions. Tom can call his first witness. What else might he do? (See The Trial.)Trial.)Trial

2. After the trial, the judge issues a judgment that includes a grant of relief for Sue, but the relief is less than Sue wanted. Neither Sue nor Tom is satisfied with this result. Who can appeal to a higher court? (See The Appeal.)The Appeal.)The Appeal

• Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

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68 UNIT ONE The Foundations

Business Scenarios 3–1. Discovery Rules. In the past, the rules of discovery were very restrictive, and trials often turned on elements of surprise. For example, a plaintiff would not necessarily know until the trial what the defendant’s defense was going to be. In the last several decades, however, new rules of discovery have substantially changed this situation. Now each attorney can access practically all of the evidence that the other side intends to present at trial, with the exception of certain information— namely, the opposing attorney’s work product. Work product is not a precise concept. Basically, it includes all of the attor- ney’s thoughts on the case. Can you see any reason why such information should not be made available to the opposing attorney? Discuss fully. (See Pretrial Procedures.)

3–2. Motions. When and for what purpose is each of the following motions made? Which of them would be appropri- ate if a defendant claimed that the only issue between the par- ties was a question of law and that the law was favorable to the defendant’s position? (See Pretrial Procedures.) (a) A motion for judgment on the pleadings. (b) A motion for a directed verdict. (c) A motion for summary judgment. (d) A motion for judgment n.o.v.

3–3. Motion for a New Trial. Washoe Medical Center, Inc., admitted Shirley Swisher for the treatment of a fractured pelvis. During her stay, Swisher suffered a fatal fall from her hospital bed. Gerald Parodi, the administrator of her estate, and others filed an action against Washoe seeking damages for the alleged lack of care in treating Swisher. During voir dire, when the plaintiffs’ attorney returned a few minutes late from

a break, the trial judge led the prospective jurors in a standing ovation. The judge joked with one of the prospective jurors, whom he had known in college, about his fitness to serve as a judge and personally endorsed another prospective juror’s business. After the trial, the jury returned a verdict in favor of Washoe. The plaintiffs moved for a new trial, but the judge denied the motion. The plaintiffs then appealed, arguing that the tone set by the judge during voir dire prejudiced their right voir dire prejudiced their right voir dire to a fair trial. Should the appellate court agree? Why or why not? (See Posttrial Motions.) 3–4. Discovery. Advance Technology Consultants, Inc. (ATC), contracted with RoadTrac, LLC, to provide soft- ware and client software systems for the products of global positioning satellite (GPS) technology being developed by RoadTrac. RoadTrac agreed to provide ATC with hardware with which ATC’s software would interface. Problems soon arose, however. ATC claimed that RoadTrac’s hardware was defective, making it difficult to develop the software. Road- Trac contended that its hardware was fully functional and that ATC had simply failed to provide supporting software.

ATC told RoadTrac that it considered their contract ter- minated. RoadTrac filed a suit in a Georgia state court against ATC alleging breach of contract. During discovery, RoadTrac requested ATC’s customer lists and marketing procedures. ATC objected to providing this information because Road- Trac and ATC had become competitors in the GPS industry. Should a party to a lawsuit have to hand over its confiden- tial business secrets as part of a discovery request? Why or why not? What limitations might a court consider imposing before requiring ATC to produce this material? (See Pretrial Procedures.)

Business Case Problems 3–5. Jury Misconduct. Michelle Fleshner worked for Pepose Vision Institute (PVI), a surgical practice. She was �red after she provided information to the U.S. Department of Labor about PVI’s overtime pay policy. She sued for wrong- ful termination, and the jury awarded her $125,000. After the trial, a juror told PVI’s attorneys that another juror had made anti-Semitic statements during jury deliberations. �e comments concerned a witness who testi�ed on PVI’s behalf. According to the juror, the other juror said, about the wit- ness: “She is a Jewish witch.” “She is a penny-pinching Jew.” “She was such a cheap Jew that she did not want to pay Plain- ti� unemployment compensation.” Another juror con�rmed the remarks. PVI �led a motion for a new trial on the basis of juror misconduct. �e trial judge held that the comments had not prevented a fair trial from occurring. PVI appealed. Do you think such comments are su�cient to require a new trial, or must a juror’s bias be discovered during voir dire for voir dire for voir dire it to matter? Explain. [Fleshner v. Pepose Vision Institute, 304 S.W.3d 81 (Mo. 2010)] (See �e Trial.)�e Trial.)�e Trial

3–6. Service of Process. Dr. Kevin Bardwell owns North- �eld Urgent Care, LLC, a Minnesota medical clinic. North�eld ordered �u vaccine from Clint Pharmaceuticals, a licensed dis- tributer of �u vaccine located in Tennessee. �e parties signed a credit agreement that speci�ed that any disputes would be litigated in the Tennessee state courts. When North�eld failed to pay what it owed for the vaccine, Clint Pharmaceuticals �led a lawsuit in Tennessee and served process on the clinic via reg- istered mail to Dr. Bardwell, the registered agent of North�eld.

Bardwell’s wife, who worked as a receptionist at the clinic and handled inquiries on the clinic’s Facebook site, signed for the letter. Bardwell did not appear on the trial date, however, and the Tennessee court entered a default judgment against Northfield. When Clint Pharmaceuticals attempted to col- lect on the judgment in Minnesota, Bardwell claimed that the judgment was unenforceable. He asserted that he had not been properly served because his wife was not a registered agent. Should the Minnesota court invalidate the Tennessee judgment? Was service of process proper when it was mailed

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CHAPTER 3 Court Procedures 69

to the defendant medical clinic and the wife of the physician who owned the clinic opened the letter? Explain. [Clint Phar- maceuticals v. Northfield Urgent Care, LLC, 2012 WL 3792546 maceuticals v. Northfield Urgent Care, LLC, 2012 WL 3792546 maceuticals v. Northfield Urgent Care, LLC (Minn.App. 2012).] (See Pretrial Procedures.) 3–7. Business Case Problem with Sample Answer— Discovery. Jessica Lester died from injuries su�ered in an

auto accident caused by the driver of a truck owned by Allied Concrete Co. Jessica’s widower, Isaiah, �led a suit against Allied for damages. �e defendant requested copies of all of Isaiah’s Face-

book photos and other postings. Before responding, Isaiah “cleaned up” his Facebook page. Allied suspected that some items had been deleted, including a photo of Isaiah holding a beer can while wearing a T-shirt that declared “I [heart] hot- moms.” Can this material be recovered? If so, how? What e�ect might Isaiah’s “postings” have on the result in this case? Discuss. [Allied Concrete Co. v. Lester,Discuss. [Allied Concrete Co. v. Lester,Discuss. [ 736 S.E.2d 699 (2013)] (See Pretrial Procedures.) • For a sample answer to Problem 3–7, go to Appendix E at

the end of this text.

3–8. Motion for Summary Judgment. Rebecca Nichols drove a truck for Tri-National Logistics, Inc. (TNI). On a delivery trip, Nichols’s fellow driver, James Paris, made unwel- come sexual advances. Paris continued to make advances dur- ing a subsequent mandatory layover. Nichols reported this behavior to their employer. TNI nevertheless left her with Paris in Pharr, Texas, for another seven days with no alternative form of transportation before sending a driver to pick her up. She �led a suit in a federal district court against TNI, alleging discrimination on the basis of sex in violation of Title VII of the Civil Rights Act. Disputed facts included whether Nichols subjectively felt abused by Paris and whether their employer was aware of his conduct and failed to take appropriate action.

Could TNI successfully �le a motion for summary judgment at this point? Explain. [Nichols v. Tri-National Logistics, Inc, 809 F.3d 981 (8th Cir. 2016)] (See Pretrial Procedures.) 3–9. A Question of Ethics—Service of Process. Narnia

Investments, Ltd., �led a suit in a Texas state court against several defendants, including Harvestons Secu- rities, Inc., a securities dealer. (Securities are invest-rities, Inc., a securities dealer. (Securities are invest-rities, Inc., a securities dealer. (Securities are invest ments that include stocks and bonds.) Harvestons is

registered with the state of Texas. �us, a party may serve a sum- mons and a copy of a complaint on Harvestons by serving the Texas Securities Commissioner. In this case, the return of service indicated that process had been served on the commissioner “by delivering to JoAnn Kocerek defendant, in person, a true copy of this [summons] together with the accompanying copy(ies) of the [complaint].”

Harvestons did not file an answer, and Narnia obtained a default judgment against the defendant for $365,000, plus attor- neys’ fees and interest. Five months after this judgment, Harvestons filed a motion for a new trial, which the court denied. Harvestons appealed to a state intermediate appellate court, claiming that it had not been served in strict compliance with the rules governing service of process. [ Harvestons Securities, Inc. v. Narnia Invest- ments, Ltd., 218 S.W.3d 126 (Tex.App.—Houston 2007)] (See 218 S.W.3d 126 (Tex.App.—Houston 2007)] (See 218 S.W.3d 126 (Tex.App.—Houston 2007)] Pretrial Procedures.) (a) Harvestons asserted that Narnia’s service was invalid, in

part, because “the return of service states that process was delivered to ‘JoAnn Kocerek’” and did not show that she “had the authority to accept process on behalf of Harvest- ons or the Texas Securities Commissioner.” Should such a detail, if it is required, be strictly construed and applied? Should it apply in this case? Explain.

(b) Who is responsible for ensuring that service of process is accomplished properly? Was it accomplished properly in this case? Why or why not?

Legal Reasoning Group Activity 3–10. Court Procedures. Bento Cuisine is a lunch-cart business. It occupies a street corner in Texarkana, a city that straddles the border of Arkansas and Texas. Across the street— and across the state line, which runs down the middle of the street—is Rico’s Tacos. �e two businesses compete for cus- tomers. Recently, Bento has begun to suspect that Rico’s is engaging in competitive behavior that is illegal. Bento’s man- ager overheard several of Rico’s employees discussing these competitive tactics while on a break at a nearby Starbucks. Bento �les a lawsuit against Rico’s in a federal court based on diversity jurisdiction. (See Pretrial Procedures.) (a) The first group will discuss whether Rico’s could file a

motion claiming that the federal court lacks jurisdiction over this dispute.

(b) The second group will assume that the case goes to trial. Bento’s manager believes that Bento’s has both the law and the facts on its side. Nevertheless, at the end of the trial, the jury decides against Bento, and the judge issues a rul- ing in favor of Rico’s. If Bento is unwilling to accept this result, what are its options?

(c) As discussed in this chapter, hearsay is literally what a witness says he or she heard another person say. A third group will decide whether Bento’s manager can testify about what he heard some of Rico’s employees say to one another while at a coffee shop. This group will also discuss what makes the admissibility of hearsay evidence poten- tially unethical.

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70

CHAPTER 4

4–1 The Constitutional Powers of Government

Following the Revolutionary War, the states adopted the Articles of Confederation. The Articles created a con- federal form of government in which the states had the federal form of government in which the states had the federal form of government authority to govern themselves and the national govern- ment could exercise only limited powers. Problems soon arose because the nation was facing an economic crisis and state laws interfered with the free flow of commerce. A national convention was called, and the delegates drafted the U.S. Constitution. This document, after its ratification by the states in 1789, became the basis for an entirely new form of government.

4–1a A Federal Form of Government The new government created by the U.S. Constitution reflected a series of compromises made by the convention delegates on various issues. Some delegates wanted sover- eign power to remain with the states. Others wanted the national government alone to exercise sovereign power. The end result was a compromise—a federal form of government in which the national government and the government in which the national government and the government states share sovereign power.share sovereign power.share

Federal Powers The Constitution sets forth specific powers that can be exercised by the national (federal)

government. It further provides that the national gov- ernment has the implied power to undertake actions necessary to carry out its expressly designated powers (or enumerated powers). All other powers are expressly enumerated powers). All other powers are expressly enumerated powers “reserved” to the states under the Tenth Amendment to the U.S. Constitution.

Regulatory Powers of the States As part of their inherent sovereignty (power to govern themselves), state sovereignty (power to govern themselves), state sovereignty governments have the authority to regulate certain affairs within their borders. As mentioned, this authority stems, in part, from the Tenth Amendment, which reserves all powers not delegated to the national government to the states or to the people.

State regulatory powers are often referred to as police powers. The term encompasses more than just the enforcement of criminal laws. Police powers also give state governments broad rights to regulate private activi- ties to protect or promote the public order, health, safety, morals, and general welfare. Fire and building codes, antidiscrimination laws, parking regulations, zoning restrictions, licensing requirements, and thousands of other state statutes have been enacted pursuant to states’ police powers. Local governments, such as cities, also exercise police powers.2 Generally, state laws enacted pur-

2. Local governments derive their authority to regulate their communities from the state, because they are creatures of the state. In other words, they cannot come into existence unless authorized by the state to do so.

Laws that govern business have their origin in the lawmaking authority granted by the U.S. Constitution, which is the supreme law in this coun- try.1 Neither Congress nor any state

1. See Appendix B for the full text of the U.S. Constitution.

may pass a law that is in conflict with the Constitution.

Constitutional disputes frequently come before the courts. For instance, numerous states challenged the Obama administration’s Affordable Care Act on constitutional grounds. The United States Supreme Court

decided in 2012 that the provisions of this law, which required most Americans to have health insurance by 2014, did not exceed the consti- tutional authority of the federal gov- ernment. The Court’s decision in the matter continues to have a significant impact on the business environment.

Business and the Constitution

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CHAPTER 4 Business and the Constitution 71

suant to a state’s police powers carry a strong presump- tion of validity.

4–1b Relations among the States The U.S. Constitution also includes provisions concern- ing relations among the states in our federal system. Particularly important are the privileges and immunities clause and the clause and the clause full faith and credit clause.

The Privileges and Immunities Clause Article IV, Section 2, of the Constitution provides that the “Citi- zens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.” This clause is often referred to as the interstate privileges and immu- nities clause.3 It prevents a state from imposing unrea- sonable burdens on citizens of another state—particularly with regard to means of livelihood or doing business.

When a citizen of one state engages in basic and essen- tial activities in another state (the “foreign state”), the foreign state must have a substantial reason for treating the nonresident differently than its own residents. Basic activities include transferring property, seeking employ- ment, and accessing the court system. The foreign state must also establish that its reason for the discrimination is substantially related to the state’s ultimate purpose in substantially related to the state’s ultimate purpose in substantially related adopting the legislation or regulating the activity.4

The Full Faith and Credit Clause Article IV, Sec- tion 1, of the U.S. Constitution provides that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.” This clause, which is referred to as the full faith and credit clause, applies only to civil matters. It ensures that rights established under deeds, wills, contracts, and similar instruments in one state will be honored by other states. It also ensures that any judicial decision with respect to such property rights will be honored and enforced in all states.

The legal issues raised by same-sex marriage involve, among other things, the full faith and credit clause, because that clause requires each state to honor marriage decrees issued by another state. See this chapter’s Mana- gerial Strategy feature for a discussion of marriage equalgerial Strategy feature for a discussion of marriage equalgerial Strategy – ity laws.

The full faith and credit clause has contributed to the unity of American citizens because it protects their

3. Interpretations of this clause commonly use the terms privilege and privilege and privilege immunity synonymously. Generally, the terms refer to certain rights, ben-immunity synonymously. Generally, the terms refer to certain rights, ben-immunity efits, or advantages enjoyed by individuals.

4. This test was first announced in Supreme Court of New Hampshire v. Piper, 470 U.S. 274, 105 S.Ct. 1272, 84 L.Ed.2d 205 (1985). For another example, see Lee v. Miner, 369 F.Supp.2d 527 (D.Del. 2005).

legal rights as they move about from state to state. It also protects the rights of those to whom they owe obliga- tions, such as persons who have been awarded monetary damages by courts. The ability to enforce such rights is extremely important for the conduct of business in a country with a very mobile citizenry.

4–1c The Separation of Powers To make it more difficult for the national government to use its power arbitrarily, the Constitution provided for three branches of government. The legislative branch makes the laws, the executive branch enforces the laws, and the judicial branch interprets the laws. Each branch performs a separate function, and no branch may exercise the authority of another branch.

Additionally, a system of checks and balances allows each branch to limit the actions of the other two branches, thus preventing any one branch from exercis- ing too much power. Some examples of these checks and balances include the following: 1. The legislative branch (Congress) can enact a law, but

the executive branch (the president) has the constitu- tional authority to veto that law.

2. The executive branch is responsible for foreign affairs, but treaties with foreign governments require the advice and consent of the Senate.

3. Congress determines the jurisdiction of the federal courts, and the president appoints federal judges, with the advice and consent of the Senate. The judi- cial branch has the power to hold actions of the other two branches unconstitutional.5

4–1d The Commerce Clause To prevent states from establishing laws and regulations that would interfere with trade and commerce among the states, the Constitution expressly delegated to the national government the power to regulate interstate commerce. Article I, Section 8, of the U.S. Constitution explicitly permits Congress “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” This clause, referred to as the commerce clause, has had a greater impact on business than any other provision in the Constitution. The com- merce clause provides the basis for the national govern- ment’s extensive regulation of state and even local affairs.

5. The power of judicial review was established by the United States Supreme Court in Marbury v. Madison, 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803).

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72 UNIT ONE The Foundations

Initially, the courts interpreted the commerce clause to apply only to commerce between the states (interstate commerce) and not commerce within the states (intra- state commerce). That changed in 1824, however, when state commerce). That changed in 1824, however, when state the United States Supreme Court decided the landmark case of Gibbons v. Ogden.6 The Court held that commerce within the states could also be regulated by the national government as long as the commerce substantially affected commerce involving more than one state.

The Expansion of National Powers under the Commerce Clause As the nation grew and faced

6. 22 U.S. (9 Wheat.) 1, 6 L.Ed. 23 (1824).

new kinds of problems, the commerce clause became a vehicle for the additional expansion of the national gov- ernment’s regulatory powers. Even activities that seemed purely local in nature came under the regulatory reach of the national government if those activities were deemed to substantially affect interstate commerce. In 1942, the Supreme Court held that wheat production by an indi- vidual farmer intended wholly for consumption on his own farm was subject to federal regulation.7

The following Classic Case involved a challenge to the Classic Case involved a challenge to the Classic Case scope of the national government’s constitutional author- ity to regulate local activities.

7. Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942).

Marriage Equality and the Constitution

The debate over same-sex marriage has been raging across the country for years. The legal issues raised by marriage equality involve pri- vacy rights and equal protection. Although marriage equality may not appear at first glance to be business related, it is an impor- tant legal issue for managers. Companies like Barilla Pasta, Chick-fil-A, Exxon Mobil, and Target Corporation have lost significant business for purportedly supporting anti-gay organizations and legislation.

The Definition of Marriage

Before 1996, federal law did not define marriage, and the U.S. government recognized any marriage that was recognized by a state. Then Congress passed the Defense of Marriage Act (DOMA), which explic- itly defined marriage as a union of one man and one woman. DOMA was later challenged, and a number of federal courts found it to be unconstitutional in the context of bankruptcy, public employee benefits, and estate taxes. In 2013, the United States Supreme Court struck down part of DOMA as unconstitutional.a Today, once again, no federal law defines marriage.

Bans on Same-Sex Marriage Eliminated by the Supreme Court

During this period, federal courts became increasingly likely to invalidate state bans on same-sex marriage. In 2013, a federal district court held that Utah’s same-sex marriage ban was unconstitutional.b In 2014, federal

district courts in Arkansas, Mississippi, and Oklahoma struck down state same-sex mar- riage bans.c Moreover, public sentiment on the issue had shifted, and more states recog- nized the rights of same-sex couples. By 2015, thirty-seven states, as well as the District of Columbia, had legalized same-sex marriage.

In 2015, the United States Supreme Court determined that the remaining state-level prohibi- tions on same-sex marriage were unconstitutional. In a landmark decision, the Court ruled that the Fourteenth Amendment requires individual states to (1) issue mar- riage licenses to same-sex couples and (2) recognize same-sex marriages performed in other states.d

The landmark Supreme Court decision requiring all states to recognize same-sex marriage means that busi- nesses must make adjustments. Company policies need to be revised to specify how same-sex partners will be treated in terms of family and medical leave, health- insurance coverage, pensions, and other benefits.

Business Questions 1. Can a business manager’s religious beliefs legally factor

into the business’s hiring and treatment of same-sex partners? Why or why not?

2. Must business owners in all states provide the same benefits to employees in a same-sex union as they do to heterosexual couples?

MANAGERIAL STRATEGY

a. Windsor v. United States, ___ U.S. ___, 133 S.Ct. 2675, 186 L.Ed.2d 808 (2013).

b. Kitchen v. Herbert, 961 F.Supp.2d 1181 (D.Utah 2013).

c. Campaign for Southern Equality v. Bryant, 64 F.Supp.3d 906 (S.D. Miss. 2014); Jernigan v. Crane, 64 F.Supp.3d 1260 (E.D.Ark. 2014); and Bishop v. U.S. ex rel. Holder, 962 F.Supp.2d 1252 (N.D. Okla. 2014).

d. Obergefell v. Hodges, ___ U.S. ___, 135 S.Ct. 2584, 192 L.Ed.2d 609 (2015).

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CHAPTER 4 Business and the Constitution 73

Background and Facts In the 1950s, the United States Supreme Court ruled that racial segrega- tion imposed by the states in school systems and other public facilities violated the Constitution. Privately owned facilities were not affected until Congress passed the Civil Rights Act of 1964, which prohibited racial discrimination in “establishments affecting interstate commerce.”

The owner of the Heart of Atlanta Motel, in violation of the Civil Rights Act of 1964, refused to rent rooms to African Americans. The motel owner brought an action in a federal district court to have the Civil Rights Act declared unconstitutional on the ground that Congress had exceeded its constitutional authority to regulate commerce by enacting the statute. The owner argued that his motel was not engaged in interstate commerce but was “of a purely

local character.” The motel, however, was accessible to state and interstate highways. The owner advertised nationally, maintained billboards throughout the state, and accepted convention trade from outside the state (75 percent of the guests were residents of other states).

The district court ruled that the act did not violate the Constitution and enjoined (prohibited) the owner from discriminating on the basis of race. The motel owner appealed. The case ultimately went to the United States Supreme Court.

In the Language of the Court Mr. Justice CLARKE delivered the opinion of the Court.CLARKE delivered the opinion of the Court.CLARKE

* * * * While the Act as adopted carried no congressional findings, the record of its passage through each

house is replete with evidence of the burdens that discrimination by race or color places upon interstate commerce * * * . This testimony included the fact that our people have become increasingly mobile with millions of all races traveling from State to State; that Negroes in particular have been the subject of discrimination in transient accommodations, having to travel great distances to secure the same; that often they have been unable to obtain accommodations and have had to call upon friends to put them up overnight. * * * These exclusionary practices were found to be nationwide, the Under Secretary of Commerce testifying that there is “no question that this discrimination in the North still exists to a large degree” and in the West and Midwest as well * * * . This testimony indicated a qualitative as well as quantitative effect on interstate travel by Negroes. The former was the obvious impairment of the Negro traveler’s pleasure and convenience that resulted when he continually was uncertain of finding lodging. As for the latter, there was evidence that this uncertainty stemming from racial discrimination had the effect of discouraging travel on the part of a substantial portion of the Negro community * * * . We shall not burden this opinion with further details since the voluminous testimony presents overwhelming evi- dence that discrimination by hotels and motels impedes interstate travel.

* * * * It is said that the operation of the motel here is of a purely local character. But, assuming this to be

true, “if it is interstate commerce that feels the pinch, it does not matter how local the operation that applies the squeeze.’’ * * * Thus the power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the States of origin and destination, which might have a substantial and harmful effect upon that commerce. [Emphasis added.]

Decision and Remedy The United States Supreme Court upheld the constitutionality of the Civil Rights Act of 1964. The power of Congress to regulate interstate commerce permitted the enactment of legislation that could halt local discriminatory practices.

Impact of This Case on Today’s Law If the United States Supreme Court had invalidated the Civil Rights Act of 1964, the legal landscape of the United States would be much different today. The act prohib- its discrimination based on race, color, national origin, religion, or gender in all “public accommodations,” including hotels and restaurants.

Classic Case 4.1 Heart of Atlanta Motel v. United States Supreme Court of the United States, 379 U.S. 241, 85 S.Ct. 348, 13 L.Ed.2d 258 (1964).

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74 UNIT ONE The Foundations

The act also prohibits discrimination in employment based on these criteria. Although state laws now prohibit many of these forms of discrimination as well, the protections available vary from state to state—and it is not certain whether such laws would have been passed had the outcome in this case been different.

Critical Thinking • What If the Facts Were Different? If this case had involved a small, private retail business that did

not advertise nationally, would the result have been the same? Why or why not?

The Commerce Clause Today Today, at least theo- retically, the power over commerce authorizes the national government to regulate almost every commercial enter- prise in the United States. The breadth of the commerce clause permits the national government to legislate in areas in which Congress has not explicitly been granted power. Only occasionally has the Supreme Court curbed the national government’s regulatory authority under the commerce clause.8

The Supreme Court has, for instance, allowed the federal government to regulate noncommercial activi- ties relating to medical marijuana that take place wholly ties relating to medical marijuana that take place wholly ties relating to medical marijuana that take place wholly within a state’s borders. ■ CASE IN POINT 4.1 More than half the states, including California, have adopted laws that legalize marijuana for medical purposes (and a handful of states now permit the recreational use of mar- ijuana). Marijuana possession, however, is illegal under the federal Controlled Substances Act (CSA).9 After the federal government seized the marijuana that two seri- ously ill California women were using on the advice of their physicians, the women filed a lawsuit. They argued that it was unconstitutional for the federal statute to pro- hibit them from using marijuana for medical purposes that were legal within the state.

The Supreme Court, though, held that Congress has the authority to prohibit the intrastate possession and intrastate possession and intrastate noncommercial cultivation of marijuana as part of a larger regulatory scheme (the CSA).10 In other words, the federal government may still prosecute individuals for possession of marijuana regardless of whether they reside in a state that allows the medical or recreational use of marijuana. ■

8. See, for example, United States v. Morrison, 529 U.S. 598, 120 S.Ct. 1740, 146 L.Ed.2d 658 (2000), holding that the federal Violence Against Women Act violated Congress’s commerce clause authority.

9. 21 U.S.C. Sections 801 et seq. 10. Gonzales v. Raich, 545 U.S. 1, 125 S.Ct. 2195, 162 L.Ed.2d 1 (2005).

The “Dormant” Commerce Clause The Supreme Court has interpreted the commerce clause to mean that the national government has the exclusive authority to exclusive authority to exclusive regulate commerce that substantially affects trade and commerce among the states. This express grant of author- ity to the national government is often referred to as the “positive” aspect of the commerce clause. But this positive aspect also implies a negative aspect—that the states do not have the authority to regulate interstate commerce. not have the authority to regulate interstate commerce. not This negative aspect of the commerce clause is often referred to as the “dormant” (implied) commerce clause.

The dormant commerce clause comes into play when state regulations affect interstate commerce. In this situ- ation, the courts weigh the state’s interest in regulating a certain matter against the burden that the state’s regula- tion places on interstate commerce. Because courts bal- ance the interests involved, it is difficult to predict the outcome in a particular case. State laws that alter con- ditions of competition to favor in-state interests over out-of-state competitors in a market (such as wineries or construction workers) are usually invalidated, however.11

■ CASE IN POINT 4.2 Maryland imposed personal income taxes on its residents at the state level and the county level. Maryland residents who paid income tax in another state were allowed a credit against the state portion of their Maryland taxes, but not the county porcounty porcounty – tion. Several Maryland residents who had earned profits in and paid taxes to other states but had not received a credit against their county tax liability sued. They claimed that Maryland’s system discriminated against intrastate commerce because those who earned income in other states paid more taxes than residents whose only income came from within Maryland. When the case reached the United States Supreme Court in 2015, the

11. See Family Winemakers of California v. Jenkins, 592 F.3d 1 (1st Cir. 2010); and Tri-M Group, LLC v. Sharp, 638 F.3d 406 (3d Cir. 2011).

Case 4.1 Continued

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CHAPTER 4 Business and the Constitution 75

Court held that Maryland’s personal income tax scheme violated the dormant commerce clause.12 ■

4–1e The Supremacy Clause and Federal Preemption

Article VI of the U.S. Constitution, commonly referred to as the supremacy clause, provides that the Constitution, laws, and treaties of the United States are “the supreme Law of the Land.” When there is a direct conflict between a federal law and a state law, the state law is rendered invalid. Because some powers are concurrent (shared by the fed- eral government and the states), however, it is necessary to determine which law governs in a particular circumstance.

Preemption When Congress chooses to act exclusively in a concurrent area, preemption occurs. In this circum- stance, a valid federal statute or regulation will take prece- dence over a conflicting state or local law or regulation on the same general subject.

Congressional Intent Often, it is not clear whether Congress, in passing a law, intended to preempt an entire subject area. In these situations, the courts determine whether Congress intended to exercise exclusive power.

No single factor is decisive as to whether a court will find preemption. Generally, though, congressional intent to preempt will be found if a federal law regulating an activity is so pervasive, comprehensive, or detailed that the states have little or no room to regulate in that area. Also, when a federal statute creates an agency to enforce the law, matters that may come within the agency’s juris- diction will likely preempt state laws.

■ CASE IN POINT 4.3 A man who alleged that he had been injured by a faulty medical device (a balloon catheter that was inserted into his artery following a heart attack) sued the manufacturer. The case ultimately came before the United States Supreme Court. The Court noted that the relevant federal law (the Medical Device Amendments of 1976) had included a preemption provi- sion. Furthermore, the device had passed the U.S. Food and Drug Administration’s rigorous premarket approval process. Therefore, the Court ruled that the federal regu- lation of medical devices preempted the man’s state law claims.13 ■

12. Comptroller of Treasury of Maryland v. Wynne, ___ U.S. ___, 135 S.Ct. 1787, 191 L.Ed.2d 813 (2015).

13. Riegel v. Medtronic, Inc., 552 U.S. 312, 128 S.Ct. 999, 169 L.Ed.2d 892 (2008).

4–1f The Taxing and Spending Powers Article I, Section 8, of the U.S. Constitution provides that Congress has the “Power to lay and collect Taxes, Duties, Imposts, and Excises.” Section 8 further requires uniformity in taxation among the states, and thus Con- gress may not tax some states while exempting others.

In the distant past, if Congress attempted to regu- late indirectly, by taxation, an area over which it had no authority, the courts would invalidate the tax. Today, however, if a tax measure is reasonable, it generally is held to be within the national taxing power. Moreover, the expansive interpretation of the commerce clause almost always provides a basis for sustaining a federal tax.

Article I, Section 8, also gives Congress its spending power—the power “to pay the Debts and provide for the common Defence and general Welfare of the United States.” Congress can spend revenues not only to carry out its expressed powers but also to promote any objec- tive it deems worthwhile, so long as it does not violate the Bill of Rights. The spending power necessarily involves policy choices, with which taxpayers (and politicians) may disagree.

4–2 Business and the Bill of Rights The importance of a written declaration of the rights of individuals caused the first Congress of the United States to submit twelve amendments to the U.S. Con- stitution to the states for approval. Ten of these amend- ments, known as the Bill of Rights, were adopted in 1791 and embody a series of protections for the indi- vidual against various types of interference by the federal government.14

The protections guaranteed by these ten amendments are summarized in Exhibit 4–1.15 Some of these consti- tutional protections apply to business entities as well as individuals. For example, corporations exist as separate legal entities, or legal persons, and enjoy many of the same rights and privileges as natural persons do.natural persons do.natural persons

14. Another of these proposed amendments was ratified more than two hundred years later (in 1992) and became the Twenty-seventh Amend- ment to the Constitution. See Appendix B.

15. See the Constitution in Appendix B for the complete text of each amendment.

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76 UNIT ONE The Foundations

First Amendment: Guarantees the freedoms of religion, speech, and the press and the rights to assemble peaceably and to petition the government.

Second Amendment: States that the right of the people to keep and bear arms shall not be infringed.

Third Amendment: Prohibits, in peacetime, the lodging of soldiers in any house without the owner’s consent.

Fourth Amendment: Prohibits unreasonable searches and seizures of persons or property.

Fifth Amendment: Guarantees the rights to indictment (formal accusation) by a grand jury, to due indictment (formal accusation) by a grand jury, to due indictment process of law, and to fair payment when private property is taken for public use. The Fifth Amendment also prohibits compulsory self-incrimination and double jeopardy (trial for the same crime twice).

Sixth Amendment: Guarantees the accused in a criminal case the right to a speedy and public trial by an impartial jury and with counsel. The accused has the right to cross-examine witnesses against him or her and to solicit testimony from witnesses in his or her favor.

Seventh Amendment: Guarantees the right to a trial by jury in a civil case involving at least twenty dollars.

Eighth Amendment: Prohibits excessive bail and fines, as well as cruel and unusual punishment.

Ninth Amendment: Establishes that the people have rights in addition to those specified in the Constitution.

Tenth Amendment: Establishes that those powers neither delegated to the federal government nor Establishes that those powers neither delegated to the federal government nor denied to the states are reserved to the states and to the people.

EXHIBIT 4–1 Protections Guaranteed by the Bill of Rights

4–2a Limits on Federal and State Governmental Actions

As originally intended, the Bill of Rights limited only the powers of the national government. Over time, however, the United States Supreme Court “incorporated” most of these rights into the protections against state actions afforded by the Fourteenth Amendment to the Constitution.

The Fourteenth Amendment The Fourteenth Amendment, passed in 1868 after the Civil War, pro- vides, in part, that “[n]o State shall . . . deprive any person of life, liberty, or property, without due process of law.” Starting in 1925, the Supreme Court began to define various rights and liberties guaranteed in the U.S. Con- stitution as constituting “due process of law,” which was required of state governments under that amendment.

Today, most of the rights and liberties set forth in the Bill of Rights apply to state governments as well as the national government. In other words, neither the federal government nor state governments can deprive persons of those rights and liberties.

Judicial Interpretation The rights secured by the Bill of Rights are not absolute. Many of the rights

guaranteed by the first ten amendments are set forth in very general terms. The Second Amendment states that people have a right to keep and bear arms, but it does not describe the extent of this right. As the Supreme Court has noted, this right does not mean that people can “keep and carry any weapon whatsoever in any manner what- soever and for whatever purpose.”16 Legislatures can pro- hibit the carrying of concealed weapons or certain types of weapons, such as machine guns.

Ultimately, the United States Supreme Court, as the final interpreter of the Constitution, gives mean- ing to these rights and determines their boundaries. Changing public views on controversial topics, such as privacy in an era of terrorist threats or the rights of gay men and lesbians, can affect the way the Supreme Court decides a case.

4–2b Freedom of Speech A democratic form of government cannot survive unless people can freely voice their political opinions and criti- cize government actions or policies. Freedom of speech,

16. District of Columbia v. Heller, 554 U.S. 570, 128 S.Ct. 2783, 171 L.Ed.2d 637 (2008).

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CHAPTER 4 Business and the Constitution 77

particularly political speech, is thus a prized right, and traditionally the courts have protected this right to the fullest extent possible.

Symbolic speech—gestures, movements, articles of clothing, and other forms of expressive conduct—is also given substantial protection by the courts. The Supreme Court has held that the burning of the American flag as part of a peaceful protest is a constitutionally protected form of expression.17 Similarly, wearing a T-shirt with a photo of a presidential candidate is a constitutionally protected form of expression. ■ EXAMPLE 4.4 As a form of expression, Nate has gang signs tattooed on his torso, arms, neck, and legs. If a reasonable person would inter- pret this conduct as conveying a message, then it might be a protected form of symbolic speech. ■

Reasonable Restrictions A balance must be struck between a government’s obligation to protect its citizens and those citizens’ exercise of their rights. Expression— oral, written, or symbolized by conduct—is therefore sub- ject to reasonable restrictions. Reasonableness is analyzed on a case-by-case basis.

Content-Neutral Laws. Laws that regulate the time, manner, and place, but not the content, of speech receive less scrutiny by the courts than do laws that restrict the content of expression. If a restriction imposed by the government is content neutral, then a court may allow it. To be content neutral, the restriction must be aimed at combatting some societal problem, such as crime or drug abuse, and not be aimed at suppressing the expres- sive conduct or its message.

Courts have often protected nude dancing as a form of symbolic expression but typically allow content-neutral laws that ban all public nudity. ■ CASE IN POINT 4.5 Ria Ora was charged with dancing nude at an annual “anti-Christmas” protest in Harvard Square in Cam- bridge, Massachusetts, under a statute banning public displays of open and gross lewdness. Ora argued that the statute was overbroad and unconstitutional, and a trial court agreed. On appeal, however, a state appellate court upheld the statute as constitutional in situations in which there was an unsuspecting or unwilling audience.18 ■

Laws That Restrict the Content of Speech. Any law that regulates the content of expression must serve a com- pelling state interest and must be narrowly written to achieve that interest. Under the compelling government

17. Texas v. Johnson, 491 U.S. 397, 109 S.Ct. 2533, 105 L.Ed.2d 342 (1989).

18. Commonwealth v. Ora, 451 Mass. 125, 883 N.E.2d 1217 (2008).

interest test, the government’s interest is balanced against the individual’s constitutional right to free expression. For the statute to be valid, there must be a compelling gov- ernment interest that can be furthered only by the law in question.

The United States Supreme Court has held that schools may restrict students’ speech at school events. ■ CASE IN POINT 4.6 Some high school stu- dents held up a banner saying “Bong Hits 4 Jesus” at an off-campus but school-sanctioned event. The Supreme Court ruled that the school did not violate the students’ free speech rights when school officials confiscated the banner and suspended the students for ten days. Because the banner could reasonably be interpreted as promot- ing drugs, the Court concluded that the school’s actions were justified. Several justices disagreed, however, noting that the majority’s holding creates an exception that will allow schools to censor any student speech that mentions drugs.19 ■

Corporate Political Speech Political speech by corporations also falls within the protection of the First Amendment. Many years ago, the United States Supreme Court struck down as unconstitutional a Massachusetts statute that prohibited corporations from making politi- cal contributions or expenditures that individuals were permitted to make.20 The Court has also held that a law forbidding a corporation from including inserts with its bills to express its views on controversial issues violates the First Amendment.21

Corporate political speech continues to be given significant protection under the First Amendsignificant protection under the First Amendsignificant protection under the First Amend- ment. ■ CASE IN POINT 4.7 In Citizens United v. Fed-Citizens United v. Fed-Citizens United v. Fed eral Election Commission,22 the Supreme Court issued a landmark decision that overturned a twenty-year-old precedent on campaign financing. The case involved Citizens United, a nonprofit corporation that runs a political action committee (an organization that regispolitical action committee (an organization that regispolitical action committee – ters with the government and campaigns for or against political candidates).

Citizens United had produced a film called Hillary: The Movie that was critical of Hillary Clinton, who was The Movie that was critical of Hillary Clinton, who was The Movie seeking the Democratic nomination for presidential can- didate. Campaign-finance law restricted Citizens United from broadcasting the movie. The Court ruled that these

19. Morse v. Frederick, 551 U.S. 393, 127 S.Ct. 2618, 168 L.Ed.2d 290 (2007).

20. First National Bank of Boston v. Bellotti, 435 U.S. 765, 98 S.Ct. 1407, 55 L.Ed.2d 707 (1978).

21. Consolidated Edison Co. v. Public Service Commission, 447 U.S. 530, 100 S.Ct. 2326, 65 L.Ed.2d 319 (1980).

22. 558 U.S. 310, 130 S.Ct. 876, 175 L.Ed.2d 753 (2010). Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

78 UNIT ONE The Foundations

restrictions were unconstitutional and that the First Amendment prevents limits from being placed on inde- pendent political expenditures by corporations. ■

Commercial Speech The courts also give substan- tial protection to commercial speech, which consists of communications—primarily advertising and marketing— made by business firms that involve only their commer- cial interests. The protection given to commercial speech under the First Amendment is less extensive than that afforded to noncommercial speech, however.

A state may restrict certain kinds of advertising, for instance, in the interest of preventing consumers from being misled. States also have a legitimate interest in road- side beautification and therefore may impose restraints on billboard advertising. ■ EXAMPLE 4.8 Café Erotica, a nude dancing establishment, sues the state after being

denied a permit to erect a billboard along an interstate highway in Florida. Because the law directly advances a substantial government interest in highway beautification and safety, a court will likely find that it is not an uncon- stitutional restraint on commercial speech. ■

Generally, a restriction on commercial speech will be considered valid as long as it meets three criteria:

1. It must seek to implement a substantial government interest.

2. It must directly advance that interest. 3. It must go no further than necessary to accomplish

its objective.

At issue in the following case was whether a govern- ment agency had unconstitutionally restricted commer- cial speech when it prohibited the inclusion of a certain illustration on beer labels.

Background and Facts Bad Frog Brewery, Inc., makes and sells alcoholic beverages. Some of the beverages feature labels that display a drawing of a frog making the gesture generally known as “giv- ing the finger.” Bad Frog’s authorized New York distributor, Renaissance Beer Company, applied to the New York State Liquor Authority (NYSLA) for brand label approval, as required by state law before the beer could be sold in New York.

The NYSLA denied the application, in part, because “the label could appear in grocery and con- venience stores, with obvious exposure on the shelf to children of tender age.” Bad Frog filed a suit in a federal district court against the NYSLA, asking for, among other things, an injunction against the denial of the application. The court granted summary judgment in favor of the NYSLA. Bad Frog appealed to the U.S. Court of Appeals for the Second Circuit.

In the Language of the Court Jon O. NEWMAN, Circuit Judge:

* * * * * * * To support its asserted power to ban Bad Frog’s labels [NYSLA advances] * * * the State’s interest

in “protecting children from vulgar and profane advertising” * * * . [This interest is] substantial * * * . States have a compelling interest in protecting the physical and psycho-

logical wellbeing of minors * * * . [Emphasis added.]logical wellbeing of minors * * * . [Emphasis added.]logical wellbeing of minors * * * * * * * NYSLA endeavors to advance the state interest in preventing exposure of children to vulgar

displays by taking only the limited step of barring such displays from the labels of alcoholic beverages. In view of the wide currency of vulgar displays throughout contemporary society, including comic books targeted directly at children, barring such displays from labels for alcoholic beverages cannot realistically be expected to reduce children’s exposure to such displays to any significant degree. [Emphasis added.]

* * * If New York decides to make a substantial effort to insulate children from vulgar displays in some significant sphere of activity, at least with respect to materials likely to be seen by children, NYSLA’s label prohibition might well be found to make a justifiable contribution to the material

Spotlight on Beer Labels

Case 4.2 Bad Frog Brewery, Inc. v. Case 4.2 Bad Frog Brewery, Inc. v. New York State Liquor AuthorityNew York State Liquor Authority Case 4.2 Bad Frog Brewery, Inc. v. New York State Liquor Authority Case 4.2 Bad Frog Brewery, Inc. v. Case 4.2 Bad Frog Brewery, Inc. v. New York State Liquor Authority Case 4.2 Bad Frog Brewery, Inc. v.

United States Court of Appeals, Second Circuit, 134 F.3d 87 (1998).United States Court of Appeals, Second Circuit, 134 F.3d 87 (1998).

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CHAPTER 4 Business and the Constitution 79

advancement of such an effort, but its currently isolated response to the perceived problem, applicable only to labels on a product that children cannot purchase, does not suffice. * * * A state must demon- strate that its commercial speech limitation is part of a substantial effort to advance a valid state interest, not merely the removal of a few grains of offensive sand from a beach of vulgarity.

* * * * * * * Even if we were to assume that the state materially advances its asserted interest by shielding

children from viewing the Bad Frog labels, it is plainly excessive to prohibit the labels from all use, including placement on bottles displayed in bars and taverns where parental supervision of children is to be expected. Moreover, to whatever extent NYSLA is concerned that children will be harmfully exposed to the Bad Frog labels when wandering without parental supervision around grocery and convenience stores where beer is sold, that concern could be less intrusively dealt with by placing restrictions on the permissible locations where the appellant’s products may be displayed within such stores.

Decision and Remedy The U.S. Court of Appeals for the Second Circuit reversed the judgment of the district court and remanded the case for the entry of a judgment in favor of Bad Frog. The NYSLA’s ban on the use of the labels lacked a “reasonable fit” with the state’s interest in shielding minors from vulgarity. In addition, the NYSLA had not adequately considered alternatives to the ban.

Critical Thinking • What If the Facts Were Different? If Bad Frog had sought to use the offensive label to market toys

instead of beer, would the court’s ruling likely have been the same? Why or why not? • Legal Environment Whose interests are advanced by the banning of certain types of advertising?

Case 4.2 Continued

Unprotected Speech The United States Supreme Court has made it clear that certain types of speech will not be protected under the First Amendment. Unpro- tected speech includes fighting words, or words that are likely to incite others to respond violently. It also includes speech that harms the good reputation of another, or defamatory speech. In addition, speech that violates crim- inal laws (threatening speech or possession of child por- nography, for instance) is not constitutionally protected.

Threatening Speech. Note that in the case of threaten- ing speech, the speaker must have posed a “true threat”— that is, must have meant to communicate a serious intent to commit an unlawful, violent act against a particular to commit an unlawful, violent act against a particular to commit an unlawful, violent act against a particular person or group. ■ CASE IN POINT 4.9 After Anthony Elonis’s wife, Tara, left him and took their two children, Elonis was upset and experienced problems at work. A coworker �led �ve sexual harassment reports against him. When Elonis posted a photograph of himself in a Hallow- een costume holding a toy knife to the coworker’s neck, he was �red from his job. Elonis then began posting vio- lent statements on his Facebook page, mostly focusing on his former wife and talking about killing her.

Elonis continued to post statements about killing his wife and eventually was arrested and prosecuted for his online posts. Elonis was convicted by a jury of violating a statute and ordered to serve time in prison. He appealed

to the United States Supreme Court, which held that it is not enough that a reasonable person might view the defendant’s Facebook posts as threats. Elonis must have intended to issue threats or known that his statements would be viewed as threats to be convicted of a crime. The Court reversed Elonis’s conviction and remanded the case back to the lower court to determine if there was sufficient evidence of intent.23 ■

Obscene Speech. �e First Amendment, as interpreted by the Supreme Court, also does not protect obscene speech. Numerous state and federal statutes make it a crime to dis- seminate and possess obscene materials, including child por- nography. Objectively de�ning obscene speech has proved di�cult, however. It is even more di�cult to prohibit the dissemination of obscenity and pornography online.

Most of Congress’s attempts to pass legislation pro- tecting minors from pornographic materials on the Internet have been struck down on First Amendment grounds when challenged in court. One exception is a law that requires public schools and libraries to install filtering software on computers to keep children from accessing adult content.24 Such software is designed to

23. Elonis v. United States, ___ U.S. ___, 135 S.Ct. 2001, 192 L.Ed.2d 1 (2015).

24. Children’s Internet Protection Act (CIPA), 17 U.S.C. Sections 1701–1741.

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80 UNIT ONE The Foundations

prevent persons from viewing certain Web sites based on a site’s Internet address or its meta tags, or key words. The Supreme Court held that the act does not uncon- stitutionally burden free speech because it is flexible and libraries can disable the filters for any patrons who ask.25

Another exception is a law that makes it a crime to intentionally distribute virtual child pornography—which virtual child pornography—which virtual child pornography uses computer-generated images, not actual people— without indicating that it is computer-generated.26 In a case challenging the law’s constitutionality, the Supreme Court held that the statute is valid because it does not prohibit a substantial amount of protected speech.27 Nevertheless, because of the difficulties of policing the Internet, as well as the constitutional complexities of prohibiting obscenity through legislation, online obscenity remains a legal issue.

4–2c Freedom of Religion The First Amendment states that the government may neither establish any religion nor prohibit the free exer- cise of religious practices. The first part of this consti- tutional provision is referred to as the establishment clause, and the second part is known as the free exercise clause. Government action, both federal and state, must be consistent with this constitutional mandate.

The Establishment Clause The establishment clause prohibits the government from establishing a state- sponsored religion, as well as from passing laws that pro- mote (aid or endorse) religion or show a preference for one religion over another. Although the establishment clause involves the separation of church and state, it does not require a complete separation.

Applicable Standard. Establishment clause cases often involve such issues as the legality of allowing or requiring school prayers, using state-issued vouchers to pay tuition at religious schools, and teaching creation theories versus evolution. Federal or state laws that do not promote or place a signi�cant burden on religion are constitutional even if they have some impact on religion. For a govern- ment law or policy to be constitutional, it must not have the primary e�ect of promoting or inhibiting religion.

Religious Displays. Religious displays on public prop- erty have often been challenged as violating the establish- ment clause, and the United States Supreme Court has

25. United States v. American Library Association, 539 U.S. 194, 123 S.Ct. 2297, 156 L.Ed.2d 221 (2003).

26. The Prosecutorial Remedies and Other Tools to End the Exploitation of Children Today Act (Protect Act), 18 U.S.C. Section 2252A(a)(5)(B).

27. United States v. Williams, 553 U.S. 285, 128 S.Ct. 1830, 170 L.Ed.2d 650 (2008).

ruled on a number of such cases. Generally, the Court has focused on the proximity of the religious display (such as a Christian Christmas symbol) to nonreligious symbols (such as reindeer and candy canes) or symbols from dif-(such as reindeer and candy canes) or symbols from dif-(such as reindeer and candy canes) or symbols from dif ferent religions (such as a menorah, a nine-branched can- delabrum used in celebrating Hanukkah).

The Supreme Court took a slightly different approach when it held that public displays having historical, as well as religious, significance do not necessarily violate the establishment clause.28 Still, historical significance must be carefully weighed against religious elements in establishment clause cases.

■ CASE IN POINT 4.10 Mount Soledad is a promi- nent hill near San Diego. There has been a forty-foot cross on top of Mount Soledad since 1913. In the 1990s, a war memorial with six walls listing the names of veter- ans was constructed next to the cross. The site was pri- vately owned until 2006, when Congress authorized the property’s transfer to the federal government “to preserve a historically significant war memorial.”

Steve Trunk and the Jewish War Veterans filed law- suits claiming that the cross violated the establishment clause because it endorsed the Christian religion. A federal appellate court agreed, finding that the primary effect of the memorial as a whole sent a strong message of endorsement of Christianity and exclusion of non- Christian veterans. The court noted that although not all cross displays at war memorials violate the establishment clause, the cross in this case physically dominated the site. Additionally, it was originally dedicated to religious purposes, had a long history of religious use, and was the only portion visible to drivers on the freeway below.29 ■

The Free Exercise Clause The free exercise clause guarantees that people can hold any religious beliefs they want or can hold no religious beliefs. The constitutional guarantee of personal freedom restricts only the actions of the government, however, and not those of individuals or private businesses.

Restrictions Must Be Necessary. �e government must have a compelling state interest for restricting the free exercise of religion, and the restriction must be the only exercise of religion, and the restriction must be the only exercise of religion, and the restriction must be the only way to further that interest. ■ CASE IN POINT 4.11 Greg- ory Holt, an inmate in an Arkansas state prison, was a devout Muslim who wished to grow a beard in accord with his religious beliefs. �e Arkansas Department of

28. Van Orden v. Perry, 545 U.S. 677, 125 S.Ct. 2854, 162 L.Ed.2d 607 (2005). The Court held that a six-foot-tall monument of the Ten Commandments on the Texas state capitol grounds did not violate the establishment clause because the Ten Commandments have historical significance.

29. Trunk v. City of San Diego, 629 F.3d 1099 (9th Cir. 2011).Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 4 Business and the Constitution 81

Correction prohibited inmates from growing beards (except for medical reasons). Holt asked for an exemp- tion to grow a half-inch beard on religious grounds, and prison o�cials denied his request. Holt �led a suit in a federal district court against Ray Hobbs, the director of the department, and others.

A federal statute prohibits the government from taking any action that substantially burdens the reli- gious exercise of an institutionalized person unless the action constitutes the least restrictive means of further- ing a compelling governmental interest. The defendants argued that beards compromise prison safety—a compel- ling government interest—because contraband can be hidden in them and because an inmate can quickly shave his beard to disguise his identity.

The district court dismissed Holt’s suit, and the dis- missal was affirmed on appeal. Holt then appealed to the United States Supreme Court. The Court noted that “an item of contraband would have to be very small indeed to

be concealed by a 1/2–inch beard.” Moreover, the Court reasoned that the department could satisfy its secu- rity concerns by simply searching the beard, the way it already searches prisoners’ hair and clothing. The Court concluded that the department’s grooming policy, which prevented Holt from growing a half-inch beard, violated his right to exercise his religious beliefs.30 ■

Restrictions Must Not Be a Substantial Burden. To comply with the free exercise clause, a government action must not place a substantial burden on religious practices. A burden is substantial if it pressures an individual to modify his or her behavior and to violate his or her beliefs.

At issue in the following case was whether forcing a state prison inmate to choose between daily nutrition and a religious practice is a substantial burden.

30. Holt v. Hobbs, ___ U.S. ___, 135 S.Ct. 853, 190 L.Ed.2d 747 (2015).

In the Language of the Court ROVNER, Circuit Judge.

Michael Thompson, a Muslim inmate incarcerated at Waupun Correctional Institution in Wisconsin, sued mem- bers of the prison staff for violating his right under the First Amendment to exercise his religion freely. The violation occurred, Thompson says, when for two days prison staff prevented him from fasting properly during Ramadan.

* * * A central religious practice of the Islamic faith is a sunrise-to-sunset fast during the month of Ramadan. The prison normally accommodates this practice by providing Ramadan “meal bags” at sunset to each Muslim prisoner listed as eligible. The prison’s chaplain determines eligibility. Each Ramadan meal bag contains two meals: the post- sunset dinner and the next morning’s pre-sunrise breakfast. A prisoner who eats at the prison cafeteria during Rama- dan forfeits his right to the meal bags for the rest of the month-long fast. Thomp- son, a practicing Muslim, began fasting for Ramadan after sunrise on August 11—the first day of Ramadan. He

received his daily meal bags until August 21, about one-third into the month.

* * * Thompson says that shortly before August 21, as he was on his way back to his cell, Randall Lashock, a prison guard, handed him a meal bag. When Thompson arrived at his cell, he found that a guard had already left a meal bag for him there. Thompson could not leave his cell to return the extra bag without risking a conduct violation, so he left one of the two bags unopened for Lashock to retrieve. Lashock asserts that when he later retrieved that extra meal bag from Thompson’s cell, he found Thompson eating from both bags.

Thompson received no meal bags on August 21 and 22. Lashock was sup- posed to deliver the Ramadan meal bags to every prisoner on the eligibility list. But on those two days, Lashock brought Thompson nothing, even though * * * he remained on the list. Receiving no meals, and learning from [prison guards] Bruce Bleich and Matthew Larson when he complained to them that he would have to go to the cafeteria if he wanted

to eat, Thompson felt pressure to break his fast by going to the cafeteria. But he knew that under the prison’s policy he could not do that without forfeiting meal bags for the rest of the month-long fast. He also had hunger pangs and felt tired and unwell. Because of his hunger, exhaustion, and anxiety, he missed one of his morning prayers and did not properly experience Ramadan, which is meant to be a time of peace and focus.

* * * * While he was receiving no meal

bags, Thompson asked other prison officials to explain why Lashock was not bringing him food * * * . Bleich and Larson told him that Captain William Holm had ordered his name removed from the list because he had stolen a meal bag; they too refused to bring him any meals. But Holm * * * did not remove Thompson from the list and had no authority to do so; only the chaplain could do that.

* * * On August 23, Thompson received a Ramadan meal bag at sunset

Case Analysis 4.3 Thompson v. Holm United States Court of Appeals, Seventh Circuit, 809 F.3d 376 (2016).

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82 UNIT ONE The Foundations

and continued to receive a bag each day until the end of Ramadan.

Thompson [filed a suit in a federal district court against] Lashock, Holm, Bleich, and Larson * * * for violating his First Amendment rights, and the defen- dants moved for summary judgment. * * * They argued the lack of meal bags for two days did not substantially bur- den Thompson’s free-exercise rights.

Thompson responded that the defen- dants unlawfully withheld his meal bags. * * * By forcing him to choose between adequate nutrition and a central tenet of his religion, the defendants substantially burdened his free-exercise rights.

[The court] granted the defendants’ motion for summary judgment. The judge ruled that receiving no meal bags for just two days was not a substantial burden on Thompson’s free-exercise rights because he kept fasting, praying, and reading the Koran.

On appeal Thompson challenges the entry of summary judgment.

We begin our analysis by asking whether the denial of meal bags substan- tially burdened Thompson’s free exercise rights. The answer is yes. Without the meal bags, Thompson was forced to choose between foregoing adequate nutrition or violating a central tenet of his religion. Facing that choice for “only” two days was not, as defendants argue, a “de minimisnot, as defendants argue, a “de minimisnot, as defendants argue, a “ ” [minimal] burden. Not only did Thomp- son receive no proper meal for 55 hours, leaving him weak and tired, he did not know if he would ever be put back on the Ramadan list and get regular food. This uncertainty put pressure on him to resign himself to the cafeteria; the anxi- ety left him unable to practice Ramadan properly. [Emphasis added.]

* * * * We next consider whether Thompson

produced sufficient evidence that all the defendants were personally involved in imposing this burden. Once again, the answer is yes. We consider the defendants individually, beginning with

Lashock. He was responsible for deliver- ing the meal bags to all inmates on the eligibility list. Yet he personally denied them to Thompson for two days even though * * * Thompson remained on the list. As to Holm, * * * Holm lied about whether he had removed Thompson from the meal list. Finally, as to Bleich and Larson, they also bear responsibility for depriving Thompson of his food. By (falsely) telling Thompson that Holm had removed him from the religious meal list, refusing to bring him any meals, and warning him to go to the cafeteria if he wanted to eat, * * * they were involved in a joint effort to pressure Thompson to break his fast.

* * * * Accordingly, we VACATE the judg-

ment. This case is REMANDED for further proceedings consistent with this order.

Legal Reasoning Questions

1. What is the standard for determining whether a restriction on a religious practice is constitutional under the First Amendment? 2. How did that standard apply to the prison guards’ conduct in this case? 3. Were all of the guards personally involved in the alleged violation of the First Amendment? Explain.

Case 4.3 Continued

Public Welfare Exception. When religious practices work against public policy and the public welfare, the government can act. For instance, the government can require that a child receive certain types of vaccinations or medical treatment if his or her life is in danger— regardless of the child’s or parent’s religious beliefs. When public safety is an issue, an individual’s religious beliefs often have to give way to the government’s interest in protecting the public.protecting the public.protecting the public.

■ EXAMPLE 4.12 A woman of the Muslim faith may choose not to appear in public without a scarf, known as a hijab, over her head. Nevertheless, due to public safety concerns, many courts today do not allow the wearing of any headgear (hats or scarves) in courtrooms. ■

4–2d Searches and Seizures The Fourth Amendment protects the “right of the people to be secure in their persons, houses, papers, and effects.”

Before searching or seizing private property, law enforce- ment officers must usually obtain a search warrant—an search warrant—an search warrant order from a judge or other public official authorizing the search or seizure. Because of the strong government inter- est in protecting the public, however, a warrant normally is not required for seizures of spoiled or contaminated food. Nor are warrants required for searches of businesses in such highly regulated industries as liquor, guns, and strip mining.

To obtain a search warrant, law enforcement officers must convince a judge that they have reasonable grounds, or probable cause, to believe a search will reveal evi- dence of a specific illegality. To establish probable cause, the officers must have trustworthy evidence that would convince a reasonable person that the proposed search or seizure is more likely justified than not.seizure is more likely justified than not.seizure is more likely justified than not.

■ CASE IN POINT 4.13 Citlalli Flores was driving across the border into the United States from Tijuana, Mexico, when a border protection officer became suspicious because she was acting nervous and looking around inside her car.

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CHAPTER 4 Business and the Constitution 83

On further inspection, the officer found thirty-six pounds of marijuana hidden in the car’s quarter panels. Flores claimed that she had not known about the marijuana.

Flores was arrested for importing marijuana into the United States. She then made two jail-recorded phone calls in which she asked her cousin to delete whatever he felt needed to be removed from Flores’s Facebook page. The government got a warrant to search Flores’s Facebook messages, where they found references to her “carrying” or “bringing” marijuana into the United States that day. Flores’s Facebook posts were later used as evi- dence against her at trial, and she was convicted.

On appeal, the court held that the phone calls had given the officers probable cause to support a warrant to search Flores’s social networking site for incriminating statements. Her conviction was affirmed.31 ■

4–2e Self-Incrimination The Fifth Amendment guarantees that no person “shall be compelled in any criminal case to be a witness against himself.” Thus, in any court proceeding, an accused per- son cannot be forced to give testimony that might subject him or her to any criminal prosecution. The guarantee applies to both federal and state proceedings because the due process clause of the Fourteenth Amendment (dis- cussed shortly) extends the protection to state courts.

The Fifth Amendment’s guarantee against self- incrimination extends only to natural persons. Neither corporations nor partnerships receive Fifth Amendment protection. When a partnership is required to produce business records, it must therefore do so even if the infor- mation provided incriminates the individual partners of the firm. In contrast, sole proprietors and sole prac- titioners (those who individually own their businesses) cannot be compelled to produce their business records. These individuals have full protection against self- incrimination because they function in only one capac- ity, and there is no separate business entity.

4–3 Due Process and Equal Protection

Other constitutional guarantees of great significance to Americans are mandated by the due process clauses of the Fifth and Fourteenth Amendments and the equal protec- tion clause of the Fourteenth Amendment.tion clause of the Fourteenth Amendment.tion clause

31. United States v. Flores, 830 F.3d 1028 (9th Cir. 2015).

4–3a Due Process Both the Fifth and Fourteenth Amendments provide that no person shall be deprived “of life, liberty, or property, without due process of law.” The due pro- cess clause of these constitutional amendments has two aspects—procedural and substantive. Note that the due process clause applies to “legal persons” (that is, corpora- tions), as well as to individuals.

Procedural Due Process Procedural due process Procedural due process Procedural requires that any government decision to take life, liberty, or property must be made equitably. In other words, the government must give a person proper notice and an opportunity to be heard. Fair procedures must be used in determining whether a person will be subjected to punishment or have some burden imposed on her or him.

Fair procedure has been interpreted as requiring that the person have at least an opportunity to object to a pro- posed action before an impartial, neutral decision maker (who need not be a judge). ■ EXAMPLE 4.14 Doyle Doyle Burns, a nursing student in Kansas, poses for a photo- graph standing next to a placenta used as a lab specimen. Although she quickly deletes the photo from her library, it ends up on Facebook. When the director of nursing sees the photo, Burns is expelled. She sues for reinstate- ment and wins. The school violated Burns’s due process rights by expelling her from the nursing program for tak- ing a photo without giving her an opportunity to present her side to school authorities. ■

Substantive Due Process Substantive due process Substantive due process Substantive focuses on the content of legislation rather than the fair- ness of procedures. Substantive due process limits what the government may do in its legislative and executive capacities. Legislation must be fair and reasonable in content and must further a legitimate governmental objective.

If a law or other governmental action limits a fun- damental right, the state must have a legitimate and compelling interest to justify its action. Fundamental rights include interstate travel, privacy, voting, marriage and family, and all First Amendment rights. Thus, for instance, a state must have a substantial reason for tak- ing any action that infringes on a person’s free speech rights.

In situations not involving fundamental rights, a law or action does not violate substantive due process if it rationally relates to any legitimate government purpose. It is almost impossible for a law or action to fail the “rationality” test. Under this test, almost any business regulation will be upheld as reasonable.Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

84 UNIT ONE The Foundations

4–3b Equal Protection Under the Fourteenth Amendment, a state may not “deny to any person within its jurisdiction the equal protection of the laws.” The United States Supreme Court has inter- preted the due process clause of the Fifth Amendment to make the equal protection clause applicable to the federal government as well. Equal protection means that the government cannot enact laws that treat similarly situated individuals differently.

Equal protection, like substantive due process, relates to the substance of a law or other governmental action. When a law or action limits the liberty of all persons, it all persons, it all may violate substantive due process. When a law or action limits the liberty of some persons but not others, it may persons but not others, it may persons but not others, it may persons but not others, it may some persons but not others, it may some violate the equal protection clause. ■ EXAMPLE 4.15 If a law prohibits all advertising on the sides of trucks, it raises a substantive due process question. If the law makes an exception to allow truck owners to advertise their own businesses, it raises an equal protection issue. ■

In an equal protection inquiry, when a law or action distinguishes between or among individuals, the basis for the distinction—that is, the classification—is examined. Depending on the classification, the courts apply differ- ent levels of scrutiny, or “tests,” to determine whether the law or action violates the equal protection clause. The courts use one of three standards: strict scrutiny, interme- diate scrutiny, or the “rational basis” test.

Strict Scrutiny If a law or action prohibits or inhibits some persons from exercising a fundamental right, the law or action will be subject to “strict scrutiny” by the courts. Under this standard, the classification must be necessary to promote a compelling state interest.

Compelling state interests include remedying past unconstitutional or illegal discrimination but do not include correcting the general effects of “society’s disinclude correcting the general effects of “society’s disinclude correcting the general effects of “society’s disinclude correcting the general effects of “society’s dis- crimination.” ■ EXAMPLE 4.16 For a city to give pref-For a city to give pref-For a city to give pref erence to minority applicants in awarding construction contracts, it normally must identify past unconstitutional or illegal discrimination against minority construction firms. Because the policy is based on suspect traits (race and national origin), it will violate the equal protection clause unless it is necessary to promote a compelling state unless it is necessary to promote a compelling state unless interest. ■ Generally, few laws or actions survive strict- scrutiny analysis by the courts.

Intermediate Scrutiny Another standard, that of intermediate scrutiny, is applied in cases involving dis- crimination based on gender or legitimacy (children born out of wedlock). Laws using these classifications must be substantially related to important government

objectives. ■ EXAMPLE 4.17 An important government An important government objective is preventing illegitimate teenage pregnancies. Males and females are not similarly situated in this regard because only females can become pregnant. Therefore, a law that punishes men but not women for statutory rape will be upheld even though it treats men and women unequally. ■

The state also has an important objective in establish- ing time limits (called statutes of limitation) for how long after an event a particular type of action can be brought. Nevertheless, the limitation period must be substantially related to the important objective of preventing fraudulent related to the important objective of preventing fraudulent related to the important objective of preventing fraudulent related to the important objective of preventing fraudulent or outdated claims. ■ EXAMPLE 4.18 A state law requires illegitimate children to bring paternity suits within six years of their births in order to seek support from their fathers. A court will strike down this law if legitimate chil- dren are allowed to seek support from their parents at any time. Distinguishing between support claims on the basis of legitimacy is not related to the important government objective of preventing fraudulent or outdated claims. ■

The “Rational Basis” Test In matters of economic or social welfare, a classification will be considered valid if there is any conceivable rational basis on which the classification rational basis on which the classification rational basis might relate to a legitimate government interest. It is almost impossible for a law or action to fail the rational basis test.

■ CASE IN POINT 4.19 A Kentucky statute prohibits businesses that sell substantial amounts of staple grocer- ies or gasoline from applying for a license to sell wine and liquor. A local grocer (Maxwell’s Pic-Pac) filed a lawsuit against the state, alleging that the statute and the regu- lation were unconstitutional under the equal protection clause. The court applied the rational basis test and ruled that the statute and regulation were rationally related to a legitimate government interest in reducing access to products with high alcohol content.

The court cited the problems caused by alcohol, including drunk driving, and noted that the state’s inter- est in limiting access to such products extends to the gen- eral public. Grocery stores and gas stations pose a greater risk of exposing members of the public to alcohol. For these and other reasons, the state can restrict these places from selling wine and liquor.32 ■

4–4 Privacy Rights The U.S. Constitution does not explicitly mention a general right to privacy. In a 1928 Supreme Court case,

32. Maxwell’s Pic-Pac, Inc. v. Dehner, 739 F.3d 936 (6th Cir. 2014).

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CHAPTER 4 Business and the Constitution 85

Olmstead v. United States,33 Justice Louis Brandeis stated in his dissent that the right to privacy is “the most com- prehensive of rights and the right most valued by civilized men.” The majority of the justices at that time, however, did not agree with Brandeis.

It was not until the 1960s that the Supreme Court endorsed the view that the Constitution protects indi- vidual privacy rights. In a landmark 1965 case, Griswold v. Connecticut,34 the Supreme Court held that a consti- tutional right to privacy was implied by the First, Third, Fourth, Fifth, and Ninth Amendments.

Today, privacy rights receive protection under vari- ous federal statutes as well the U.S. Constitution. State constitutions and statutes also secure individuals’ privacy rights, often to a significant degree. Privacy rights are also protected to an extent under tort law, consumer law, and employment law.

4–4a Federal Privacy Legislation In the last several decades, Congress has enacted a num- ber of statutes that protect the privacy of individuals in

33. 277 U.S. 438, 48 S.Ct. 564, 72 L.Ed. 944 (1928). 34. 381 U.S. 479, 85 S.Ct. 1678, 14 L.Ed.2d 510 (1965).

various areas of concern. Most of these statutes deal with personal information collected by governments or pri- vate businesses.

In the 1960s, Americans were sufficiently alarmed by the accumulation of personal information in government files that they pressured Congress to pass laws permitting individuals to access their files. Congress responded by passing the Freedom of Information Act, which allows any person to request copies of any information on her or him contained in federal government files. Congress later enacted the Privacy Act, which also gives persons the right to access such information.

In the 1990s, responding to the growing need to protect the privacy of individuals’ health records— particularly computerized records—Congress passed the Health Insurance Portability and Accountability Act (HIPAA).35 This act defines and limits the circumstances in which an individual’s “protected health informa- tion” may be used or disclosed by health-care providers, health-care plans, and others. These and other major fed- eral laws protecting privacy rights are listed and briefly described in Exhibit 4–2.

35. HIPAA was enacted as Pub. L. No. 104-191 (1996) and is codified in 29 U.S.C.A. Sections 1181 et seq.

EXHIBIT 4–2 Federal Legislation Relating to Privacy

Provides that individuals have a right to obtain access to information about them collected in government files.

Freedom of Information Act (1966)

Privacy Act (1974) Protects the privacy of individuals about whom the federal government has information. Regulates agencies’ use and disclosure of data, and gives individuals access to and a means to correct inaccuracies.

Electronic Communications Privacy Act (1986)

Prohibits the interception of information communicated by electronic means.

Health Insurance Portability and Accountability Act (1996)

Requires health-care providers and health-care plans to inform patients of their privacy rights and of how their personal medical information may be used. States that medical records may not be used for purposes unrelated to health care or disclosed without permission.

Financial Services Modernization Act (Gramm-Leach-Bliley Act) (1999)

Prohibits the disclosure of nonpublic personal information about a consumer to an unaffiliated third party unless strict disclosure and opt-out requirements are met.

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86 UNIT ONE The Foundations

Debate This . . . Legislation aimed at “protecting people from themselves” concerns the individual as well as the pub- lic in general. Protective helmet laws are just one example of such legislation. Should individuals be allowed to engage in unsafe activities if they choose to do so?

Reviewing: Business and the Constitution

A state legislature enacted a statute that required any motorcycle operator or passenger on the state’s highways to wear a protective helmet. Jim Alderman, a licensed motorcycle operator, sued the state to block enforcement of the law. Alder- man asserted that the statute violated the equal protection clause because it placed requirements on motorcyclists that were not imposed on other motorists. Using the information presented in the chapter, answer the following questions. 1. Why does this statute raise equal protection issues instead of substantive due process concerns? 2. What are the three levels of scrutiny that the courts use in determining whether a law violates the equal protection

clause? 3. Which standard of scrutiny, or test, would apply to this situation? Why? 4. Applying this standard, is the helmet statute constitutional? Why or why not?

Terms and Concepts Bill of Rights 75 checks and balances 71 commerce clause 71 compelling government interest 77 due process clause 83 equal protection clause 84 establishment clause 80

federal form of government 70 �ltering software 79 free exercise clause 80 full faith and credit clause 71 meta tag 80 police powers 70 preemption 75

privileges and immunities clause 71 probable cause 82 search warrant 82 sovereignty 70 supremacy clause 75 symbolic speech 77

4–4b The USA Patriot Act and the USA Freedom Act

The USA Patriot Act was passed by Congress in the wake of the terrorist attacks of September 11, 2001.36 The Patriot Act has given government officials increased authority to monitor Internet activities (such as e-mail and Web site visits) and to gain access to personal financial information and student information. Law enforcement officials can track the telephone and e-mail communications of one party to find out the identity of the other party or parties. Privacy advocates argue that

36. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, also known as the USA Patriot Act, was enacted as Pub. L. No. 107-56 (2001) and last reauthorized by Pub. L. No. 112-114 (2011).

this law adversely affects the constitutional rights of all Americans, and it has been widely criticized in the media.

While the bulk of the Patriot Act is permanent law, its most controversial surveillance provisions had to be reau- thorized every four years and expired in June 2015. Most of the expired provisions were restored by the USA Free- dom Act, which extends surveillance authority through 2019.37 The Freedom Act did amend a portion of the Patriot Act in an attempt to stop the National Security Agency (NSA) from collecting mass phone data. (Note, however, that the act still allows the data to be collected by private phone companies, and the NSA can obtain data about targeted individuals through these companies.)

37. The full title of this statute is Uniting and Strengthening America by Fulfilling Rights and Ending Eavesdropping, Dragnet-collection and Online Monitoring, H.R. 3361.

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CHAPTER 4 Business and the Constitution 87

Issue Spotters 1. Can a state, in the interest of energy conservation, ban

all advertising by power utilities if conservation could be accomplished by less restrictive means? Why or why not? (See Business and the Bill of Rights.)

2. Suppose that a state imposes a higher tax on out-of-state companies doing business in the state than it imposes on

in-state companies. Is this a violation of equal protection if the only reason for the tax is to protect the local firms from out-of-state competition? Explain. (See The Consti- tutional Powers of Government.)

• Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios 4–1. Commerce Clause. A Georgia state law requires the use of contoured rear-fender mudguards on trucks and trail- ers operating within Georgia state lines. The statute further makes it illegal for trucks and trailers to use straight mud- guards. In approximately thirty-five other states, straight mud- guards are legal. Moreover, in Florida, straight mudguards are explicitly required by law. There is some evidence suggesting that contoured mudguards might be a little safer than straight mudguards. Discuss whether this Georgia statute violates any constitutional provisions. (See The Constitutional Powers of Government.) 4–2. Equal Protection. With the objectives of prevent- ing crime, maintaining property values, and preserving the

quality of urban life, New York City enacted an ordinance to regulate the locations of adult entertainment establishments. The ordinance expressly applied to female, but not male, top- less entertainment. Adele Buzzetti owned the Cozy Cabin, a New York City cabaret that featured female topless danc- ers. Buzzetti and an anonymous dancer filed a suit in a fed- eral district court against the city, asking the court to block the enforcement of the ordinance. The plaintiffs argued, in part, that the ordinance violated the equal protection clause. Under the equal protection clause, what standard applies to the court’s consideration of this ordinance? Under this test, how should the court rule? Why? (See Due Process and Equal Protection.)

Business Case Problems 4–3. Spotlight on Plagiarism—Due Process. �e Russ

College of Engineering and Technology of Ohio University announced in a press conference that it had found “rampant and �agrant plagiarism” in the theses of mechanical engineering graduate stu-

dents. Faculty singled out for “ignoring their ethical responsi- bilities” included Jay Gunasekera, chair of the department. Gunasekera was prohibited from advising students. He �led a suit against Dennis Irwin, the dean of Russ College, for violat- ing his due process rights. What does due process require in these circumstances? Why? [Gunasekera v. Irwin, 551 F.3d 461 (6th Cir. 2009)] (See Due Process and Equal Protection.) 4–4. Business Case Problem with Sample Answer— The Dormant Commerce Clause. In 2001, Puerto Rico

enacted a law that requires speci�c labels on cement sold in Puerto Rico and imposes �nes for any violations of these requirements. �e law prohibits the sale or distribution of cement man-

ufactured outside Puerto Rico that does not carry a required label warning that the cement may not be used in government-�nanced construction projects. Antilles Cement Corp., a Puerto Rican �rm that imports foreign cement, �led a complaint in federal court, claiming that this law vio- lated the dormant commerce clause. (�e dormant com- merce clause doctrine applies not only to commerce among the states and U.S. territories, but also to international

commerce.) Did the 2001 Puerto Rican law violate the dor- mant commerce clause? Why or why not? [Antilles Cement mant commerce clause? Why or why not? [Antilles Cement mant commerce clause? Why or why not? [ Corp. v. Fortuno, 670 F.3d 310 (1st Cir. 2012)] (See �e Con- stitutional Powers of Government.) • For a sample answer to Problem 4–4, go to Appendix E at

the end of this text.

4–5. Freedom of Speech. Mark Wooden sent an e-mail to an alderwoman for the city of St. Louis. Attached was a nineteen-minute audio �le that compared her to the biblical character Jezebel. �e audio said she was a “bitch in the Sixth Ward,” spending too much time with the rich and powerful and too little time with the poor. In a menacing, maniacal tone, Wooden said that he was “dusting o� a sawed-o� shot- gun,” called himself a “domestic terrorist,” and referred to the assassination of President John Kennedy, the murder of federal judge John Roll, and the shooting of Representative Gabrielle Gi�ords. Feeling threatened, the alderwoman called the police. Wooden was convicted of harassment under a state criminal statute. Was this conviction unconstitutional under the First Amendment? Discuss. [State of Missouri v. Wooden, 388 S.W.3d 522 (Mo. 2013)] (See Business and the Bill of Rights.)

4–6. Equal Protection. Abbott Laboratories licensed SmithKline Beecham Corp. to market an Abbott human immunode�ciency virus (HIV) drug in conjunction with one of SmithKline’s drugs. Abbott then increased the price

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88 UNIT ONE The Foundations

of its drug fourfold, forcing SmithKline to increase its prices and thereby driving business to Abbott’s own combination drug. SmithKline �led a suit in a federal district court against Abbott. During jury selection, Abbott struck the only self- identi�ed gay person among the potential jurors. (�e pricing of HIV drugs is of considerable concern in the gay commu- nity.) Could the equal protection clause be applied to prohibit discrimination based on sexual orientation in jury selection? Discuss. [SmithKline Beecham Corp. v. Abbott Laboratories, 740 F.3d 471 (9th Cir. 2014)] (See Due Process and Equal Protection.)

4–7. Procedural Due Process. Robert Brown applied for admission to the University of Kansas School of Law. Brown answered “no” to questions on the application asking if he had a criminal history and acknowledged that a false answer con- stituted “cause for . . . dismissal.” In fact, Brown had crimi- nal convictions for domestic battery and driving under the in�uence. He was accepted for admission to the school. When school o�cials discovered his history, however, he was noti- �ed of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. �e o�cials refused to grant Brown a hearing and then expelled him. Did the school’s actions deny Brown due process? Discuss. [Brown v. University of Kansas, 599 Fed.Appx. 833 (10th Cir. 2015)] (See Due Process and Equal Protection.) 4–8. The Commerce Clause. Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains its corporate headquarters, four warehouses, and a maintenance facility and terminal location for repairing and storing vehicles in Massachusetts. All of the vehicles in Regency’s �eet were bought in other states. Massa- chusetts imposes a use tax on all taxpayers subject to its jurisdic- tion, including those that do business in interstate commerce, as Regency does. When Massachusetts imposed the tax on the purchase price of each tractor and trailer in Regency’s �eet, the trucking �rm challenged the assessment as discriminatory under the commerce clause. What is the chief consideration under the commerce clause when a state law a�ects interstate commerce?

Is Massachusetts’s use tax valid? Explain. [Regency Transporta- tion, Inc. v. Commissioner of Revenue, 473 Mass. 459, 42 N.E.3d 1133 (2016)] (See �e Constitutional Powers of Government.)�e Constitutional Powers of Government.)�e Constitutional Powers of Government 4–9. A Question of Ethics—Defamation. Aric Toll owns

and manages the Balboa Island Village Inn, a restau- rant and bar in Newport Beach, California. Anne Lemen lives across from the inn. Lemen complained to the authorities about the inn’s customers, whom

she called “drunks” and “whores.” She referred to Aric’s wife as “Madam Whore” and told neighbors that the owners were involved in illegal drugs and prostitution. Lemen told Ewa Cook, a bartender at the Inn, that Cook “worked for Satan.” She repeated her statements to potential customers, and the inn’s sales dropped more than 20 percent. �e inn �led a suit against Lemen. [ Balboa Island Village Inn, Inc. v. Lemen, 40 Cal.4th 1141, 156 P.3d 339 (2007)] (See 156 P.3d 339 (2007)] (See 156 P.3d 339 (2007)] Business and the Bill of Rights.) (a) Are Lemen’s statements about the inn’s owners, customers,

and activities protected by the U.S. Constitution? Should such statements be protected? In whose favor should the court rule? Why?

(b) Did Lemen behave unethically in the circumstances of this case? Explain.

4–10. Special Case Analysis—Freedom of Religion. Go to Case Analysis 4.3, �ompson v. Holm. Read the excerpt, and answer the following questions. (a) Issue: The focus in this case was on an allegation of the

violation of which clause of the U.S. Constitution, and by what means?

(b) Rule of Law: What is required to establish that this clause has been violated?

(c) Applying the Rule of Law: How did the court deter- mine whether the claim of a violation was supported in this case?

(d) Conclusion: What did the federal appellate court con- clude with respect to the plaintiff ’s claim, and what did the court order as the next step in the case?

Legal Reasoning Group Activity 4–11. Free Speech and Equal Protection. For many years, New York City has had to deal with the vandalism and defacement of public property caused by unauthorized graf-defacement of public property caused by unauthorized graf-defacement of public property caused by unauthorized graf �ti. In an e�ort to stop the damage, the city banned the sale of aerosol spray-paint cans and broad-tipped indelible markers to persons under twenty-one years of age. �e new rules also prohibited people from possessing these items on property other than their own. Within a year, �ve people under age twenty-one were cited for violations of these regulations, and 871 individuals were arrested for actually making gra�ti.

Lindsey Vincenty and other artists wished to create graf-Lindsey Vincenty and other artists wished to create graf-Lindsey Vincenty and other artists wished to create graf �ti on legal surfaces, such as canvas, wood, and clothing. Unable to buy supplies in the city or to carry them into the city from elsewhere, Vincenty and others �led a lawsuit on behalf of themselves and other young artists against Michael

Bloomberg, the city’s mayor, and others. �e plainti�s claimed that, among other things, the new rules violated their right to freedom of speech. (a) One group will argue in favor of the plaintiffs and provide

several reasons why the court should hold that the city’s new rules violate the plaintiffs’ freedom of speech. (See Business and the Bill of Rights.)

(b) Another group will develop a counterargument that out- lines the reasons why the new rules do not violate free speech rights. (See Business and the Bill of Rights.)

(c) A third group will argue that the city’s ban violates the equal protection clause because it applies only to per- sons under age twenty-one. (See Due Process and Equal Protection.)Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

89

CHAPTER 5

5–1 Business Ethics At the most basic level, the study of ethics is the study of what constitutes right or wrong behavior. It is a branch of philosophy focusing on morality and the way moral prin- ciples are derived and implemented. Ethics has to do with the fairness, justness, rightness, or wrongness of an action.

The study of business ethics typically looks at the decisions businesses make or have to make and whether those decisions are right or wrong. It has to do with how businesspersons apply moral and ethical principles in making their decisions. Those who study business eth- ics also evaluate what duties and responsibilities exist or should exist for businesses.

In this book, we include an Application and Ethics fea- ture at the end of each unit to expand on the concepts of business ethics discussed in that unit. We also cover ethi- cal issues in Ethics Today features that appear in a number Ethics Today features that appear in a number Ethics Today of chapters.

5–1a Why Is Studying Business Ethics Important?

Over the last hundred years, the public perception of the corporation has changed from an entity that primarily generates revenues for its owners to an entity that partici- pates in society as a corporate citizen. Originally, the only

goal or duty of a corporation was to maximize profits. Although many people today may view this idea as greedy or inhumane, the rationale for the profit-maximization theory is still valid.

Profit Maximization In theory, if all firms strictly adhere to the goal of profit maximization, resources flow to where they are most highly valued by society. Corpora- tions can focus on their strengths, and other entities that are better suited to deal with social problems and perform charitable acts can specialize in those activities. The gov- ernment, through taxes and other financial allocations, can shift resources to those other entities to perform pub- lic services. Thus, in an ideal world, profit maximization leads to the most efficient allocation of scarce resources.

The Rise of Corporate Citizenship Over the years, as resources purportedly were not sufficiently reallocated to cover the costs of social needs, many people became dis- satisfied with the profit-maximization theory. Investors and others began to look beyond profits and dividends and to consider the triple bottom line—a corporation’s profits, its triple bottom line—a corporation’s profits, its triple bottom line impact on people, and its impact on the planet. Magazines and Web sites began to rank companies based on their envi- ronmental impacts and their ethical decisions. The corpo- ration came to be viewed as a “citizen” that was expected to participate in bettering communities and society.

One of the most complex issues businesspersons and corpo-rations face is ethics. It is not as well defined as the law, and yet it can have substantial impacts on a firm’s finances and reputation, espe- cially when the firm is involved in a well-publicized scandal. Some scan- dals arise from activities that are legal, but are ethically questionable. Other

scandals arise from conduct that is both illegal and unethical.

Consider, for example, Volkswa- gen’s corporate executives, who were accused of cheating on the pollu- tion emissions tests of millions of vehicles that were sold in the United States. Volkswagen admitted in 2015 that it had installed “defeat device” software in its diesel models. The

software detected when the car was being tested and changed its perfor- mance to improve the test outcome. As a result, the diesel cars showed low emissions—a feature that made the cars more attractive to today’s consumers. Ultimately, millions of Volkswagen vehicles were recalled, and the company suffered its first quarterly loss in fifteen years.

Business Ethics

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90 UNIT ONE The Foundations

Even so, many still believe that corporations are fun- damentally profit-making entities that should have no responsibility other than profit maximization.

5–1b The Importance of Ethics in Making Business Decisions

Whether one believes in profit maximization or corporate citizenship, ethics is important in making business deci- sions. When making decisions, a business should evaluate: 1. The legal implications of each decision. 2. The public relations impact. 3. The safety risks for consumers and employees. 4. The financial implications. This four-part analysis will assist the firm in making decisions that not only maximize profits but also reflect good corporate citizenship.

Long-Run Profit Maximization In attempting to maximize profits, corporate executives and employees have to distinguish between short-run and long-run profit maximization. In the short run, a company may increase its profits by continuing to sell a product even though it knows that the product is defective. In the long run, though, because of lawsuits, large settlements, and bad publicity, such unethical conduct will cause profits to suffer. Thus, business ethics is consistent only with long- run profit maximization. An overemphasis on short-term profit maximization is the most common reason that ethi- cal problems occur in business.

■ CASE IN POINT 5.1 When the powerful narcotic painkiller OxyContin was first marketed, its manufac- turer, Purdue Pharma, claimed that it was unlikely to lead to drug addiction or abuse. Internal company docu- ments later showed that the company’s executives knew that OxyContin could be addictive, but kept this risk a secret to boost sales and maximize short-term profits.

Subsequently, Purdue Pharma and three former exec- utives pleaded guilty to criminal charges that they had misled regulators, patients, and physicians about Oxy- Contin’s risks of addiction. Purdue Pharma agreed to pay $600 million in fines and other payments. The three for- mer executives agreed to pay $34.5 million in fines and were barred from federal health programs for a period of fifteen years. Thus, the company’s focus on maximizing profits in the short run led to unethical conduct that hurt profits in the long run.1 ■

1. United States v. Purdue Frederick Co., 495 F.Supp.2d 569 (W.D.Va. 2007).

The Internet Can Ruin Reputations In the past, negative information or opinions about a company might remain hidden. Now, however, cyberspace provides a forum where disgruntled employees, unhappy consum- ers, or special interest groups can post derogatory remarks. Thus, the Internet has increased the potential for a major corporation (or other business) to suffer damage to its reputation or loss of profits through negative publicity.

Wal-Mart and Nike in particular have been frequent targets for advocacy groups that believe those corporations exploit their workers. Although some of these assertions may be unfounded or exaggerated, the courts generally have refused to consider them defamatory (a tort giving defamatory (a tort giving defamatory rise to a civil lawsuit). Most courts regard online attacks as expressions of opinion protected by the First Amendment. Even so, corporations often incur considerable expense in running marketing campaigns to thwart bad publicity and may even face legal costs if the allegations lead to litigation.

Image Is Everything The study of business ethics is concerned with the purposes of a business and how that business achieves those purposes. Thus, business ethics is concerned not only with the image of the business, but also with the impact that the business has on the envi- ronment, customers, suppliers, employees, and the global economy.

Unethical corporate decision making can negatively affect suppliers, consumers, the community, and society as a whole. It can also have a negative impact on the repu- tation of the company and the individuals who run that company. Hence, an in-depth understanding of business ethics is important to the long-run viability of any cor- poration today.

5–1c The Relationship of Law and Ethics Because the law does not codify all ethical requirements, compliance with the law is not always sufficient to deter- mine “right” behavior. Laws have to be general enough to apply in a variety of circumstances. Laws are broad in their purpose and their scope. They prohibit or require certain actions to avoid significant harm to society.

When two competing companies secretly agree to set prices on products, for instance, society suffers harm— typically, the companies will charge higher prices than they could if they continued to compete. This harm inflicted on consumers has negative consequences for the economy, and so colluding to set prices is an illegal activ- ity. Similarly, when a company is preparing to issue stock, the law requires certain disclosures to potential investors. This requirement is meant to prevent harms that come

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CHAPTER 5 Business Ethics 91

with uninformed investing. Such harms occurred in the 1920s and may have contributed to the stock market crash and the Great Depression.

Moral Minimum Compliance with the law is some- times called the moral minimum. If people and entities

merely comply with the law, they are acting at the low- est ethical level society will tolerate. The study of ethics goes beyond those legal requirements to evaluate what is right for society. The following case illustrates some con- sequences of a businessperson’s failure to meet the moral minimum.

Background and Facts Rick Scott deposited $2 million into an escrow account maintained by a company owned by Salvatore Carpanzano. Immediately after the deposit was made, in violation of the escrow agreement, the funds were withdrawn. When Scott was unable to recover his money, he filed a suit against Salvatore Carpanzano and others, including Salvatore’s daughter Carmela Carpan- zano. In the complaint, Scott made no allegations of acts or knowledge on Carmela’s part.

Salvatore failed to cooperate with discovery and did not respond to attempts to contact him by certified mail, regular mail, or e-mail. Salvatore also refused to make an appearance in the court and did not finalize a settlement negotiated between the parties’ attorneys. Carmela denied that she was involved in her father’s business or the Scott transaction. The court found that the defendants had in- tentionally failed to respond to the litigation and issued a judgment for more than $6 million in Scott’s favor. The defendants appealed to the U.S. Court of Appeals for the Fifth Circuit.

In the Language of the Court PER CURIAM [By the Whole Court].PER CURIAM [By the Whole Court].PER CURIAM

* * * * A willful default is an intentional failure to respond to litigation. The district court found that [the]

Defendants willfully defaulted based on evidence that the Defendants were aware of the proceedings against them and that [their] attorneys were specifically instructed not to enter an appearance [partici- pate] in this case. [Emphasis added.]

The evidence substantially supports the district court’s finding as to Mr. Carpanzano. First, Mr. Carpanzano’s first attorney withdrew [from the case] because Mr. Carpanzano failed to cooperate with the discovery process and refused to appear as requested and ordered. Second, * * * Mr. Carpanzano instructed his second set of attorneys to negotiate settlement of this matter but not to enter an appear- ance in the district court. Significantly, Mr. Carpanzano never denies this allegation. Third, * * * Mr. Carpanzano and his attorneys were well aware that the case was proceeding toward default and * * * were in communication with each other during this time. Fourth, * * * once final execution of settle- ment papers was at hand, Mr. Carpanzano also ceased communication with his second set of attorneys and did not finalize the settlement. Finally, other than ambiguously suggesting that a health condition (unsupported by any evidence of what the condition was) and absence from the country (unsupported by any evidence that electronic communication was not possible from that country) prevented him from defending this action, Mr. Carpanzano offers no real reason why he did not answer the * * * complaint.

* * * * By contrast, the record does not support the district court’s finding that * * * Ms. [Carmela] Carpan-

zano also willfully defaulted. * * * Ms. Carpanzano repeatedly indicated that [she was] relying on Mr. Carpanzano * * * to make

sure [her] interests were protected. Nothing in the record contradicts this assertion. While [her] reliance on Mr. Carpanzano acting with the attorneys he retained may have been negligent, it does not amount to an intentional failure to respond to litigation.

Scott v. Carpanzano United States Court of Appeals, Fifth Circuit, 556 Fed.Appx. 288 (2014).

Case 5.1

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92 UNIT ONE The Foundations

* * * * * * * [Furthermore] the * * * complaint * * * contains no factual allegations of acts or omissions on

the part of Ms. Carpanzano. It does not allege that she ever was in contact with Scott, that she was in control of the * * * escrow account, or that she wrongfully transferred any funds out of the account. Nor does it allege any intent or knowledge on the part of Ms. Carpanzano * * *. Indeed, an examination of the complaint reveals that there is not a sufficient basis in the pleadings for the judgment * * * entered against Ms. Carpanzano.

The defenses presented by Ms. Carpanzano to the district court assert that she had no knowledge of the details of her father’s business transactions, she did not personally enter into any contracts with Scott or seek to defraud him, and * * * she had limited involvement in the facts of this case.

* * * * * * * Even if Scott were able to prove the entirety of the * * * complaint, we fail to see how it would

justify a judgment * * * against Ms. Carpanzano.

Decision and Remedy The U.S. Court of Appeals for the Fifth Circuit affirmed the judgment against Salvatore, but reversed the decision against Carmela. Scott had made no allegations of acts on Carmela’s part.

Critical Thinking • Ethical Are Salvatore’s actions likely to affect his business’s ability to profit in the long run? Discuss. • Legal Environment Did Carmela Carpanzano meet the minimum acceptable standard for ethical

business behavior? Explain.

Case 5.1 Continued

Ethical Requirements The study of ethics goes beyond legal requirements to evaluate what is right for society. Businesspersons thus must remember that an action that is legal is not necessarily ethical. For instance, a company’s refusal to negotiate liability claims for alleged injuries because of a faulty product is legal. But it may not be ethical if the reason the business refuses to negotiate is to increase the injured party’s legal costs and force the person to drop a legitimate claim.

Private Company Codes of Ethics Most compa- nies attempt to link ethics and law through the creation of internal codes of ethics. Company codes are not law. Instead, they are rules that the company sets forth that it can also enforce (by terminating an employee who does not follow them, for instance). Codes of conduct typi- cally outline the company’s policies on particular issues and indicate how employees are expected to act.

■ EXAMPLE 5.2 Google’s code of conduct starts with the motto “Don’t be evil.” The code then makes general statements about how Google promotes integrity, mutual respect, and the highest standard of ethical business con- duct. Google’s code also provides specific rules on a num- ber of issues, such as privacy, drugs and alcohol, conflicts of interest, co-worker relationships, and confidentiality.

It even has a dog policy. The company takes a stand against employment discrimination that goes further than the law requires—it prohibits discrimination based on sexual orientation, gender identity or expression, and veteran status. ■

Industry Ethical Codes Numerous industries have also developed their own codes of ethics. The American Institute of Certified Public Accountants (AICPA) has a comprehensive Code of Professional Conduct for the ethical practice of accounting. The American Bar Associa- tion has model rules of professional conduct for attorneys, and the American Nurses Association has a code of ethics that applies to nurses. These codes can give guidance to decision makers facing ethical questions.

Violation of an industry code may result in discipline of an employee or sanctions against a company from the industry organization. Remember, though, that these internal codes are not laws, so their effectiveness is deter- mined by the commitment of the industry or company leadership to enforcing the codes.leadership to enforcing the codes.leadership to enforcing the codes.

■ CASE IN POINT 5.3 National Football League (NFL) rules require footballs to be inflated to a minimum air pressure (pounds per square inch, or psi) as measured by the referees. This rule gained attention when the New

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CHAPTER 5 Business Ethics 93

England Patriots played the Indianapolis Colts for the American Football Conference championship in early 2015. After Tom Brady, the Patriots quarterback, threw a pass that was intercepted, officials became suspicious that the football was underinflated. The game continued after NFL officials verified the psi in all the footballs, and the Patriots won.

Nevertheless, allegations continued that Brady and the Patriots had deflated balls during the game—a con- troversy popularly known as “deflategate.” The NFL performed an investigation, and after arbitration, the league announced that Brady would be suspended for four games. Brady appealed, and a federal district court vacated the arbitrator’s decision to suspend, but a federal appellate court reinstated Brady’s suspension in 2016. The reviewing court held that the arbitrator had grounds to suspend Brady for being generally aware that the team had intentionally released air from the game balls.2 ■

“Gray Areas” in the Law Because it is often highly subjective and subject to change over time without any sort of formal process, ethics is less certain than law. But the law can also be uncertain. Numerous “gray areas” in the law make it difficult to predict with certainty how a court will apply a given law to a particular action. In addi- tion, laws frequently change.

5–2 Business Ethics and Social Media

Most young people may think of social media—Facebook, Flickr, Instagram, Tumblr, Twitter, Pinterest, Google+, LinkedIn, VR, and the like—as simply ways to commu- nicate rapidly. Businesses, though, often face ethical issues with respect to these same social media platforms.

5–2a Hiring Procedures In the past, to learn about a prospective employee, an employer would ask the candidate’s former employers for references. Today, employers are likely to also conduct Internet searches to discover what job candidates have posted on their Facebook pages, blogs, and tweets.

On the one hand, job candidates may be judged by what they post on social media. On the other hand, though, they may be judged because they do not

2. National Football League Management Council v. National Football League Players Association, 820 F.3d 527 (2d Cir. 2016).

participate in social media. Given that the vast majority of younger people do use social media, some employers have decided that the failure to do so raises a red flag. In either case, many people believe that judging a job candidate based on what she or he does outside the work environment is unethical.

5–2b The Use of Social Media to Discuss Work-Related Issues

Because so many Americans use social media daily, they often discuss work-related issues there. Numerous com- panies have strict guidelines about what is appropriate and inappropriate for employees to say when making posts on their own or others’ social media accounts. A number of companies have fired employees for such activities as criticizing other employees or managers through social media outlets. Until recently, such disci- plinary measures were considered ethical and legal.

Responsibility of Employers Today, in con- trast, a ruling by the National Labor Relations Board (NLRB—the federal agency that investigates unfair labor practices) has changed the legality of such labor practices) has changed the legality of such labor practices) has changed the legality of such actions. ■ EXAMPLE 5.4 At one time, Costco’s social media policy specified that its employees should not make statements that would damage the company, harm another person’s reputation, or violate the com- pany’s policies. Employees who violated these rules were subject to discipline and could be fired.

The NLRB ruled that Costco’s social media policy violated federal labor law, which protects employees’ right to engage in “concerted activities.” Employees can freely associate with each other and have conversations about common workplace issues without employer inter- ference. This right extends to social media posts. There- fore, an employer cannot broadly prohibit its employees from criticizing the company or co-workers, supervisors, or managers via social media. ■

Responsibility of Employees While most of the discussion in this chapter concerns the ethics of business management, employee ethics is also an important issue. For instance, is it ethical for employees to make negative posts in social media about other employees or, more commonly, about managers? After all, negative comments about managers reflect badly on those managers, who often are reluctant to respond via social media to such criticism. Disgruntled employees may exaggerate the neg- ative qualities of managers whom they do not like.

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94 UNIT ONE The Foundations

Some may consider the decision by the National Labor Relations Board outlined in Example 5.4 to be too Example 5.4 to be too Example 5.4 lenient toward employees and too stringent toward man- agement. There is likely to be an ongoing debate about how to balance employees’ right to free expression against employers’ right to prevent the spreading of inaccurate negative statements across the Internet.

5–3 Ethical Principles and Philosophies

As Dean Krehmeyer, executive director of the Business Roundtable’s Institute for Corporate Ethics, once said, “Evidence strongly suggests being ethical—doing the right thing—pays.” Even if ethics “pays,” though, instill- ing ethical business decision making into the fabric of a business organization is no small task.

How do business decision makers decide whether a given action is the “right” one for their firms? What ethi- cal standards should be applied? Broadly speaking, ethi- cal reasoning—the application of morals and ethics to cal reasoning—the application of morals and ethics to cal reasoning a situation—applies to businesses just as it does to indi- viduals. As businesses make decisions, they must analyze their alternatives in a variety of ways, one of which is the ethical implications of each alternative.

Generally, the study of ethics is divided into two major categories—duty-based ethics and outcome- based ethics. Duty-based ethics is rooted in the idea that every person has certain duties to others, including both humans and the planet. Outcome-based ethics focuses on the impacts of a decision on society or on key stakeholders.

5–3a Duty-Based Ethics Duty-based ethics focuses on the obligations of the cor- poration. It deals with standards for behavior that tra- ditionally were derived from revealed truths, religious authorities, or philosophical reasoning. These standards involve concepts of right and wrong, duties owed, and rights to be protected. Corporations today often describe these values or duties in their mission statements or stra- tegic plans. Some companies base their statements on a nonreligious rationale, while others derive their values from religious doctrine.

Religious Ethical Principles Nearly every religion has principles or beliefs about how one should treat others. In the Judeo-Christian tradition, which is the

dominant religious tradition in the United States, the Ten Commandments of the Old Testament establish these fundamental rules for moral action. The principles of the Muslim faith are set out in the Qur’an, and Hindus find their principles in the four Vedas.

Religious rules generally are absolute with respect to Religious rules generally are absolute with respect to Religious rules generally are absolute with respect to the behavior of their adherents. ■ EXAMPLE 5.5 The commandment “Thou shalt not steal” is an absolute mandate for a person who believes that the Ten Com- mandments reflect revealed truth. Even a benevolent motive for stealing (such as Robin Hood’s) cannot justify the act because the act itself is inherently immoral and thus wrong. ■

For businesses, religious principles can be a unify- ing force for employees or a rallying point to increase employee motivation. They can also present problems, however, because different owners, suppliers, employees, and customers may have different religious backgrounds. Taking an action based on religious principles, especially when those principles address socially or politically con- troversial topics, can lead to negative publicity and even to protests or boycotts.

Principles of Rights Another view of duty-based ethics focuses on basic rights. The principle that human beings have certain fundamental rights (to life, freedom, and the pursuit of happiness, for example) is deeply embedded in Western culture.

Those who adhere to this principle of rights, or “rights theory,” believe that a key factor in determining whether a business decision is ethical is how that decision affects the rights of others. These others include the firm’s owners, its employees, the consumers of its products or services, its suppliers, the community in which it does business, and society as a whole.

Conflicting Rights. A potential dilemma for those who support rights theory is that they may disagree on which rights are most important. When considering all those a�ected by a business decision to downsize a �rm, for example, how much weight should be given to employ- ees relative to shareholders? Which employees should be laid o� �rst—those with the highest salaries or those who have worked there for less time (and have less seniority)? How should the �rm weigh the rights of customers rela- tive to the community, or employees relative to society as a whole?

Resolving Conflicts. In general, rights theorists believe that whichever right is stronger in a particular cirthat whichever right is stronger in a particular cirthat whichever right is stronger in a particular cir- cumstance takes precedence. ■ EXAMPLE 5.6 Murray

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CHAPTER 5 Business Ethics 95

Chemical Corporation has to decide whether to keep a chemical plant in Utah open, thereby saving the jobs of a hundred and �fty workers, or shut it down. Closing the plant will avoid contaminating a river with pollut- ants that might endanger the health of tens of thousands of people. In this situation, a rights theorist can easily choose which group to favor because the value of the right to health and well-being is obviously stronger than the basic right to work. Not all choices are so clear-cut, however. ■

Kantian Ethical Principles Duty-based ethical standards may also be derived solely from philosophi- cal reasoning. The German philosopher Immanuel Kant (1724–1804) identified some general guiding principles for moral behavior based on what he thought to be the fundamental nature of human beings. Kant believed that human beings are qualitatively different from other physical objects and are endowed with moral integrity and the capacity to reason and conduct their affairs rationally.

People Are Not a Means to an End. Based on this view of human beings, Kant said that when people are treated merely as a means to an end, they are being treated as the equivalent of objects and are being denied their basic humanity. For instance, a manager who treats subordi- nates as mere pro�t-making tools is less likely to retain motivated and loyal employees than a manager who respects employees. Management research has shown that, in fact, employees who feel empowered to share their thoughts, opinions, and solutions to problems are happier and more productive.

Categorical Imperative. When a business makes uneth- ical decisions, it often rationalizes its action by saying that the company is “just one small part” of the problem or that its decision has had “only a small impact.” A cen- tral theme in Kantian ethics is that individuals should evaluate their actions in light of the consequences that would follow if everyone in society acted in the same way. �is categorical imperative can be applied to any action.

■ EXAMPLE 5.7 CHS Fertilizer is deciding whether to invest in expensive equipment that will decrease profits but will also reduce pollution from its factories. If CHS has adopted Kant’s categorical imperative, the decision makers will consider the consequences if every company invested in the equipment (or if no company did so). If the result would make the world a better place (less pol- luted), CHS’s decision would be clear. ■

5–3b Outcome-Based Ethics: Utilitarianism

In contrast to duty-based ethics, outcome-based ethics focuses on the consequences of an action, not on the nature of the action itself or on any set of preestablished moral values or religious beliefs. Outcome-based ethics looks at the impacts of a decision in an attempt to maxi- mize benefits and minimize harms.

The premier philosophical theory for outcome-based decision making is utilitarianism, a philosophical theory developed by Jeremy Bentham (1748–1832) and modi- fied by John Stuart Mill (1806–1873)—both British phi- losophers. “The greatest good for the greatest number” is a paraphrase of the major premise of the utilitarian approach to ethics.

Cost-Benefit Analysis Under a utilitarian model of ethics, an action is morally correct, or “right,” when, among the people it affects, it produces the greatest amount of good for the greatest number or creates the least amount of harm for the fewest people. When an action affects the majority adversely, it is morally wrong. Applying the utili- tarian theory thus requires the following steps:

1. A determination of which individuals will be affected by the action in question.

2. A cost-benefit analysis, which involves an assess- ment of the negative and positive effects of alterna- tive actions on these individuals.

3. A choice among alternative actions that will produce maximum societal utility (the greatest positive net benefits for the greatest number of individuals).

Thus, if expanding a factory would provide hundreds of jobs but generate pollution that could endanger the lives of thousands of people, a utilitarian analysis would find that saving the lives of thousands creates greater good than providing jobs for hundreds.

Problems with the Utilitarian Approach There are problems with a strict utilitarian analysis. In some situations, an action that produces the greatest good for the most people may not seem to be the most ethi- cal. ■ EXAMPLE 5.8 Phazim Company is producing a drug that will cure a disease in 85 percent of patients, but the other 15 percent will experience agonizing side effects and a horrible, painful death. A quick utilitarian analysis would suggest that the drug should be produced and mar- keted because the majority of patients will benefit. Many people, however, have significant concerns about manu- facturing a drug that will cause such harm to anyone. ■

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96 UNIT ONE The Foundations

5–3c Corporate Social Responsibility In pairing duty-based concepts with outcome-based concepts, strategists and theorists developed the idea of the corporate citizen. Corporate social responsibility (CSR) combines a commitment to good citizenship with a commitment to making ethical decisions, improving society, and minimizing environmental impact.

CSR is a relatively new concept in the history of busi- ness, but a concept that becomes more important every year. Although CSR is not imposed on corporations by law, it does involve a commitment to self-regulation in a way that attends to the text and intent of the law as well as to ethical norms and global standards. A survey of U.S. executives undertaken by the Boston College Cen- ter for Corporate Citizenship found that more than 70 percent of those polled agreed that corporate citizenship must be treated as a priority. More than 60 percent said that good corporate citizenship added to their compa- nies’ profits.

CSR can be a successful strategy for companies, but corporate decision makers must not lose track of the two descriptors in the title: corporate and social. The com- pany must link the responsibility of citizenship with the strategy and key principles of the business. Incorporating both the social and the corporate components of CSR and making ethical decisions can help companies grow and prosper. CSR is most successful when a company undertakes activities that are significant and related to its business operations.

The Social Aspects of CSR Because business con- trols so much of the wealth and power in this country, business has a responsibility to use that wealth and power in socially beneficial ways. Thus, the social aspect requires that corporations demonstrate that they are promot- ing goals that society deems worthwhile and are moving toward solutions to social problems. Companies may be judged on how much they donate to social causes, as well as how they conduct their operations with respect to employment discrimination, human rights, environmen- tal concerns, and similar issues.

Some corporations publish annual social responsibil- ity reports, which may also be called corporate sustain- ability (referring to the capacity to endure) or citizenship ability (referring to the capacity to endure) or citizenship ability (referring to the capacity to endure) or citizenship reports. ■ EXAMPLE 5.9 The software company Syman- tec Corporation issues corporate responsibility reports to demonstrate its focus on critical environmental, social, and governance issues. In its 2014 report, Symantec

pointed out that 88 percent of facilities it owns or leases on a long-term basis are certified as environmentally friendly by the LEED program. LEED stands for Leader- ship in Energy and Environmental Design. Certification requires the achievement of high standards for energy efficiency, material usage in construction, and other envi- ronmental qualities. ■

The Corporate Aspects of CSR Arguably, any socially responsible activity will benefit a corporation. A corporation may see an increase in goodwill from the local community for creating a park, for instance. A corpora- tion that is viewed as a good citizen may see an increase in sales.

At times, the benefit may not be immediate. Con- structing a new plant that meets the high LEED stan- dards may cost more initially. Nevertheless, over the life of the building, the savings in maintenance and utilities may more than make up for the extra cost of construction.

Surveys of college students about to enter the job mar- ket confirm that young people are looking for socially responsible employers. Socially responsible activities may thus cost a corporation now, but may lead to more impressive and more committed employees. Corpora- tions that engage in meaningful social activities retain workers longer, particularly younger ones.workers longer, particularly younger ones.workers longer, particularly younger ones.

■ EXAMPLE 5.10 Pacific Gas and Electric (PG&E) Pacific Gas and Electric (PG&E) in California sends its employees out on Earth Day to help clean and restore state parks. PG&E also provides free solar panels for new Habitat for Humanity homes and donates food to the needy. LinkedIn employees participate in an “InDay” every month to donate time and resources to the community. Zappos donates large amounts of its goods to charities and pays its employees for time off if they are volunteering. ■

Stakeholders One view of CSR stresses that cor- porations have a duty not just to shareholders, but also to other groups affected by corporate decisions—called stakeholders. The rationale for this “stakeholder view” is that, in some circumstances, one or more of these other groups may have a greater stake in company decisions than the shareholders do.

Under this approach, a corporation considers the impact of its decisions on its employees, customers, cred- itors, suppliers, and the community in which it operates. Stakeholders could also include advocacy groups such as environmental groups and animal rights groups. To

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CHAPTER 5 Business Ethics 97

avoid making a decision that may be perceived as unethi- cal and result in negative publicity or protests, a corpora- tion should consider the impact of its decision on the stakeholders.

The most difficult aspect of the stakeholder analysis is determining which group’s interests should receive greater weight if the interests conflict. For instance, companies that are struggling financially sometimes lay off workers to reduce labor costs. But in recent years, some corpora- tions have given greater weight to employees’ interests and have found ways to avoid slashing their workforces. Companies finding alternatives to layoffs included Dell (extended unpaid holidays), Cisco Systems (four-day end-of-year shutdowns), Motorola (salary cuts), and Honda (voluntary unpaid vacation time).

5–4 Making Ethical Business Decisions

Even if officers, directors, and others in a company want to make ethical decisions, it is not always clear what is ethical in a given situation. Thinking beyond things that are easily measured, such as profits, can be challenging. Although profit projections are not always accurate, they are more objective than considering the personal impacts of decisions on employees, shareholders, customers, and the community. But this subjective component of deci- sion making potentially has a great potential influence on a company’s profits.

Companies once considered leaders in their indus- try, such as Enron and the worldwide accounting firm Arthur Andersen, were brought down by the unethical behavior of a few. A two-hundred-year-old British invest- ment banking firm, Barings Bank, was destroyed by the actions of one employee and a few of his friends. Clearly, ensuring that all employees get on the ethical business decision-making “bandwagon” is crucial in today’s fast- paced world.

Individuals entering the global corporate community, even in entry-level positions, must be prepared to make hard decisions. Sometimes, there is no “good” answer to the questions that arise. Therefore, it is important to have tools to help in the decision-making process and to create a framework for organizing those tools. Business deci- sions can be complex and may involve legal concerns, financial questions, possibly health and safety concerns, and ethical components.

5–4a A Systematic Approach Organizing the ethical concerns and issues and approach- ing them systematically can help a businessperson elimi- nate various alternatives and identify the strengths and weaknesses of the remaining alternatives. Ethics consul- tant Leonard H. Bucklin of Corporate-Ethics.US/ has devised a procedure that he calls Business Process Prag- matism/. It involves five steps: Step 1: Inquiry. First, the decision maker must under-

stand the problem. This step involves identifying the parties involved (the stakeholders) and collect- ing the relevant facts. Once the ethical problem or problems are clarified, the decision maker lists any relevant legal and ethical principles that will guide the decision.

Step 2: Discussion. In this step, the decision maker lists possible actions. The ultimate goals for the decision are determined, and each option is evaluated using the laws and ethical principles listed in Step 1.

Step 3: Decision. In this step, those participating in the decision making work together to craft a con- sensus decision or consensus plan of action for the corporation.

Step 4: Justification. In this step, the decision maker articulates the reasons for the proposed action or series of actions. Generally, these reasons should come from the analysis done in Step 3. This step essentially results in documentation to be shared with stakeholders explaining why the proposal is an ethical solution to the problem.

Step 5: Evaluation. This final step occurs once the deci- sion has been made and implemented. The solution should be analyzed to determine if it was effective. The results of this evaluation may be used in making future decisions.

5–4b The Importance of Ethical Leadership Talking about ethical business decision making is meaningless if management does not set standards. Fur- thermore, managers must apply the same standards to themselves as they do to the company’s employees. See this chapter’s Digital Update feature for a discussion of an ethical dilemma that has arisen from the increased use of digital technology by employees after work hours.

Attitude of Top Management One of the most important ways to create and maintain an ethical

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98 UNIT ONE The Foundations

Should Employees Have a “Right of Disconnecting”?

Almost all jobs today involve digital technol- ogy, whether it be e-mail, Internet access, or smartphone use. Most employees, when inter- viewed, say that digital technology increases their productivity and flexibility.

The downside is what some call an “elec- tronic leash”—meaning that employees are constantly connected and end up working when they are not “at work.” Over one-third of full- time workers, for example, say that they frequently check e-mails outside normal working hours.

Do Workers Have the Right to Disconnect?

Because the boundaries between being “at work” and being “at leisure” can be so hazy, some labor unions in other countries have attempted to pass rules that allow employees to disconnect from e-mail and other work-related digital communication during nonworking hours. For instance, a French labor union representing high-tech workers signed an agreement with a large business association recognizing a “right of disconnect- ing.” In Germany, Volkswagen and BMW no longer for- ward e-mail to staff from company servers after the end of the workday. Other German firms have declared that workers are not expected to check e-mail on weekends and holidays. The government is considering legislating such restrictions nationwide.

The Thorny Issue of Overtime and the Fair Labor Standards Act

Payment for overtime work is strictly regulated under the Fair Labor Standards Act (FLSA). According to the United States Supreme Court, in this context, work is “physical work is “physical work or mental exertion (whether burdensome or not) con- trolled or required by the employer and pursued neces- sarily for the benefit of the employer and his business.”a

This definition was extended to off-duty work if such work is an “integral and indispensible part of [employees’] activities.”b

Today’s modern digital connectivity raises issues about the definition of work. Employees at several major companies, including Black & Decker, T-Mobile, and Verizon, have sued for unpaid overtime related to smartphone use.

In another case, a police sergeant has sued the city of Chicago, claiming that he should have been paid over- time for hours spent using his personal digital assistant (PDA).c The police department issues PDAs to officers and requires them to respond to work-related text mes- sages, e-mails, and voice mails not only while on duty, but also while off duty. Off-duty responses are not com- pensated by the city.

Not All Employees Demand the “Right to Disconnect”

According to a recent Gallup poll, 79 percent of full- time employees had either strongly positive or some- what positive views of using computers, e-mail, tablets, and smartphones to work remotely outside of normal business hours. According to the same poll, 17 percent of them report “better overall lives” because of con- stant online connectivity with their work. Finally, work- ing remotely after business hours apparently does not necessarily result in additional work-related stress.

Critical Thinking From an ethical point of view, is there any difference between calling subordinates during off hours for work-related questions and sending them e-mails or text messages?

DIGITAL UPDATE

a. Tennessee Coal, Iron & R. Co. v. Muscoda Local No. 123, 321 U.S. 590, 64 S.Ct. 698, 8 L.Ed. 949 (1944). Although Congress later passed a statute that superseded the holding in this case, the statute gave the courts broad authority to interpret the FLSA’s definition of work. 29 U.S.C. Section 251(a). See Integrity Staffing Solutions, Inc. v. Busk, ___ U.S. ___, 135 S.Ct. 513, 190 L.Ed.2d 410 (2014).

b. Steiner v. Mitchell, 350 U.S. 247, 76 S.Ct. 330, 100 L.Ed. 267 (1956).

c. Allen v. City of Chicago, 2014 WL 5461856 (N.D.Ill. 2014).

workplace is for top management to demonstrate its com- mitment to ethical decision making. A manager who is not totally committed to an ethical workplace rarely succeeds in creating one. Management’s behavior, more than any-in creating one. Management’s behavior, more than any-in creating one. Management’s behavior, more than any thing else, sets the ethical tone of a firm. Employees take their cues from management.

Managers have found that discharging even one employee for ethical reasons has a tremendous impact as

a deterrent to unethical behavior in the workplace. This is true even if the company has a written code of ethics. If management does not enforce the company code, the code is essentially nonexistent.

The administration of a university may have had a similar concept in mind in the following case when it applied the school’s professionalism standard to a student who had engaged in serious misconduct.Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

CHAPTER 5 Business Ethics 99

Background and Facts The curriculum at Case Western Reserve University School of Medicine identifies nine “core competencies.” At the top of the list is professionalism, which includes “ethi- cal, honest, responsible and reliable behavior.” The university’s Committee on Students determines whether a student has met the professionalism requirements.

Amir Al-Dabagh enrolled at the school and did well academically. But he sexually harassed fellow students, often asked an instructor not to mark him late for class, received complaints from hospital staff about his demeanor, and was convicted of driving while intoxicated. The Committee on Students unanimously refused to certify him for graduation and dismissed him from the university.

He filed a suit in a federal district court against Case Western, alleging a breach of good faith and fair dealing. The court ordered the school to issue a diploma. Case Western appealed.

In the Language of the Court SUTTON, Circuit Judge.SUTTON, Circuit Judge.SUTTON

* * * * * * * Case Western’s student handbook * * * makes clear that the only thing standing between Al-

Dabagh and a diploma is the Committee on Students’ finding that he lacks professionalism. Unhappily for Al-Dabagh, that is an academic judgment. And we can no more substitute our personal views for the Committee’s when it comes to an academic judgment than the Committee can substitute its views for ours when it comes to a judicial decision. [Emphasis added.]

* * * * * * * The Committee’s professionalism determination is an academic judgment. That conclusion all but

resolves this case. We may overturn the Committee only if it substantially departed from accepted academic norms when it refused to approve Al-Dabagh for graduation. And given Al-Dabagh’s track record—one member of the Committee does not recall encountering another student with Al-Dabagh’s “repeated professionalism issues” in his quarter century of experience—we cannot see how it did. [Emphasis added.]

To the contrary, Al-Dabagh insists: The Committee’s decision was a “punitive disciplinary measure” that had nothing to do with academics. * * * His argument fails to wrestle with the prominent place of professionalism in the university’s academic curriculum—which itself is an academic decision courts may not lightly disturb.

Even if professionalism is an academic criterion, Al-Dabagh persists that the university defined it too broadly. As he sees it, the only professional lapses that matter are the ones linked to academic performance. That is not how we see it or for that matter how the medical school sees it. That many professionalism-related cases involve classroom incidents does not establish that only classroom incidents are relevant to the professionalism inquiry * * * . Our own standards indicate that professionalism does not end at the courtroom door. Why should hospitals operate any differently? As for the danger that an expansive view of professionalism might forgive, or provide a cloak for, arbitrary or discriminatory behavior, we see no such problem here. Nothing in the record suggests that the university had impermis- sible motives or acted in bad faith in this instance. And nothing in our deferential standard prevents us from invalidating genuinely objectionable actions when they occur.

Decision and Remedy The U.S. Court of Appeals for the Sixth Circuit reversed the lower court’s order to issue a diploma to Al-Dabagh. The federal appellate court found nothing to indicate that Case Western had “impermissible motives,” acted in bad faith, or dealt unfairly with Al-Dabagh.

Critical Thinking • What If the Facts Were Different? Suppose that Case Western had tolerated Al-Dabagh’s conduct

and awarded him a diploma. What impact might that had on other students at the school? Why?

Al-Dabagh v. Case Western Reserve University United States Court of Appeals, Sixth Circuit, 777 F.3d 355 (2015).

Case 5.2

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100 UNIT ONE The Foundations

Behavior of Owners and Managers Certain types of behavior on the part of managers and owners contrib- ute to unethical behavior among employees. Managers who set unrealistic production or sales goals increase the probability that employees will act unethically. If a sales quota can be met only through high-pressure, unethical sales tactics, employees will try to act “in the best inter- est of the company” and will continue to behave unethi- cally. A manager who looks the other way when she or he knows about an employee’s unethical behavior also sets an example—one indicating that ethical transgressions will be accepted.

Business owners and managers sometimes take more active roles in fostering unethical and illegal conduct. This sort of misbehavior can have negative consequences for the owners and managers and their business. Not only can a court sanction them, but it can also issue an injunction that prevents them from engaging in similar patterns of conduct in the future.patterns of conduct in the future.patterns of conduct in the future.

■ CASE IN POINT 5.11 John Robert Johnson, Jr., took a truck that needed repair along with its fifteen-ton trailer to Bubba Shaffer, doing business as Shaffer’s Auto and Diesel Repair, LLC. The truck was supposedly fixed,

and Johnson paid the bill, but the truck continued to leak oil and water. Johnson returned the truck to Shaffer, who again claimed to have fixed the problem. Johnson paid the second bill. The problems with the truck contin- ued, however, so Johnson returned the truck and trailer to Shaffer a third time.

Johnson was given a verbal estimate of $1,000 for the repairs, but Shaffer ultimately sent an invoice for $5,863. Johnson offered to settle for $2,480, the amount of the initial estimate ($1,000), plus the costs of parts and shipping. Shaffer refused the offer and would not return Johnson’s truck or trailer until full payment was made. Shaffer retained possession for almost four years and also charged Johnson a storage fee of $50 a day and 18 percent interest on the $5,863. Johnson sued for unfair trade practices and won. The court awarded him $3,500 in damages plus attorneys’ fees and awarded Shaf-$3,500 in damages plus attorneys’ fees and awarded Shaf-$3,500 in damages plus attorneys’ fees and awarded Shaf fer $1,000 (the amount of his estimate).3 ■

The following case further demonstrates the types of situations that can occur when management demon- strates a lack of concern about ethics.

3. Johnson Construction Co. v. Shaffer, 87 So.3d 203 (La.App. 2012).

In the Language of the Court Joseph H. RODRIGUEZ, District Judge.RODRIGUEZ, District Judge.RODRIGUEZ

* * * Plaintiff Moseley is an employee of Defendant Pepco Energy Services, Inc. (“PES”). He has been employed by PES or its corporate predecessors for over twenty-five years. PES, a subsidiary of Defendant Pepco Holdings, Inc. (“PHI”), provides deregulated energy and energy- related services for residential, small busi- ness, and large commercial customers.

* * * * In 1998, Thomas Herzog held the

position of Vice President of CTS. * * * In or around 2002, CTS merged with Potomic Electric Power Company, Inc., and each company became a subsidiary of PHI. Following the merger, according to Plaintiff, he continued to work for

PHI, still as Maintenance Manager at Midtown Thermal, until December 31, 2009.

* * * * Following the 2002 merger with

PHI, employees were required to com- plete an annual ethics survey. By March of 2007, Plaintiff and two co-workers had discussed their respective observa- tions of Herzog’s conduct, which they deemed questionable and possibly unethical. Specifically, they felt that Herzog improperly used company assets and improperly hired immediate fam- ily members and friends who did not appear on the payroll. The three decided to disclose this information on PHI’s annual “Ethics Survey.”

The three planned to reveal that Her- zog employed his daughter, Laurie, as his

secretary in the sum- mer of 2005 and the beginning of 2006 without posting the position first and in violation of PHI’s anti-nepotism policy.

* * * * Next, Herzog hired his girlfriend’s

daughter as his secretary after his daugh- ter had gone back to school. Plaintiff believed this was in violation of Com- pany policy because the position again was not posted. Herzog also hired his son as a project manager, again through a third party independent contractor, Walter Ratai. Plaintiff thought this was wrong because (1) Herzog circumvented the Company’s hiring process, (2) it vio- lated Company policy, and (3) Herzog’s son was being paid $75.00/hr, which was more than Plaintiff was making. * * *

Case Analysis 5.3 Moseley v. Pepco Energy Services, Inc. United States District Court, District of New Jersey, 2011 WL 1584166 (2011).

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CHAPTER 5 Business Ethics 101

In addition, Plaintiff had learned that Herzog was improperly using the Com- pany’s Eagles’ tickets for personal use. Finally, Herzog had leased a new SUV with Company funds, but which was not approved by the Company.

* * * * [After the surveys were completed,

an] investigation ensued. Following the investigation, effective on or about May 10, 2007, Herzog was escorted out of the building. * * * On March 8, 2008, Plaintiff received his annual performance evaluation * * * ; for the first time in twenty-three years, Plaintiff ’s perfor- mance review was negative. Plaintiff feels that this negative performance review was a further act of retaliation for his disclosure of Herzog’s conduct.

* * * * On or about June 11, 2008 the

Plant/Operations Manager position was posted * * * . Plaintiff applied for the position, but it was offered to [another person]. Plaintiff alleges that he “was not promoted to the position of Plant/ Operations Manager despite his experi- ence performing the job for the previ- ous two and a half years, qualifications for same and seniority, as a direct and proximate result of his prior complaints and/or disclosures regarding the Herzog illegal conduct and activities.”

* * * * The New Jersey Legislature enacted

the Conscientious Employee Protection Act (CEPA) to “protect and encourage employees to report illegal or unethical workplace activities.” * * * CEPA prohib- its a New Jersey employer from taking “retaliatory action” against an employee who objects to “any activity, policy or practice which the employee reasonably believes” is in violation of applicable law. * * * “To prevail on a claim under

this provision, a plaintiff must establish that: (1) he reasonably believed that [the complained-of ] conduct was violating a law or rule or regulation promulgated pursuant to law; (2) he objected to the conduct; (3) an adverse employment action was taken against him; and (4) a causal connection exists between the whistleblowing activity and the adverse employment action.

* * * * The first element of the prima

facie case [a case sufficient to be sent facie case [a case sufficient to be sent facie to the jury] under CEPA is that the Plaintiff reasonably believed that the complained-of conduct (1) was violat- ing a “law, rule, or regulation promul- gated pursuant to law, including any violation involving deception of, or misrepresentation to, any shareholder, investor, client, patient, customer, employee, former employee, retiree or pensioner of the employer or any governmental entity”; or “(2) is fraudu- lent or criminal, including any activ- ity, policy or practice of deception or misrepresentation which the employee reasonably believes may defraud any shareholder, investor, client, patient, customer, employee, former employee, retiree or pensioner of the employer or any governmental entity.”

Although Defendants have argued that Plaintiff merely disclosed a violation of Company policy, Moseley has testified that in March 2007, he reported what he believed to be “unethical conduct, misappropriation of company funds, and theft” by his direct supervisor. * * * Moreover, a plaintiff need not demonstrate that there was a violation of the law or fraud, but instead that he “reasonably believed” that to be the case. The facts in this case support an objectively reason- able belief that a violation of law or

fraudulent conduct was being commit- ted by Plaintiff ’s supervisor. [Emphasis added.]

Regarding the causal connection between Plaintiff ’s whistleblow- ing activity and the negative adverse employment actions taken against him, Plaintiff stresses that he was employed by the Defendants for twenty-five years without a negative employment evalu- ation or any form of discipline until immediately after he disclosed the wrongful conduct of his supervisor. Not only did Plaintiff then receive a nega- tive performance evaluation, but the posted position of Plant Manager was given to [another], despite [the other’s] alleged past negative history and despite that Plaintiff asserts he had been acting in that job for over two years. Plaintiff contends that this is sufficient evidence of pretext.

The Court is unable to find as a matter of law that Defendants’ inferences prevail or that a jury could not reasonably adopt a contrary inference of retaliation. There are questions of fact as to how much the individuals responsible for Plaintiff ’s negative performance evaluations knew about Plaintiff ’s complaints. “[A] finding of the required causal connection may be based solely on circumstantial evidence that the person ultimately responsible for an adverse employment action was aware of an employee’s whistle-blowing activity.” Because jurors may infer a causal connection from the surrounding circumstances, as well as temporal prox- imity, the Court will not grant summary judgment. [Emphasis added.]

* * * * IT IS ORDERED on this 26th

day of April, 2011 that Defendants’ motion for summary judgment is hereby DENIED.

Legal Reasoning Questions

1. Using duty-based ethical principles, what facts or circumstances in this case would lead Moseley to disclose Herzog’s behavior? 2. Using outcome-based ethical principles, what issues would Moseley have to analyze in making the decision to report Herzog’s

behavior? What would be the risks to Moseley? The benefits? 3. Under the Business Process Pragmatism/ steps, what alternatives might Moseley have had in this situation?

Case 5.3 Continued

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102 UNIT ONE The Foundations

The Sarbanes-Oxley Act Congress enacted the Sarbanes-Oxley Act4 to help reduce corporate fraud and unethical management decisions. The act requires com- panies to set up confidential systems so that employees and others can “raise red flags” about suspected illegal or unethical auditing and accounting practices.

Some companies have implemented online report- ing systems to accomplish this goal. In one such system, employees can click on an on-screen icon that anony- mously links them with NAVEX Global, an organization based in Oregon. Through NAVEX Global, employees can report suspicious accounting practices, sexual harass- ment, and other possibly unethical behavior. NAVEX, in turn, alerts management personnel or the audit commit- tee at the designated company to the possible problem.

5–5 Global Business Ethics Just as different religions have different moral codes, dif-Just as different religions have different moral codes, dif-Just as different religions have different moral codes, dif ferent countries, regions, and even states have different ethical expectations and priorities. Some of these dif-ethical expectations and priorities. Some of these dif-ethical expectations and priorities. Some of these dif ferences are based in religious values, whereas others are cultural in nature. Such differences make it even more difficult to determine what is ethical in a particular situ- ation. For instance, in certain countries the consumption of alcohol is forbidden for religious reasons. It would be considered unethical for a U.S. business to produce alco- hol in those countries and employ local workers to assist in alcohol production.

International transactions often involve issues related to employment and financing. Congress has addressed some of these issues, not eliminating the ethical compo- nents but clarifying some of the conflicts between the ethics of the United States and the ethics of other nations. For instance, the Civil Rights Act and the Foreign Cor- rupt Practices Act have clarified the U.S. ethical position on employment issues and bribery in foreign nations. (Other nations, including Mexico, have also enacted laws that prohibit bribery.)

5–5a Monitoring the Employment Practices of Foreign Suppliers

Many businesses contract with companies in developing nations to produce goods, such as shoes and clothing, because the wage rates in those nations are significantly lower than those in the United States. But what if one of those contractors hires women and children at

4. 15 U.S.C. Sections 7201 et seq.

below-minimum-wage rates or requires its employees to work long hours in a workplace full of health hazards? What if the company’s supervisors routinely engage in workplace conduct that is offensive to women? What if plants located abroad routinely violate labor and envi- ronmental standards?

■ EXAMPLE 5.12 Pegatron Corporation, a company based in China, manufactures and supplies parts to Apple, Inc., for iPads and other Apple products. After an explosion at a Pegatron factory in Shanghai, allegations surfaced that the conditions at the factory violated labor and environmental standards. Similar allegations were made about other Apple suppliers.

Apple started to evaluate practices at companies in its supply chain and to communicate its ethics policies to them. Its audits revealed numerous violations. Apple released a list of its suppliers for the first time and issued a lengthy “Supplier Responsibility Report” detailing supplier practices. Numerous facilities had withheld worker pay as a disciplinary measure. Some had falsified pay records and forced workers to use machines without safeguards. Oth- ers had engaged in unsafe environmental practices, such as dumping wastewater on neighboring farms. Apple termi- nated its relationship with one supplier and turned over its findings to the Fair Labor Association for further inquiry. ■

Given today’s global communications network, few companies can assume that their actions in other nations will go unnoticed by “corporate watch” groups that discover and publicize unethical corporate behavior. As a result, U.S. businesses today usually take steps to avoid such adverse publicity—either by refusing to deal with certain suppliers or by arranging to monitor their suppliers’ workplaces to make sure that the employees are not being mistreated.

5–5b The Foreign Corrupt Practices Act Another ethical problem in international business deal- ings has to do with the legitimacy of certain side pay- ments to government officials. In the United States, the majority of contracts are formed within the private sector. In many foreign countries, however, government officials make the decisions on most major construction and manufacturing contracts because of extensive gov- ernment regulation and control over trade and industry.

Side payments to government officials in exchange for favorable business contracts are not unusual in such countries, nor have they been considered unethical. In the past, U.S. corporations doing business in these nations largely followed the dictum “When in Rome, do as the Romans do.”

In the 1970s, however, the U.S. media uncovered a number of business scandals involving large side

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CHAPTER 5 Business Ethics 103

payments by U.S. corporations to foreign representatives for the purpose of securing advantageous international trade contracts. In response to this unethical behavior, Congress passed the Foreign Corrupt Practices Act5 (FCPA), which prohibits U.S. businesspersons from bribing foreign officials to secure beneficial contracts.

Prohibition against the Bribery of Foreign Officials The first part of the FCPA applies to all U.S. companies and their directors, officers, shareholders, employees, and agents. This part prohibits the bribery of most officials of foreign governments if the purpose of the payment is to motivate the official to act in his or her official capacity to provide business opportunities.

The FCPA does not prohibit payments made to minor officials whose duties are ministerial. A ministerial action is a routine activity, such as the processing of paperwork, with little or no discretion involved in the action. These payments are often referred to as “grease,” or facilitating payments. They are meant to accelerate the performance of administrative services that might otherwise be carried out at a slow pace. Thus, for instance, if a firm makes a payment to a minor official to speed up an import licens- ing process, the firm has not violated the FCPA.

Generally, the act, as amended, permits payments to foreign officials if such payments are lawful within the foreign country. Payments to private foreign companies or other third parties are permissible—unless the U.S. firm knows that the payments will be passed on to a foreign government in violation of the FCPA. The U.S. Department of Justice also uses the FCPA to prosecute foreign companies suspected of bribing officials outside the United States.

Accounting Requirements In the past, bribes were often concealed in corporate financial records. Thus, the second part of the FCPA is directed toward accountants.

5. 15 U.S.C. Sections 78dd-1 et seq.

All companies must keep detailed records that “accu- rately and fairly” reflect their financial activities. Their accounting systems must provide “reasonable assurance” that all transactions entered into by the companies are accounted for and legal. These requirements assist in detecting illegal bribes. The FCPA prohibits any person from making false statements to accountants or false entries in any record or account.

■ CASE IN POINT 5.13 Noble Corporation, an international provider of offshore drilling services and equipment, was operating some drilling rigs offshore in Nigeria. Mark Jackson and James Ruehlen were officers at Noble. The U.S. government accused Noble of bribing Nigerian government officials and charged Jackson and Ruehlen individually with violating the FCPA’s account- ing provisions. Jackson and Ruehlen allegedly assisted in the bribery because they repeatedly allowed allegedly ille- gal payments to be posted on Noble’s books as legitimate operating expenses.6 ■

Penalties for Violations The FCPA provides that business firms that violate the act may be fined up to $2 million. Individual officers or directors who violate the FCPA may be fined up to $100,000 (the fine cannot be paid by the company) and may be imprisoned for up to five years. These statutory amounts can be significantly increased under the Alternative Fines Act7 (up to twice the amount of any gain that the defendant obtained by making the corrupt payment).

Today, the U.S. government is actively seeking out violators and has around 150 FCPA investigations going on at any given time. In recent years, a high percentage of the total fines imposed by the Department of Justice have come from FCPA cases.

6. S.E.C. v. Jackson, 908 F.Supp.2d 834 (S.D.Tex—Houston Div. 2012). 7. 18 U.S.C. Section 3571.

Reviewing: Business Ethics

James Stilton is the chief executive officer (CEO) of RightLiving, Inc., a company that buys life insurance policies at a discount from terminally ill persons and sells the policies to investors. RightLiving pays the terminally ill patients a percentage of the future death benefit (usually 65 percent) and then sells the policies to investors for 85 percent of the value of the future benefit. The patients receive the cash to use for medical and other expenses. The investors are “guaranteed” a positive return on their investment, and RightLiving profits on the difference between the purchase and sale prices. Stilton is aware that some sick patients might obtain insurance policies through fraud (by not revealing the illness on the insurance application). Insurance companies that discover this will cancel the policy and refuse to pay.

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104 UNIT ONE The Foundations

Debate This . . . Executives in large corporations are ultimately rewarded if their companies do well, particularly as evidenced by rising stock prices. Consequently, should we let those who run corporations decide what level of negative side effects of their goods or services is “acceptable”?

Stilton believes that most of the policies he has purchased are legitimate, but he knows that some probably are not. Using the information presented in this chapter, answer the following questions. 1. Would a person who adheres to the principle of rights consider it ethical for Stilton not to disclose the potential

risk of cancellation to investors? Why or why not? 2. Using Immanuel Kant’s categorical imperative, are the actions of RightLiving, Inc., ethical? Why or why not? 3. Under utilitarianism, are Stilton’s actions ethical? Why or why not? What difference does it make if most of the

policies are legitimate? 4. Using the Business Process Pragmatism/ steps discussed in this chapter, discuss the decision process Stilton should

use in deciding whether to disclose the risk of fraudulent policies to potential investors.

Terms and Concepts business ethics 89 categorical imperative 95 corporate social responsibility

(CSR) 96 cost-bene�t analysis 95

duty-based ethics 94 ethical reasoning 94 ethics 89 moral minimum 91 outcome-based ethics 94

principle of rights 94 stakeholders 96 triple bottom line 89 utilitarianism 95

Issue Spotters 1. Acme Corporation decides to respond to what it sees

as a moral obligation to correct for past discrimina- tion by adjusting pay differences among its employ- ees. Does this raise an ethical conflict between Acme and its employees? Between Acme and its sharehold- ers? Explain your answers. (See Making Ethical Business Decisions.)

2. Delta Tools, Inc., markets a product that under some cir- cumstances is capable of seriously injuring consumers. Does Delta have an ethical duty to remove this product from the market, even if the injuries result only from misuse? Why or why not? (See Making Ethical Business Decisions.)

• Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios 5–1. Business Ethics. Jason Trevor owns a commercial bak- ery in Blakely, Georgia, that produces a variety of goods sold in grocery stores. Trevor is required by law to perform internal tests on food produced at his plant to check for contamina- tion. On three occasions, the tests of food products contain- ing peanut butter were positive for salmonella contamination. Trevor was not required to report the results to U.S. Food and Drug Administration officials, however, so he did not. Instead, Trevor instructed his employees to simply repeat the

tests until the results were negative. Meanwhile, the products that had originally tested positive for salmonella were eventu- ally shipped out to retailers.

Five people who ate Trevor’s baked goods that year became seriously ill, and one person died from a salmonella infection. Even though Trevor’s conduct was legal, was it unethical for him to sell goods that had once tested positive for salmonella? Why or why not? (See Business Ethics.)

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CHAPTER 5 Business Ethics 105

Business Case Problems 5–2. Spotlight on Pfizer, Inc.—Corporate Social Responsibility. Methamphetamine (meth) is an addictive

drug made chie�y in small toxic labs (STLs) in homes, tents, barns, or hotel rooms. �e manu- facturing process is dangerous and often results in explosions, burns, and toxic fumes. Government

entities spend time and resources to �nd and destroy STLs, imprison meth dealers and users, treat addicts, and provide services for a�ected families. Meth cannot be made without ingredients that are also used in cold and allergy medications. Arkansas has one of the highest numbers of STLs in the United States. To recoup the costs of �ghting the meth epi- demic, twenty counties in Arkansas �led a suit against P�zer, Inc., which makes cold and allergy medications. What is P�z- er’s ethical responsibility here, and to whom is it owed? Why? [Ashley County, Arkansas v. P�zer, Inc., [Ashley County, Arkansas v. P�zer, Inc., [ 552 F.3d. 659 (8th Cir. 2009)] (See Ethical Principles and Philosophies.) 5–3. Business Case Problem with Sample Answer— Online Privacy. Facebook, Inc., launched a program called

“Beacon” that automatically updated the pro�les of users on Facebook’s social networking site when those users had any activity on Beacon “partner” sites. For example, one partner site was Block-

buster.com. When a user rented or purchased a movie through Blockbuster.com, the user’s Facebook pro�le would be updated to share the purchase. �e Beacon program was set up as a default setting, so users never consented to the pro- gram, but they could opt out. What are the ethical implica- tions of an opt-in program versus an opt-out program in social media? [Lane v. Facebook, Inc., 696 F.3d 811 (9th Cir. 2011)] (See Business Ethics and Social Media.) • For a sample answer to Problem 5–3, go to Appendix E at

the end of this text.

5–4. Business Ethics on a Global Scale. After the fall of the Soviet Union, the new government of Azerbaijan began converting certain state-controlled industries to private own- ership. Ownership in these companies could be purchased through a voucher program. Frederic Bourke, Jr., and Vik- tor Kozeny wanted to purchase the Azerbaijani oil company, SOCAR, but it was unclear whether the Azerbaijani president would allow SOCAR to be put up for sale. Kozeny met with one of the vice presidents of SOCAR (who was also the son of the president of Azerbaijan) and other Azerbaijani leaders to discuss the sale of SOCAR. To obtain their cooperation, Kozeny set up a series of parent and subsidiary companies through which the Azerbaijani leaders would eventually receive two-thirds of the SOCAR pro�ts without ever invest- ing any of their own funds. In return, the Azerbaijani leaders would attempt to use their in�uence to convince the president to put SOCAR up for sale. Assume that Bourke and Kozeny are operating out of a U.S. company. Discuss the ethics of this scheme, both in terms of the Foreign Corrupt Practices Act

(FCPA) and as a general ethical issue. What duties did Kozeny have under the FCPA? [United States v. Kozeny, 667 F.3d 122 (2d Cir. 2011)] (See Making Ethical Business Decisions.) 5–5. Business Ethics. Mark Ramun worked as a manager for Allied Erecting and Dismantling Co., where he had a tense relationship with his father, who was Allied’s president. After more than ten years, Mark left Allied, taking 15,000 pages of Allied’s documents on DVDs and CDs, which constituted trade secrets. Later, he joined Genesis Equipment & Manufac- turing, Inc., a competitor. Genesis soon developed a piece of equipment that incorporated elements of Allied equipment. How might business ethics have been violated in these cir- cumstances? Discuss. [Allied Erecting and Dismantling Co. v. cumstances? Discuss. [Allied Erecting and Dismantling Co. v. cumstances? Discuss. [ Genesis Equipment & Manufacturing, Inc., 511 Fed.Appx. 398 (6th Cir. 2013)] (See Business Ethics.) 5–6. Business Ethics. Stephen Glass made himself infa- mous as a dishonest journalist by fabricating material for more than forty articles for �e New Republic magazine and �e New Republic magazine and �e New Republic other publications. He also fabricated supporting materials to delude �e New Republic’s fact checkers. At the time, he was a law student at Georgetown University. Once suspicions were aroused, Glass tried to avoid detection. Later, Glass applied for admission to the California bar. �e California Supreme Court denied his application, citing “numerous instances of dishon- esty and disingenuousness” during his “rehabilitation” follow- ing the exposure of his misdeeds. How do these circumstances underscore the importance of ethics? Discuss. [In re Glass, 58 Cal.4th 500, 316 P.3d 1199 (2014)] (See Business Ethics.) 5–7. Business Ethics. Operating out of an apartment in Secane, Pennsylvania, Hratch Ilanjian convinced Vicken Setra- kian, the president of Kenset Corp., that he was an international businessman who could help Kenset turn around its business in the Middle East. At Ilanjian’s insistence, Setrakian provided con�dential business documents. Claiming that they had an agreement, Ilanjian demanded full, immediate payment and threatened to disclose the con�dential information to a Kenset supplier if payment was not forthcoming. Kenset denied that they had a contract and �led a suit in a federal district court against Ilanjian, seeking return of the documents. During dis- covery, Ilanjian was uncooperative. Who behaved unethically in these circumstances? Explain. [Kenset Corp. v. Ilanjian, 600 Fed.Appx. 827 (3rd Cir. 2015)] (See Business Ethics.) 5–8. Business Ethics. Priscilla Dickman worked as a medical technologist at the University of Connecticut Health Center. Dickman’s supervisor received complaints that she was getting nonbusiness-related phone calls and was absent from her work area when she should have been working. Based on e-mails and other documents found on Dickman’s work computer, the state investigated her for violations of state law. She was convicted of conducting “personal busi- ness for �nancial gain on state time utilizing state resources.” Separate criminal investigations resulted in convictions for

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106 UNIT ONE The Foundations

forgery and �ling an unrelated fraudulent insurance claim. She “retired” from her job and �led a claim with the state of Connecticut against the health center, alleging that her for- mer employer had initiated the investigations to harass her and force her to quit. For lack of “credible evidence or legal support,” the claim was dismissed. Which of these acts, if any, were unethical? Why? [Dickman v. University of Connecticut Health Center, 162 Conn.App. 441, __ A.3d __ (2016)] (See Business Ethics.) 5–9. A Question of Ethics—Consumer Rights. Best Buy,

a national electronics retailer, o�ered a credit card that allowed users to earn “reward points” that could be redeemed for discounts on Best Buy goods. After reading a newspaper advertisement for the card,

Gary Davis applied for, and was given, a credit card. As part of the application process, he visited a Web page containing Fre- quently Asked Questions as well as terms and conditions for the card. He clicked on a button a�rming that he understood the terms and conditions. When Davis received his card, it came with seven brochures about the card and the reward point program. As he read the brochures, he discovered that a $59 annual fee would be charged for the card. Davis went back to the Web pages he had

visited and found a statement that the card “may” have an annual fee. Davis sued, claiming that the company did not adequately disclose the fee. [Davis v. HSBC Bank Nevada, N.A., disclose the fee. [Davis v. HSBC Bank Nevada, N.A., disclose the fee. [ 691 F.3d 1152 (9th Cir. 2012)] (See Business Ethics.) (a) Online applications frequently have click-on buttons or

check boxes for consumers to acknowledge that they have read and understand the terms and conditions of applica- tions or purchases. Often, the terms and conditions are so long that they cannot all be seen on one screen and users must scroll to view the entire document. Is it unethical for companies to put terms and conditions, especially terms that may cost the consumer, in an electronic document that is too long to read on one screen? Why or why not? Does this differ from having a consumer sign a hard-copy document with terms and conditions printed on it? Why or why not?

(b) The Truth-in-Lending Act requires that credit terms be clearly and conspicuously disclosed in application materi- als. Assuming that the Best Buy credit-card materials had sufficient legal disclosures, discuss the ethical aspects of businesses strictly following the language of the law as opposed to following the intent of the law.

Legal Reasoning Group Activity 5–10. Global Business Ethics. P�zer, Inc., developed a new antibiotic called Trovan (trova�oxacinmesylate). Tests showed that in animals Trovan had life-threatening side e�ects, including joint disease, abnormal cartilage growth, liver dam- age, and a degenerative bone condition. Several years later, an epidemic of bacterial meningitis swept across Nigeria. P�zer sent three U.S. physicians to test Trovan on children who were patients in Nigeria’s Infectious Disease Hospital. P�zer did not obtain the patients’ consent, alert them to the risks, or tell them that Médecins Sans Frontières (Doctors without Borders) was providing an e�ective conventional treatment at the same site. Eleven children died in the experiment, and others were left blind, deaf, paralyzed, or brain damaged. Rabi

Abdullahi and other Nigerian children �led a suit in a U.S. federal court against P�zer, alleging a violation of a custom- ary international law norm prohibiting involuntary medical experimentation on humans. (See Global Business Ethics.) (a) One group should use the principles of ethical reasoning

discussed in this chapter to develop three arguments that Pfizer’s conduct was a violation of ethical standards.

(b) A second group should take a pro-Pfizer position and argue that the company did not violate any ethical stan- dards (and counter the first group).

(c) A third group should come up with proposals for what Pfizer might have done differently to avert the consequences.

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107

It is nearly impossible to apply for credit, obtain phone or Internet service, or buy goods online without agreeing to submit any claim arising from the deal to arbitration. This is also true with respect to employment—job applicants are generally informed by a potential employer that “any controversy or claim arising out of or relating to this employment application shall be settled by arbitration.”1

By including arbitration clauses in consumer and employment contracts, businesses can prevent customers and employees from getting their day in court. Claims removed from con- sideration by the courts in favor of arbitration have involved theft, fraud, sexual harassment, employment discrimination, and other serious issues.

Class Action A class action is a suit in which a large number of plaintiffs file a complaint as a group. A class action can increase the efficiency of the legal process and lower the costs to the parties. It can be an important method by which plaintiffs with similar claims seek relief. More importantly, a class action may be the best means by which the costs of wrongdoing can be imposed on a wrongdoer.

Best Means to Stop a Bad Practice In some circumstances, a class-action suit may be the only practical method for a group of individuals to stop an allegedly harmful business practice. For example, suppose a business pads all of its customers’ bills with an unexpected fee—adding up to millions in profit for the business. An individual customer may find it too costly to bring suit against the business or even to engage in arbitration to contest the charge. But a number of customers together could afford to fight the charge.

Groundless Claims and High Fees “Arbitration, No Class Actions,” states the terms of use for Budget Rent a Car System, Inc.2 Everyone who rents a car from Budget must agree to these terms. Businesses, such as Budget, assert that class-action suits are fomented by lawyers, who make millions of dollars in fees. Businesses claim that they have no choice but to settle such claims, even those that are groundless. Arbitration, they argue, can prevent these consequences.

Arbitration Arbitration is a method of alternative dispute resolution in which a dispute is submitted to a third party (an arbitrator), who listens to the parties, reviews the evidence, and renders a deci- sion. Arbitration clauses can be mandatory or voluntary. A dispute that is subject to mandatory

1. American Arbitration Association, Drafting Dispute Resolution Clauses: A Practical Guide, https://www.adr.org/aaa/ ShowPDF?doc=ADRSTG_002540 (Nov. 6, 2015).

2. Budget Rent a Car System, Inc., Terms of Use, http://www.budget.com /budgetWeb/html/en/customer/termsofuse.html (Nov. 6, 2015).

“Arbitration, No Class Actions”

UNIT ONE Application and Ethics

Continues

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arbitration must be resolved through arbitration. The parties give up their right to sue in court, participate in a class action, or appeal the arbitration decision.

Professional and Unbiased Businesses argue that class-action suits are unnecessary because individuals can more easily resolve their complaints through arbitration. With arbitration, dis- putes can be resolved quickly without complicated procedures, the limits of judicial rules, or the time constraints of a crowded court’s schedule.

Proponents of arbitration also contend that arbitrators can act professionally and without bias. The American Arbitration Association and JAMS, the two largest arbitration firms, claim to ensure a professional and unbiased process. These organizations require an arbitrator to dis- close any conflict of interest before taking a case, for instance.

Biased and Unprofessional Opponents of arbitration emphasize that a party’s right to appeal an arbitrator’s handling of a case and its outcome is limited. Questions about a witness’s testi- mony, a party’s handling of the evidence, an arbitrator’s potential conflict of interest, and many other issues are not grounds for appeal to a court.

Arbitrators often depend for their business on a company against whom a customer or employee may have a grievance. An arbitrator may handle many cases involving the same com- pany and may therefore consider the company his or her client. For this reason, critics argue that an arbitrator is more likely to rule in favor of the business, regardless of the merits of a claim against it.

What Do the Courts Say? Most plaintiffs who are blocked from pursuing their claim as a group drop their case. Fur- thermore, in four out of five class actions filed between 2014 and 2016, judges remanded the disputes to arbitration. During the same period, only about five hundred consumers went to arbitration over a dispute of $2,500 or less. Among those contesting a credit card or loan fee, two-thirds received no award of money in arbitration.

In other words, individual consumers whose only recourse against a company is arbitration do not normally prevail in their claims. Despite this history, recent decisions by the United States Supreme Court upheld the use of arbitration clauses in consumer and merchant contracts to prohibit class-action suits.

Class Actions Interfere with Arbitration Vincent and Liza Concepcion, along with other consumers, filed a class action in a California state court against AT&T Mobility LLC, alleging that the company had promised them a free phone if they agreed to service but actually charged them $30.22 for the phone. AT&T responded that a class-action ban in an arbitration clause in the customers’ contracts barred the suit. The court ruled that the ban was unconscionable.

AT&T appealed to the United States Supreme Court, which reasoned that “requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration.” The main purpose of the federal law that applied in this case—the Federal Arbitration Act—“is to ensure the enforcement of arbitration agreements according to their terms.” This conclusion relegated state law on this issue, including California’s ruling, to the sidelines.state law on this issue, including California’s ruling, to the sidelines.state 3

3. AT&AT&AT T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011).

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UNIT ONE Application and Ethics

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Arbitration Clauses Trump Class Actions Meanwhile, Alan Carlson, the owner of the res- taurant Italian Colors, pursued a suit against American Express Company over the fee that the company assessed merchants to process American Express credit-card charges. Carlson argued that a class-action ban in an arbitration clause in the company’s merchant contract prevented merchants from exercising their federal right to fight a monopoly. None of the merchants could federal right to fight a monopoly. None of the merchants could federal afford to fight the charge individually.

On appeal, the Supreme Court ruled in favor of American Express. The Court stated that federal antitrust “laws do not guarantee an affordable procedural path to the vindication of every claim.”4 Under this decision, an arbitration clause can outlaw a class action even if it is the only realistic, practical way to bring a case.

More recently, the U.S. Court of Appeals for the Fifth Circuit concluded that employers who require prospective employees to sign mandatory arbitration agreements do not violate the National Labor Relations Act.5

Ethical Connection Some persons would contend that a business’s principal ethical obligation is to make a profit for its owners. Others might propose that a business take a number of stakeholders’ perspectives into account when deciding on a course of action. Still others might insist that a business has a responsibility to act chiefly in the best interests of society. And there may be some who would impose a different ethical standard—religious, philosophical, or political.

Whichever standard is applied, a business has an interest in staying in business. Sometimes, a class action may be based on a groundless claim and brought for the sole purpose of generating a fee for the lawyer who brings it. There is no ethical requirement for a business to exhaust its assets to litigate or settle such a case.

Other times, though, a class action may be the best means of curbing a bad business practice. In that circumstance, engaging in harmful conduct and then cutting off an important means of redress for those harmed by the conduct cannot be seen as ethical.

Ethics Question Is it unethical for a business to include an arbitration clause with a class-action ban in its contracts with customers, employees, and other businesses? Discuss.

Critical Thinking Many businesses include opt-out provisions in their arbitration clauses, but few consumers and employees take advantage of them. Why?

4. American Express Co. v. Italian Colors Restaurant, 570 U.S. 333, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013).American Express Co. v. Italian Colors Restaurant, 570 U.S. 333, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013).American Express Co. v. Italian Colors Restaurant 5. Murphy Oil USA, Inc. v. National Labor Relations Board, 808 F.3d 1013 (5th Cir. 2015).Murphy Oil USA, Inc. v. National Labor Relations Board, 808 F.3d 1013 (5th Cir. 2015).Murphy Oil USA, Inc. v. National Labor Relations Board

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UNIT ONE Application and Ethics

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Unit Two

�e Public and International Environment

6. Tort Law

7. Strict Liability and Product Liability

8. Intellectual Property Rights

9. Internet Law, Social Media, and Privacy

10. Criminal Law and Cyber Crime

11. International and Space Law

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112

CHAPTER 6

Compensatory Damages A plaintiff is awarded compensatory damages to compensate or reimburse the plaintiff for actual losses. Thus, the goal is to make the plaintiff whole and put her or him in the same posi- tion that she or he would have been in had the tort not occurred. Compensatory damages awards are often bro- ken down into special damages and special damages and special damages general damages.

Special damages compensate the plaintiff for quanti- fiable monetary losses, such as medical expenses and lost wages and benefits (now and in the future). Special dam- ages might also be awarded to compensate for extra costs, the loss of irreplaceable items, and the costs of repairing or replacing damaged property.or replacing damaged property.or replacing damaged property.

■ CASE IN POINT 6.1 Seaway Marine Transport operates the Enterprise, a large cargo ship, which has twenty-two hatches for storing coal. When the Enterprise positioned itself to receive a load of coal on the shores of Lake Erie, in Ohio, it struck a land-based coal-loading machine operated by Bessemer & Lake Erie Railroad Company. A federal court found Seaway liable and awarded $522,000 in special damages to compensate Bessemer for the cost of repairing the damage to the load- ing boom.1 ■

General damages compensate individuals (not com- panies) for the nonmonetary aspects of the harm suf-panies) for the nonmonetary aspects of the harm suf-panies) for the nonmonetary aspects of the harm suf fered, such as pain and suffering. A court might award general damages for physical or emotional pain and suf-general damages for physical or emotional pain and suf-general damages for physical or emotional pain and suf fering, loss of companionship, loss of consortium (losing

1. Bessemer & Lake Erie Railroad Co. v. Seaway Marine Transport, 357 F.3d Lake Erie Railroad Co. v. Seaway Marine Transport, 357 F.3d Lake Erie Railroad Co. v. Seaway Marine Transport 596 (6th Cir. 2010).

6–1 The Basis of Tort Law Two notions serve as the basis of all torts: wrongs and compensation. Tort law is designed to compensate those who have suffered a loss or injury due to another person’s wrongful act. In a tort action, one person or group brings a lawsuit against another person or group to obtain com- pensation (monetary damages) or other relief for the harm suffered.

6–1a The Purpose of Tort Law Generally, the purpose of tort law is to provide remedies for the violation of various protected interests. Society rec- ognizes an interest in personal physical safety. Thus, tort law provides remedies for acts that cause physical injury or that interfere with physical security and freedom of movement. Society also recognizes an interest in protect- ing property, and tort law provides remedies for acts that cause destruction of or damage to property.

6–1b Damages Available in Tort Actions Because the purpose of tort law is to compensate the injured party for the damage suffered, you need to have an understanding of the types of damages that plaintiffs seek in tort actions. Note that legal usage distinguishes between the terms damage and damage and damage damages. Damage refers Damage refers Damage to harm or injury to persons or property, while damages refers to monetary compensation for such harm or injury.

Part of doing business today—and, indeed, part of everyday life—is the risk of being involved in a lawsuit. The list of circumstances in which businesspersons can be sued is long and varied. A customer who is injured by a security guard at a business establishment, for instance,

may sue the business owner, claiming that the security guard’s conduct was intentionally wrongful. A person who slips and falls at a retail store may sue the company for negligence.

Any time that one party’s alleg- edly wrongful conduct causes injury to another, an action may arise under

the law of torts (the word tort is tort is tort French for “wrong”). Through tort law, society compensates those who have suffered injuries as a result of the wrongful conduct of others. Many of the lawsuits brought by or against business firms are based on various tort theories.

Tort Law

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CHAPTER 6 Tort Law 113

the emotional and physical benefits of a spousal relation- ship), disfigurement, loss of reputation, or loss or impair- ment of mental or physical capacity.

Punitive Damages Occasionally, the courts also award punitive damages in tort cases to punish the wrongdoer and deter others from similar wrongdoing. Punitive damages are appropriate only when the defen- dant’s conduct was particularly egregious (flagrant) or reprehensible (blameworthy).

Usually, this means that punitive damages are available in intentional tort actions and only rarely in negligence intentional tort actions and only rarely in negligence intentional lawsuits (negligence actions will be discussed later in this chapter). They may be awarded, however, in suits involv- ing gross negligence. Gross negligence can be defined as an intentional failure to perform a manifest duty in reckless disregard of the consequences of such a failure for the life or property of another.

Courts exercise great restraint in granting punitive damages to plaintiffs in tort actions because punitive damages are subject to limitations under the due pro- cess clause of the U.S. Constitution. The United States Supreme Court has held that to the extent that an award of punitive damages is grossly excessive, it furthers no legitimate purpose and violates due process require- ments.2 Consequently, an appellate court will sometimes reduce the amount of punitive damages awarded to a plaintiff on the ground that it is excessive and thereby violates the due process clause.

Legislative Caps on Damages State laws may limit the amount of damages—both punitive and gen- eral—that can be awarded to the plaintiff. More than half of the states have placed caps ranging from $250,000 to $750,000 on noneconomic general damages (such as for pain and suffering), especially in medical malpractice suits. More than thirty states have limited punitive dam- ages, with some imposing outright bans.

6–1c Classification of Torts There are two broad classifications of torts: intentional torts and torts and torts unintentional torts (torts involving negligence). unintentional torts (torts involving negligence). unintentional torts The classification of a particular tort depends largely on how the tort occurs (intentionally or negligently) and the surrounding circumstances. Intentional torts result from the intentional violation of person or property (fault plus intent). Negligence results from the breach of a duty to act reasonably (fault without intent).

2. State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, State Farm Mutual Automobile Insurance Co. v. Campbell 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003).

6–1d Defenses Even if a plaintiff proves all the elements of a tort, the defendant can raise a number of legally recognized defenses (reasons why the plaintiff should not obtain damages). A successful defense releases the defendant from partial or full liability for the tortious act.

The defenses available may vary depending on the specific tort involved. A common defense to intentional torts against persons, for instance, is consent. When a per- son consents to the act that damages her or him, there is generally no liability. The most widely used defense in negligence actions is comparative negligence.

In addition, most states have a statute of limitations that establishes the time limit (often two years from the date of discovering the harm) within which a particular type of lawsuit can be filed. After that time period has run, the plaintiff can no longer file a claim.

6–2 Intentional Torts against Persons

An intentional tort, as the term implies, requires intent. The tortfeasor (the one committing the tort) must tortfeasor (the one committing the tort) must tortfeasor intend to commit an act, the consequences of which interfere with another’s personal or business interests in a way not permitted by law. An evil or harmful motive is not required—in fact, the person committing the action may even have a beneficial motive for doing what turns out to be a tortious act.

In tort law, intent means only that the person intended intent means only that the person intended intent the consequences of his or her act or knew with substan- tial certainty that specific consequences would result from the act. The law generally assumes that individuals intend the normal consequences of their actions. Thus, normal consequences of their actions. Thus, normal forcefully pushing another—even if done in jest—is an intentional tort (if injury results), because the object of a strong push can ordinarily be expected to fall down.

In addition, intent can be transferred when a defen- dant intends to harm one individual, but unintention- ally harms a second person. This is called transferred intent. ■ EXAMPLE 6.2 Alex swings a bat intending to hit Blake but misses and hits Carson instead. Carson can sue Alex for the tort of battery (discussed shortly) because Alex’s intent to harm Blake can be transferred to Carson. ■

6–2a Assault An assault is any intentional and unexcused threat of assault is any intentional and unexcused threat of assault immediate harmful or offensive contact—words or acts

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114 UNIT TWO The Public and International Environment

that create a reasonably believable threat. An assault can occur even if there is no actual contact with the plaintiff, provided that the defendant’s conduct creates a reason- able apprehension of imminent harm in the plaintiff. Tort law aims to protect individuals from having to expect harmful or offensive contact.

6–2b Battery If the act that created the apprehension is completed and completed and completed results in harm to the plaintiff, it is a battery—an unexbattery—an unexbattery – cused and harmful or offensive physical contact inten- tionally performed. tionally performed. tionally ■ EXAMPLE 6.3 Ivan threatens Jean with a gun and then shoots her. The pointing of the gun at Jean is an assault. The firing of the gun (if the bullet hits Jean) is a battery. ■

The contact can be harmful, or it can be merely offen- sive (such as an unwelcome kiss). Physical injury need not occur. The contact can involve any part of the body or anything attached to it—for instance, a hat, a purse, or a jacket. The contact can be made by the defendant or by some force set in motion by the defendant, such as a rock thrown by the defendant. Whether the contact is offen- sive is determined by the reasonable person standard.3

If the plaintiff shows that there was contact, and the jury (or judge, if there is no jury) agrees that the contact was offensive, then the plaintiff has a right to compensa- tion. A plaintiff may be compensated for the emotional harm or loss of reputation resulting from a battery, as well as for physical harm. A defendant may assert self- defense or defense of others in an attempt to justify his or her conduct.

6–2c False Imprisonment False imprisonment is the intentional confinement or False imprisonment is the intentional confinement or False imprisonment restraint of another person’s activities without justifica- tion. False imprisonment interferes with the freedom to move without restraint. The confinement can be accom- plished through the use of physical barriers, physical restraint, or threats of physical force. Moral pressure does not constitute false imprisonment. It is essential that the person being restrained does not wish to be restrained. (The plaintiff ’s consent to the restraint bars any liability.)

Businesspersons often face suits for false imprison- ment after they have attempted to confine a suspected shoplifter for questioning. Under the “privilege to detain” granted to merchants in most states, a merchant can use

3. The reasonable person standard is an “objective” test of how a reasonable reasonable person standard is an “objective” test of how a reasonable reasonable person standard person would have acted under the same circumstances. See “The Duty of Care and Its Breach” later in this chapter.

reasonable force to detain or delay persons suspected of reasonable force to detain or delay persons suspected of reasonable force shoplifting and hold them for the police. Although laws pertaining to this privilege vary from state to state, gen- erally any detention must be conducted in a reasonable manner and for only a reasonable length of time. Undue force or unreasonable detention can lead to liability for the business.

Cities and counties may also face lawsuits for false imprisonment if they detain individuals without rea- son. ■ CASE IN POINT 6.4 Police arrested Adetokunbo Police arrested Adetokunbo Shoyoye for riding the subway without a ticket and for a theft that had been committed by someone who had stolen his identity. A court ordered him to be released, but a county employee mistakenly confused Shoyoye’s paperwork with that of another person who was sched- uled to be sent to state prison. As a result, instead of being released, Shoyoye was held in county jail for more than two weeks. Shoyoye later sued the county for false imprisonment and won.4 ■

6–2d Intentional Infliction of Emotional Distress

The tort of intentional infliction of emotional distress involves an intentional act that amounts to extreme and outrageous conduct resulting in severe emotional distress to another. To be actionable (capable of serving as the ground for a lawsuit), the act must be extreme and outra- geous to the point that it exceeds the bounds of decency accepted by society.

Outrageous Conduct Courts in most jurisdictions are wary of emotional distress claims and confine them to situations involving truly outrageous behavior. Gener- ally, repeated annoyances (such as those experienced by a person who is being stalked), coupled with threats, are enough. Acts that cause indignity or annoyance alone usually are not sufficient.

■ EXAMPLE 6.5 A father attacks a man who has had consensual sexual relations with the father’s nineteen- year-old daughter. The father handcuffs the man to a steel pole and threatens to kill him unless he leaves town immediately. The father’s conduct may be sufficiently extreme and outrageous to be actionable as an inten- tional infliction of emotional distress. ■

Limited by the First Amendment When the out- rageous conduct consists of speech about a public figure,

4. Shoyoye v. County of Los Angeles, 203 Cal.App.4th 947, 137 Cal.Rptr.3d 839 (2012).

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CHAPTER 6 Tort Law 115

the First Amendment’s guarantee of freedom of speech also limits emotional distress claims.

■ CASE IN POINT 6.6 Hustler magazine once printed Hustler magazine once printed Hustler a false advertisement that showed a picture of the late Reverend Jerry Falwell and described him as having lost his virginity to his mother in an outhouse while he was drunk. Falwell sued the magazine for intentional inflic- tion of emotional distress and won, but the United States Supreme Court overturned the decision. The Court held that parodies of public figures are protected under the First Amendment from intentional infliction of emo- tional distress claims. (The Court uses the same stan- dards that apply to public figures in defamation lawsuits, discussed next.)5 ■

6–2e Defamation The freedom of speech guaranteed by the First Amend- ment is not absolute. The courts are required to balance the vital guarantee of free speech against other pervasive

5. Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 108 S.Ct. 876, 99 L.Ed.2d Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 108 S.Ct. 876, 99 L.Ed.2d Hustler Magazine, Inc. v. Falwell 41 (1988). For another example of how the courts protect parody, see Busch v. Viacom International, Inc., 477 F.Supp.2d 764 (N.D.Tex. 2007), involving a false endorsement of televangelist Pat Robertson’s diet shake.

and strong social interests, including society’s interest in preventing and redressing attacks on reputation.

Defamation of character involves wrongfully hurting a person’s good reputation. The law imposes a general duty on all persons to refrain from making false, defama- tory statements of fact about others. Breaching this duty statements of fact about others. Breaching this duty statements of fact in writing or other permanent form (such as a digital recording) involves the tort of libel. Breaching this duty orally involves the tort of slander. The tort of defamation also arises when a false statement of fact is made about a person’s product, business, or legal ownership rights to property.

Establishing defamation involves proving the follow- ing elements: 1. The defendant made a false statement of fact. 2. The statement was understood as being about the

plaintiff and tended to harm the plaintiff ’s reputation. 3. The statement was published to at least one person

other than the plaintiff. 4. If the plaintiff is a public figure, she or he must also

prove actual malice, discussed later in the chapter. The following case involved the application of free

speech guarantees to online reviews of professional services.

In the Language of the Court CIKLIN, C.J. [Chief Judge]CIKLIN, C.J. [Chief Judge]CIKLIN

* * * * [Ann-Marie] Giustibelli represented

Copia Blake in a dissolution of mar- riage proceeding brought against Peter Birzon. After a breakdown in the attor- ney-client relationship between Giusti- belli and her client[,] Blake, and oddly, Birzon as well, took to the Internet to post defamatory reviews of Giustibelli. In response, Giustibelli brought suit [in a Florida state court against Blake and Birzon], pleading a count for libel.

Blake’s and Birzon’s posted Inter- net reviews contained the following statements:

This lawyer represented me in my divorce. She was combative and

explosive and took my divorce to a level of anger which caused major suffering of my minor children. She insisted I was an emotionally abused wife who couldn’t make rational decisions which caused my case to drag on in the system for a year and a half so her FEES would continue to multiply!! She misrepresented her fees with regards to the contract I initially signed. The contract she submitted to the courts for her fees were 4 times her original quote and pages of the original had been exchanged to support her claims, only the signature page was the same. Shame on me that I did not have an original copy, but like an idiot * * * I trusted my lawyer. Don’t mistake sincerity for honesty because I assure you, that in this attorney’s case, they are NOT the same thing. She absolutely perpetuates

the horrible image of attorneys who are only out for the money and themselves. Although I know this isn’t the case and there are some very good honest lawyers out there, Mrs. Giustibelli is simply not one of the “good ones.” Horrible horrible experience. Use anyone else, it would have to be a better result.

* * * *

No integrity. Will say one thing and do another. Her fees outweigh the truth. Altered her charges to 4 times the original quote with no explana- tion. Do not use her. Don’t mistake sincerity for honesty. In her case, they’re not at all the same. Will liter- ally lie to your face if it means more money for her. Get someone else.

Case Analysis 6.1 Blake v. Giustibelli District Court of Appeal of Florida, Fourth District, 182 So.3d 881, 41 Fla.L.Weekly D122 (2016).

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116 UNIT TWO The Public and International Environment

* * * Anyone else would do a superior effort for you.

* * * *

I accepted an initial VERY fair offer from my ex. Mrs. Giustibelli convinced me to “crush” him and that I could have permanent etc. Spent over a year (and 4 times her original estimate) to arrive at the same place we started at. Caused unnecessary chaos and fear with my kids, convinced me that my ex cheated (which he didn’t), that he was hiding money (which he wasn’t), and was mad at ME when I realized her fee circus had gone on long enough and finally said “stop.” Altered her fee structures, actu- ally replaced original documents with others to support her charges and gen- erally gave the kind of poor service you only hear about. I’m not a disgruntled

ex-wife. I’m just the foolish person who believes that a person’s word should be backed by integrity. Not even remotely true in this case. I’ve had 2 prior attor- neys and never ever have I seen ego and monies be so blatantly out of control.

Both Blake and Birzon admitted to posting the reviews on various Internet sites. The evidence showed that Blake had agreed to pay her attorney the amount reflected on the written retainer agreement—$300 an hour. Blake and Birzon both admitted at trial that Giusti- belli had not charged Blake four times more than what was quoted in the agree- ment. The court entered judgment in favor of Giustibelli and awarded punitive damages of $350,000.

On appeal, Blake and Birzon argue that their Internet reviews constituted

statements of opinion and thus were pro- tected by the First Amendment and not actionable as defamation. We disagree. An action for libel will lie for a false and unprivileged publication by letter, or oth- erwise, which exposes a person to distrust, hatred, contempt, ridicule or obloquy [cen- sure or disgrace] or which causes such person to be avoided, or which has a tendency to injure such person in their office, occupation, business or employment. [Emphasis added.]

Here, all the reviews contained alle- gations that Giustibelli lied to Blake regarding the attorney’s fee. Two of the reviews contained the allegation that Giustibelli falsified a contract. These are factual allegations, and the evidence showed they were false.

* * * * Affirmed.

Legal Reasoning Questions

1. What is the standard for the protection of free speech guaranteed by the First Amendment? 2. How did this standard apply to the statements posted online by Blake and Birzon? 3. The First Amendment normally protects statements of opinion, and this can be an effective defense against a charge of defama-

tion. Does it seem reasonable to disregard this defense, however, if any assertion of fact within a statement of opinion is false? any assertion of fact within a statement of opinion is false? any Explain.

Case 6.1 Continued

Statement-of-Fact Requirement Often at issue in defamation lawsuits (including online defamation) is whether the defendant made a statement of fact or a statement of opinion. Statements of opinion normally are not actionable, because they are protected under the First Amendment.

In other words, making a negative statement about another person is not defamation unless the statement is false and represents something as a fact rather than a is false and represents something as a fact rather than a is false and represents something as a fact rather than a personal opinion. ■ EXAMPLE 6.7 The statement “Lane cheats on his taxes,” if false, can lead to liability for defa- mation. The statement “Lane is a jerk” cannot constitute defamation because it is clearly an opinion. ■

The Publication Requirement The basis of the tort of defamation is the publication of a statement or state- ments that hold an individual up to contempt, ridicule, or

hatred. Publication here means that the defamatory state- ments are communicated (either intentionally or acciden- tally) to persons other than the defamed party.

The courts have generally held that even dictating a letter to a secretary constitutes publication, although the publication may be privileged (a concept that will be explained shortly). Moreover, if a third party merely overhears defamatory statements by chance, the courts usually hold that this also constitutes publication. Defamatory statements made via the Internet are action- able as well. Note also that any individual who repeats or republishes defamatory statements normally is liable even if that person reveals the source of the statements.

■ CASE IN POINT 6.8 Eddy Ramirez, a meat cut Eddy Ramirez, a meat cut- ter at Costco Wholesale Corporation, was involved in a workplace incident with a coworker, and Costco gave him a notice of suspension. After an investigation

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CHAPTER 6 Tort Law 117

in which coworkers were interviewed, Costco fired Ramirez. Ramirez sued, claiming that the suspension notice was defamatory. The court ruled in Costco’s favor. Ramirez could not establish defamation, because he had not shown that the suspension notice was published to any third parties. Costco did nothing beyond what was necessary to investigate the events that led to Ramirez’s termination.6 ■

Damages for Libel Once a defendant’s liability for libel is established, general damages are presumed as a matter of law. General damages are designed to compen- sate the plaintiff for nonspecific harms such as disgrace or dishonor in the eyes of the community, humiliation, injured reputation, and emotional distress—harms that are difficult to measure. In other words, to recover dam- ages, the plaintiff need not prove that he or she was actu- ally harmed in any specific way as a result of the libelous statement.

Damages for Slander In contrast to cases alleging libel, in a case alleging slander, the plaintiff must prove special damages to establish the defendant’s liability. The special damages to establish the defendant’s liability. The special damages plaintiff must show that the slanderous statement caused her or him to suffer actual economic or monetary losses.

Unless this initial hurdle of proving special damages is overcome, a plaintiff alleging slander normally can- not go forward with the suit and recover any damages. This requirement is imposed in slander cases because oral statements have a temporary quality. In contrast, a libel- ous (written) statement has the quality of permanence and can be circulated widely, especially through tweets and blogs. Also, libel usually results from some degree of deliberation by the author.

Slander Per Se Exceptions to the burden of prov- ing special damages in cases alleging slander are made for certain types of slanderous statements. If a false statement constitutes “slander per se,” it is actionable with no proof of special damages required. In most states, the following four types of declarations are considered to be slander per se: 1. A statement that another has a “loathsome” disease

(such as a sexually transmitted disease). 2. A statement that another has committed impropri-

eties while engaging in a profession or trade. 3. A statement that another has committed or has been

imprisoned for a serious crime.

6. Ramirez v. Costco Wholesale Corp., 2014 WL 2696737 (Ct.Sup.Ct. 2014).

4. A statement that a person is unchaste or has engaged in serious sexual misconduct. (This usually applies only to unmarried persons and sometimes only to women.)

Defenses to Defamation Truth is normally an absolute defense against a defamation charge. In other words, if a defendant in a defamation case can prove that the allegedly defamatory statements of fact were true, nor- mally no tort has been committed.

■ CASE IN POINT 6.9 David McKee, a neurologist, went to examine a patient who had been transferred from the intensive care unit (ICU) to a private room. In the room were family members of the patient, including his son. The patient’s son later made the following post on a “rate your doctor” Web site: “[Dr. McKee] seemed upset that my father had been moved [into a private room]. Never having met my father or his family, Dr. McKee said ‘When you weren’t in ICU, I had to spend time find- ing out if you transferred or died.’ When we gaped at him, he said ‘Well, 44 percent of hemorrhagic strokes die within 30 days. I guess this is the better option.’”

McKee filed suit for defamation but lost. The court found that all the statements made by the son were essen- tially true, and truth is a complete defense to a defama- tion action.7 ■ In other words, true statements are not actionable no matter how disparaging. Even the presence of minor inaccuracies of expression or detail does not render basically true statements false.

Other defenses to defamation may exist if the speech is privileged or if it concerns a public figure. We discuss these defenses next. Note that the majority of defama- tion actions are filed in state courts, and state laws differ somewhat in the defenses they allow.

Privileged Communications. In some circumstances, a person will not be liable for defamatory statements because she or he enjoys a privilege, or immunity. Privileged com- munications are of two types: absolute and quali�ed.8 Only in judicial proceedings and certain government pro- ceedings is an absolute privilege granted. �us, statements made by attorneys and judges in the courtroom during a trial are absolutely privileged, as are statements made by government o�cials during legislative debate.

7. McKee v. Laurion, 825 N.W.2d 725 (Minn.Sup. 2013). 8. Note that the term privileged communication in this context is not the

same as privileged communication between a professional, such as an attorney, and his or her client.

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118 UNIT TWO The Public and International Environment

In other situations, a person will not be liable for defamatory statements because he or she has a qualified, or conditional, privilege. An employer’s statements in writ- ten evaluations of employees, for instance, are protected by a qualified privilege. Generally, if the statements are made in good faith and the publication is limited to those who have a legitimate interest in the communication, the statements fall within the area of qualified privilege.statements fall within the area of qualified privilege.statements fall within the area of qualified privilege.

■ EXAMPLE 6.10 Jorge has worked at Google for five years and is being considered for a management position. His supervisor, Lydia, writes a memo about Jorge’s per- formance to those evaluating him for the position. The memo contains certain negative statements, which Lydia honestly believes are true. If Lydia limits the disclosure of the memo to company representatives, her statements will likely be protected by a qualified privilege. ■

Public Figures. Politicians, entertainers, professional ath- letes, and others in the public eye are considered public �gures. Public �gures are regarded as “fair game.” False and defamatory statements about public �gures that are pub- lished in the media will not constitute defamation unless the statements are made with actual malice.9 To be made with actual malice, a statement must be made with either knowledge of its falsity or a reckless disregard of the truth.

Statements made about public figures, especially when they are communicated via a public medium, usu- ally relate to matters of general interest. They are made about people who substantially affect all of us. Further- more, public figures generally have some access to a public medium for answering belittling falsehoods about them- selves. For these reasons, public figures have a greater burden of proof in defamation cases—to show actual malice—than do private individuals.

■ CASE IN POINT 6.11 In Touch magazine published In Touch magazine published In Touch a story about a former call girl who claimed to have slept with legendary soccer player David Beckham more than once. Beckham sued In Touch magazine for libel, seeking $25 million in damages. He said that he had never met the woman, had not cheated on his wife with her, and had not paid her for sex. After months of litigation, a federal district court dismissed the case because Beckham could not show that the magazine had acted with actual malice. Whether or not the statements in the article were accurate, there was no evidence that the defendants had made the statements with knowledge of their falsity or reckless disregard for the truth.10 ■

9. New York Times Co. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964).

10. Beckham v. Bauer Pub. Co., L.P., 2011 WL 977570 (2011).

6–2f Invasion of Privacy A person has a right to solitude and freedom from prying public eyes—in other words, to privacy. The courts have held that certain amendments to the U.S. Constitution imply a right to privacy. Some state constitutions explic- itly provide for privacy rights, as do a number of federal and state statutes.

Tort law also safeguards these rights through the tort of invasion of privacy. Generally, to sue successfully for an inva- sion of privacy, a person must have a reasonable expectation of privacy, and the invasion must be highly offensive. (See this chapter’s Digital Update feature for a discussion of how invasion of privacy claims can arise when someone posts pictures or videos taken with digital devices.)

Invasion of Privacy under the Common Law The following four acts qualify as an invasion of privacy under the common law: 1. Intrusion into an individual’s affairs or seclusion.

Invading someone’s home or searching some- one’s briefcase or laptop without authorization is an invasion of privacy. This tort has been held to extend to eavesdropping by wiretap, unauthorized scanning of a bank account, compulsory blood scanning of a bank account, compulsory blood scanning of a bank account, compulsory blood testing, and window peeping. ■ EXAMPLE 6.12 A female sports reporter for ESPN is digitally videoed while naked through the peephole in the door of her hotel room. She will probably win a lawsuit against the man who took the video and posted it on the Internet. ■

2. False light. Publication of information that places a person in a false light is also an invasion of privacy. For instance, writing a story that attributes to a per- son ideas and opinions not held by that person is an invasion of privacy. (Publishing such a story could invasion of privacy. (Publishing such a story could invasion of privacy. (Publishing such a story could involve the tort of defamation as well.) ■ EXAMPLE 6.13 An Iowa newspaper prints an article saying that An Iowa newspaper prints an article saying that nineteen-year-old Yassine Alam is part of the terror- ist organization Islamic State of Iraq (ISIL). Next to the article is a photo of Yassine’s brother, Salaheddin. Salaheddin can sue the paper for putting him in a false light by using his photo. If the report is not true, and Yassine is not involved with ISIL, Yassine can sue the paper for defamation. ■

3. Public disclosure of private facts. This type of invasion of privacy occurs when a person publicly discloses private facts about an individual that an ordinary person would find objectionable or embarrassing. A newspaper account of a private citizen’s sex life or financial affairs could be an actionable invasion of

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CHAPTER 6 Tort Law 119

Revenge Porn and Invasion of Privacy

Nearly every digital device today takes photos and videos at virtually no cost. Software allows the recording of conversations via Skype. Many couples immortalize their “private moments” using such digital devices. One partner may take a racy selfie and send it as an attachment to a text message to the other partner, for example.

Occasionally, after a couple breaks off their relation- ship, one of them seeks a type of digital revenge. The result, called revenge porn, has been defined in the Cyber Civil Rights Initiative as “the online distribution of sexually explicit images of a non-consenting indi- vidual with the intent to humiliate that person.”

Until relatively recently, few states had criminal stat- utes that covered revenge porn. Therefore, victims have sued on the basis of (1) invasion of privacy, (2) public disclosure of private facts, and (3) intentional infliction of emotional distress.

It Is More Than Just Pictures and Videos

Perhaps the worst form of revenge porn occurs when the perpetrator provides detailed information about the victim. Such information may include the victim’s name, Facebook page, address, and phone number, as well as the victim’s workplace and children’s names. This information, along with the sexually explicit pho- tos and videos, are posted on hosting Web sites. Many such Web sites have been shut down, as was the case with IsAnybodyDown? and Texxxan.com. But others are still active, usually with offshore servers and foreign domain name owners.

The Injurious Results of Revenge Porn

Of course, victims of revenge porn suffer extreme embarrassment. They may also have their reputations ruined. Some have lost their jobs. Others have been unable to obtain jobs because employers have seen their pictures online. A number of victims have been stalked in the physical world and harassed online and

offline. When attempts to have offending pho- tos removed from Web sites have failed, vic- tims have changed their phone numbers and sometimes their names.

A Class-Action Lawsuit

Hollie Toups, along with twenty-two other female plaintiffs, sued the domain name reg-

istrar and Web hosting company GoDaddy in a Texas court. Although GoDaddy did not create the defama- tory and offensive material at issue, GoDaddy knew of the content and did not remove it. The plaintiffs asserted causes of action “for intentional infliction of emotional distress,” among other claims.

Additionally, the plaintiffs argued that “by its know- ing participation in these unlawful activities, GoDaddy has also committed the intentional Texas tort of inva- sion of privacy . . . as well as intrusion on Plaintiffs’ right to seclusion, the public disclosure of their private facts, [and] the wrongful appropriation of their names and likenesses. . . .” GoDaddy sought to dismiss the case, and an appeals court eventually granted the motion to dismiss.a

Another Texas woman had better luck. The woman’s ex-boyfriend had uploaded videos of her to YouTube and other sites. At the time she made the complaint, revenge porn was not a crime in Texas. Nevertheless, in a jury trial in 2014, she won a $500,000 award. Since then, a handful of states have made revenge porn a crime. In 2015, a California man, Kevin Bollaert, was convicted for creating a revenge porn Web site and sentenced to serve eighteen years in prison.

Critical Thinking Should domain name hosting compa- nies be liable for revenge porn?

DIGITAL UPDATE

a. GoDaddy.com, LLC. v. Toups, 429 S.W.3d 752 (Tex.App.—Beaumont 2014).

privacy. This is so even if the information revealed is true, because it should not be a matter of public concern.

4. Appropriation of identity. Using a person’s name, pic- ture, likeness, or other identifiable characteristic for commercial purposes without permission is also an

invasion of privacy. An individual’s right to privacy normally includes the right to the exclusive use of normally includes the right to the exclusive use of normally includes the right to the exclusive use of her or his identity. ■ EXAMPLE 6.14 An advertising agency asks a singer with a distinctive voice and stage presence to take part in a marketing campaign for a new automobile. The singer rejects the offer. If the

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120 UNIT TWO The Public and International Environment

agency then uses someone who imitates the singer’s voice and dance moves in the ad, it will be actionable as an appropriation of identity. ■

Appropriation Statutes Most states today have codified the common law tort of appropriation of identity in statutes that establish the distinct tort of appropriation, or right of publicity. States differ as to the degree of like- ness that is required to impose liability for appropriation, however.

Some courts have held that even when an animated character in a video or a video game is made to look like an actual person, there are not enough similarities to an actual person, there are not enough similarities to an actual person, there are not enough similarities to constitute appropriation. ■ CASE IN POINT 6.15 Rob Rob- ert Burck is a street entertainer in New York City who has become famous as “The Naked Cowboy.” Burck per- forms wearing only a white cowboy hat, white cowboy boots, and white underwear. He carries a guitar strate- gically placed to give the illusion of nudity. Burck sued Mars, Inc., the maker of M&Ms candy, over a video it showed on billboards in Times Square that depicted a blue M&M dressed exactly like The Naked Cowboy. The court, however, held that the use of Burck’s signature cos- tume did not amount to appropriation.11 ■

11. Burck v. Mars, Inc., 571 F.Supp.2d 446 (S.D.N.Y. 2008).

6–2g Fraudulent Misrepresentation A misrepresentation leads another to believe in a con- dition that is different from the condition that actually exists. Although persons sometimes make misrepre- sentations accidentally because they are unaware of the existing facts, the tort of fraudulent misrepresentation (fraud), involves intentional deceit for personal gain. The intentional deceit for personal gain. The intentional tort includes several elements: 1. A misrepresentation of material facts or conditions

with knowledge that they are false or with reckless disregard for the truth.

2. An intent to induce another party to rely on the misrepresentation.

3. A justifiable reliance on the misrepresentation by the deceived party.

4. Damages suffered as a result of that reliance. 5. A causal connection between the misrepresentation

and the injury suffered. For fraud to occur, more than mere puffery, or seller’s

talk, must be involved. Fraud exists only when a person represents as a fact something he or she knows is untrue. For instance, it is fraud to claim that the roof of a build- ing does not leak when one knows that it does. Facts are objectively ascertainable, whereas seller’s talk (such as “I am the best accountant in town”) is not, because the use of the word best is subjective. best is subjective. best

In the following case, the court considered each of the elements of fraud.

Background and Facts Joseph Guido bought a parcel of land in Stillwater, New York, that con- tained nine rental houses. The houses shared a waste disposal system that was defective. Guido had a new septic system installed. When town officials discovered sewage on the property, Guido had the system partially replaced. Prospective buyers, including Danny Revell, were given a property infor- mation sheet that stated, “Septic system totally new—each field totally replaced.” In response to a questionnaire from the buyers’ bank, Guido denied any knowledge of environmental problems.

A month after the buyers bought the houses, the septic system failed and required substantial repairs. The lender foreclosed on the property. The buyers filed a suit in a New York state court against Guido and his firm, Real Property Solutions, LLC, alleging fraud. A jury found fraud and awarded dam- ages. The court issued a judgment in the plaintiffs’ favor. The defendants appealed.

In the Language of the Court EGAN, Jr., J: [Judge:]

* * * * To prevail upon their cause of action for fraud, plaintiffs were required to establish that defendants, with

the intent to deceive, misrepresented or omitted a material fact that they knew to be false and that plaintiffs,

Revell v. Guido New York Supreme Court, Appellate Division, Third Department, 124 A.D.3d 1006, 2 N.Y.S.3d 252 (2015).

Case 6.2

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CHAPTER 6 Tort Law 121

in turn, justifiably relied upon such misrepresentation or omission, thereby incurring damages. As to the mis- representation element, plaintiffs point to the statement made on the property information sheet * * * , as well as Guido’s responses to certain of the inquiries contained on the environmental questionnaire. In this regard, the record reflects that the [replacement] septic system * * * was not “totally new,” as it retained the original pump house structure and, more to the point, utilized the holding tanks that origi- nally were part of the system * * * . There also is no question that Guido provided false answers to vari- ous inquiries posed on the environmental questionnaire. For example, Guido disavowed any knowledge of “governmental notification relating to past or recurrent violations of environmental laws with respect to the property * * * ”—despite having been advised by the Town of Stillwater * * * that partially treated sewage was discovered on the property. [Emphasis added.]

As to the intent element, * * * given the arguably cavalier [offhand] manner in which Guido com- pleted the environmental questionnaire, as well as his extensive knowledge regarding the * * * problems with the original septic system * * * , the jury could properly find that Guido made the cited misrepre- sentations with the intent to deceive plaintiffs.

With respect to the issue of justifiable reliance, Revell * * * conducted a visual inspection of the prop- erty prior to making an offer and did not observe any conditions indicative of a problem with the septic system. * * * If a septic system was represented to be “totally new” and a visual inspection of the property did not reveal any red flags, [that is,] boggy areas, odors or liquids bubbling up to the surface, one would assume that the system was working properly. * * * The jury [could] find that plaintiffs’ reliance upon the representation contained in the property information sheet was reasonable.

* * * * Nor are we persuaded that plaintiffs failed to tender sufficient admissible proof to substantiate the

damages awarded by the jury. During the trial, the parties stipulated to the admission into evidence of a binder containing, among other things, an abundance of receipts, invoices, billing statements and canceled checks detailing plaintiffs’ expenditures related to the subject property—and plaintiffs’ forensic accountant, in turn, utilized such documents to arrive at a damages figure. * * * We are satisfied that plaintiffs tendered sufficient admissible proof to sustain the damages awarded by the jury.

Decision and Remedy The state intermediate appellate court affirmed the lower court’s judgment in the plaintiffs’ favor. The facts of the case and the plaintiffs’ proof met all of the requirements for establish- ing fraud.

Critical Thinking • Legal Environment Financing for the purchase of the property was conditioned on the bank’s review of

Guido’s answers to the environmental questionnaire. How could the court conclude that the plaintiffs justi- fiably relied on misrepresentations made to the bank? Explain.

• What If the Facts Were Different? If a visual inspection of the property had revealed “boggy areas, odors or liquids bubbling up to the surface” indicating that the septic system was not working properly, would the outcome of this case have been different?

Case 6.2 Continued

Statement of Fact versus Opinion Normally, the tort of fraudulent misrepresentation occurs only when there is reliance on a statement of fact. Sometimes, however, reliance on a statement of opinion may involve the tort of fraudulent statement of opinion may involve the tort of fraudulent statement of opinion misrepresentation if the individual making the statement of opinion has superior knowledge of the subject matter. For instance, when a lawyer makes a statement of opinion about the law in a state in which the lawyer is licensed to practice, a court might treat it as a statement of fact.

Negligent Misrepresentation Sometimes, a tort action can arise from misrepresentations that are made negligently rather than intentionally. The key difference between intentional and negligent misrepresentation is whether the person making the misrepresentation had actual knowledge of its falsity. Negligent misrepresenta- tion requires only that the person making the statement or omission did not have a reasonable basis for believing its truthfulness.

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122 UNIT TWO The Public and International Environment

Liability for negligent misrepresentation usually arises when the defendant who made the misrepresentation owed a duty of care to the plaintiff to supply correct information. (We discuss the duty of care in more detail later in the chapter.) Statements or omissions made by attorneys and accountants to their clients, for instance, can lead to liability for negligent misrepresentation.

6–2h Abusive or Frivolous Litigation Tort law recognizes that people have a right not to be sued without a legally just and proper reason, and there- fore it protects individuals from the misuse of litigation. Torts related to abusive litigation include malicious pros- ecution and abuse of process. If a party initiates a lawsuit

out of malice and without a legitimate legal reason, and ends up losing the suit, that party can be sued for mali- cious prosecution. Abuse of process can apply to any person cious prosecution. Abuse of process can apply to any person cious prosecution. Abuse of process using a legal process against another in an improper man- ner or to accomplish a purpose for which the process was not designed.

The key difference between the torts of abuse of process and malicious prosecution is the level of proof. Unlike malicious prosecution, abuse of process is not limited to prior litigation and does not require the plain- tiff to prove malice. It can be based on the wrongful use of subpoenas, court orders to attach or seize real property, or other types of formal legal process.

Concept Summary 6.1 reviews intentional torts against persons.

Intentional Torts against Persons

Concept Summary 6.1

Any unexcused and intentional act that causes another person to be apprehensive of immediate harm is an assault. An assault resulting in physical contact is a battery.

Assault and Battery

An intentional confinement or restraint of another person’s movement without justification.

False Imprisonment

An intentional act that amounts to extreme and outrageous conduct resulting in severe emotional distress to another.

Intentional Infliction of Emotional Distress

The filing of a lawsuit without legitimate grounds and with malice. Alternatively, the use of a legal process in an improper manner.

Abusive or Frivolous Litigation

A false statement of fact, not made under privilege, that is communicated to a third person and that causes damage to a person’s reputation. For public figures, the plaintiff must also prove that the statement was made with actual malice.

Defamation (Libel or Slander)

Publishing or otherwise making known or using information relating to a person’s private life and affairs, with which the public has no legitimate concern, without that person’s permission or approval.

Invasion of Privacy

A false representation made by one party, through misstatement of facts or through conduct, with the intention of deceiving another and on which the other reasonably relies to his or her detriment.

Fraudulent MisreprMisreprMisr esentation (Fraud)

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CHAPTER 6 Tort Law 123

6-2i Wrongful Interference The torts known as business torts generally involve wrongbusiness torts generally involve wrongbusiness torts – ful interference with another’s business rights. Public pol- icy favors free competition, and these torts protect against tortious interference with legitimate business. Business torts involving wrongful interference generally fall into two categories: interference with a contractual relation- ship and interference with a business relationship.

Wrongful Interference with a Contractual Relationship Three elements are necessary for wrong- ful interference with a contractual relationship to occur: 1. A valid, enforceable contract must exist between two

parties. 2. A third party must know that this contract exists. 3. This third party must intentionally induce a party to intentionally induce a party to intentionally induce

the contract to breach the contract. ■ CASE IN POINT 6.16 A landmark case in this area

involved an opera singer, Joanna Wagner, who was under contract to sing for a man named Lumley for a specified period of years. A man named Gye, who knew of this contract, nonetheless “enticed” Wagner to refuse to carry out the agreement, and Wagner began to sing for Gye. Gye’s action constituted a tort because it interfered with the contractual relationship between Wagner and Lumley. (Wagner’s refusal to carry out the agreement also entitled Lumley to sue Wagner for breach of contract.)12 ■

The body of tort law relating to wrongful interference with a contractual relationship has increased greatly in recent years. In principle, any lawful contract can be the basis for an action of this type. The contract could be between a firm and its employees or a firm and its cus- tomers. Sometimes, a competitor of a firm lures away one of the firm’s key employees. In this situation, the origi- nal employer can recover damages from the competitor only if it can be shown that the competitor knew of the contract’s existence and intentionally induced the breach.

Wrongful Interference with a Business Rela- tionship Businesspersons devise countless schemes to attract customers. They are prohibited, however, from unreasonably interfering with another’s business in their attempts to gain a greater share of the market.

There is a difference between competitive practices and competitive practices and competitive practices predatory behavior—actions undertaken with the intenpredatory behavior—actions undertaken with the intenpredatory behavior – tion of unlawfully driving competitors completely out of the market. Attempting to attract customers in gen- eral is a legitimate business practice, whereas specifically

12. Lumley v. Gye, 118 Eng.Rep. 749 (1853).

targeting the customers of a competitor is more likely to be predatory. A plaintiff claiming predatory behavior must show that the defendant used predatory methods to intentionally harm an established business relationship or gain a prospective economic advantage.or gain a prospective economic advantage.or gain a prospective economic advantage.

■ EXAMPLE 6.17 A shopping mall contains two ath- letic shoe stores: Joe’s and Ultimate Sport. Joe’s cannot station an employee at the entrance of Ultimate Sport’s to divert customers to Joe’s by telling them that Joe’s will beat Ultimate Sport’s prices. This type of activity con- stitutes the tort of wrongful interference with a business relationship, which is commonly considered to be an unfair trade practice. If this activity were permitted, Joe’s would reap the benefits of Ultimate Sport’s advertising. ■

Defenses to Wrongful Interference A person will not be liable for the tort of wrongful interference with a contractual or business relationship if it can be shown that the interference was justified or permissible. Bona fide competitive behavior—such as marketing and adver- tising strategies—is a permissible interference even if it results in the breaking of a contract.results in the breaking of a contract.results in the breaking of a contract.

■ EXAMPLE 6.18 Taylor Meats advertises so effectively Taylor Meats advertises so effectively that it induces Sam’s Restaurant to break its contract with Burke’s Meat Company. In that situation, Burke’s Meat Company will be unable to recover against Taylor Meats on a wrongful interference theory. The public policy that favors free competition through advertising outweighs any possible instability that such competitive activity might cause in contractual relations. ■

6–3 Intentional Torts against Property

Intentional torts against property include trespass to land, trespass to personal property, conversion, and dis- paragement of property. These torts are wrongful actions that interfere with individuals’ legally recognized rights with regard to their land or personal property.

The law distinguishes real property from personal property. Real property is land and things permanently Real property is land and things permanently Real property attached to the land, such as a house. Personal property consists of all other items, including cash and securities (such as stocks and bonds).

6–3a Trespass to Land A trespass to land occurs when a person, without pertrespass to land occurs when a person, without pertrespass to land – mission, does any of the following:

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124 UNIT TWO The Public and International Environment

1. Enters onto, above, or below the surface of land that is owned by another.

2. Causes anything to enter onto land owned by another. 3. Remains on land owned by another or permits any-

thing to remain on it. Actual harm to the land is not an essential element of this tort, because the tort is designed to protect the right of an owner to exclusive possession.

Common types of trespass to land include walking or driving on another’s land, shooting a gun over another’s land, and throwing rocks at a building that belongs to someone else. Another common form of trespass involves constructing a building so that part of it extends onto an adjoining landowner’s property.

Establishing Trespass Before a person can be a trespasser, the real property owner (or another person in actual and exclusive possession of the property, such as a renter) must establish that person as a trespasser. For instance, “posted” trespass signs expressly establish as a trespasser a person who ignores these signs and enters onto the property. A guest in your home is not a tres- passer, unless he or she has been asked to leave and refuses. Any person who enters onto another’s property to com- mit an illegal act (such as a thief entering a lumberyard at night to steal lumber) is impliedly a trespasser, with or without posted signs.

Liability for Harm At common law, a trespasser is liable for any damage caused to the property and gen- erally cannot hold the owner liable for injuries that the trespasser sustains on the premises. This common law rule is being modified in many jurisdictions, however, in favor of a reasonable duty of care rule that varies depending on reasonable duty of care rule that varies depending on reasonable duty of care the status of the parties.

For instance, a landowner may have a duty to post a notice that guard dogs patrol the property. Also, if young children are attracted to the property by some object, such a swimming pool or a sand pile, and are injured, the landowner may be held liable (under the attractive nuisance doctrine). Still, an owner can normally use rea- sonable force to remove a trespasser from the premises or detain the trespasser for a reasonable time without liabil- ity for damages.

Defenses against Trespass to Land One defense to a claim of trespass is to show that the trespass was war- ranted, such as when a trespasser enters a building to assist someone in danger. Another defense exists when the tres- passer can show that she or he had a license to come onto license to come onto license the land.

A licensee is one who is invited (or allowed to enter) onto the property of another for the licensee’s benefit. A person who enters another’s property to read an elec- tric meter, for example, is a licensee. When you purchase a ticket to attend a movie or sporting event, you are licensed to go onto the property of another to view that movie or event.

Note that licenses to enter onto another’s property are revocable by the property owner. If a property owner asks revocable by the property owner. If a property owner asks revocable an electric meter reader to leave and she or he refuses to do so, the meter reader at that point becomes a trespasser.

6–3b Trespass to Personal Property Whenever any individual wrongfully takes or harms the personal property of another or otherwise interferes with the lawful owner’s possession and enjoyment of personal property, trespass to personal property occurs. This trespass to personal property occurs. This trespass to personal property tort may also be called trespass to chattels or trespass to chattels or trespass to chattels trespass to per- sonalty.13 In this context, harm means not only destruc- tion of the property, but also anything that diminishes its value, condition, or quality.

Trespass to personal property involves intentional meddling with a possessory interest (one arising from possession), including barring an owner’s access to perpossession), including barring an owner’s access to perpossession), including barring an owner’s access to per- sonal property. ■ EXAMPLE 6.19 Kelly takes Ryan’s busi- ness law book as a practical joke and hides it so that Ryan is unable to find it for several days before the final exami- nation. Here, Kelly has engaged in a trespass to personal property (and also conversion, the tort discussed next). ■

If it can be shown that trespass to personal property was warranted, then a complete defense exists. Most states, for instance, allow automobile repair shops to hold a customer’s car (under what is called an artisan’s lien) when the customer refuses to pay for repairs already completed.

6–3c Conversion Any act that deprives an owner of personal property or of the use of that property without the owner’s permis- sion and without just cause can constitute conversion. Even the taking of electronic records and data may form the basis of a conversion claim. Often, when conver- sion occurs, a trespass to personal property also occurs. The original taking of the personal property from the owner was a trespass. Wrongfully retaining the property is conversion.

13. Pronounced per-sun-ul-tee.

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CHAPTER 6 Tort Law 125

Failure to Return Goods Conversion is the civil side of crimes related to theft, but it is not limited to theft. Even when the rightful owner consented to the initial taking of the property, so no theft or trespass occurred, a failure to return the property may still be conver- sion. ■ EXAMPLE 6.20 Chen borrows Mark’s iPad mini to use while traveling home from school for the holidays. When Chen returns to school, Mark asks for his iPad back, but Chen says that he gave it to his little brother for Christmas. In this situation, Mark can sue Chen for conversion, and Chen will have to either return the iPad or pay damages equal to its replacement value. ■

Intention Conversion can occur even when a person mistakenly believed that she or he was entitled to the goods. In other words, good intentions are not a defense against conversion. Someone who buys stolen goods, for instance, may be sued for conversion even if he or she did not know the goods were stolen. If the true owner of the goods sues the buyer, the buyer must either return the property to the owner or pay the owner the full value of the property.

Conversion can also occur from an employee’s unauConversion can also occur from an employee’s unauConversion can also occur from an employee’s unau- thorized use of a credit card. ■ CASE IN POINT 6.21 Nich- olas Mora worked for Welco Electronics, Inc., but had also established his own company, AQM Supplies. Mora used Welco’s credit card without permission and deposited more than $375,000 into AQM’s account, which he then transferred to his personal account. Welco sued. A Cali- fornia court held that Mora was liable for conversion. The court reasoned that when Mora misappropriated Welco’s credit card and used it, he took part of Welco’s credit balance with the credit-card company.14 ■

6–3d Disparagement of Property Disparagement of property occurs when economically Disparagement of property occurs when economically Disparagement of property injurious falsehoods are made about another’s product or property rather than about another’s reputation (as in the tort of defamation). Disparagement of property is a general Disparagement of property is a general Disparagement of property term for torts that can be more specifically referred to as slander of quality or slander of quality or slander of quality slander of title.

Slander of Quality The publication of false informa- tion about another’s product, alleging that it is not what its seller claims, constitutes the tort of slander of qual- ity, or trade libel. or trade libel. or To establish trade libel, the plaintiff must prove that the improper publication caused a third

14. Welco Electronics, Inc. v. Mora, 223 Cal.App.4th 202, 166 Cal.Rptr.3d 877 (2014).

person to refrain from dealing with the plaintiff and that the plaintiff sustained economic damages (such as lost profits) as a result.

An improper publication may be both a slander of quality and a defamation of character. For instance, a statement that disparages the quality of a product may also, by implication, disparage the character of a person who would sell such a product.

Slander of Title When a publication falsely denies or casts doubt on another’s legal ownership of property, resulting in financial loss to the property’s owner, the tort of slander of title occurs. Usually, this is an intentional occurs. Usually, this is an intentional tort in which someone knowingly publishes an untrue statement about another’s ownership of certain property with the intent of discouraging a third person from deal- ing with the person slandered. For instance, it would be difficult for a car dealer to attract customers after compet- itors published a notice that the dealer’s stock consisted of stolen automobiles.

See Concept Summary 6.2 for a review of intentional torts against property.

6–4 Unintentional Torts—Negligence

The tort of negligence occurs when someone suf- occurs when someone suf- occurs when someone suf fers injury because of another’s failure to live up to a required duty of care. In contrast to intentional torts, in torts involving negligence, the tortfeasor neither wishes to bring about the consequences of the act nor believes that they will occur. The person’s conduct merely creates a risk of such consequences. If no risk is created, there is no negligence.

Moreover, the risk must be foreseeable. In other words, it must be such that a reasonable person engaging in the same activity would anticipate the risk and guard against it. In determining what is reasonable conduct, courts consider the nature of the possible harm.

Many of the actions giving rise to the intentional torts discussed earlier in the chapter constitute negli- gence if the element of intent is missing (or cannot be gence if the element of intent is missing (or cannot be gence if the element of intent is missing (or cannot be proved). ■ EXAMPLE 6.22 Juan walks up to Maya and intentionally shoves her. Maya falls and breaks her arm as a result. In this situation, Juan is liable for the intentional tort of battery. If Juan carelessly bumps into Maya, how- ever, and she falls and breaks her arm as a result, Juan’s action constitutes negligence. In either situation, Juan has committed a tort. ■

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126 UNIT TWO The Public and International Environment

To succeed in a negligence action, the plaintiff must prove each of the following: 1. Duty. The defendant owed a duty of care to the

plaintiff. 2. Breach. The defendant breached that duty. 3. Causation. The defendant’s breach caused the plain-

tiff ’s injury. 4. Damages. The plaintiff suffered a legally recognizable

injury.

6–4a The Duty of Care and Its Breach Central to the tort of negligence is the concept of a duty of care. The basic principle underlying the duty of care is that people are free to act as they please so long as their actions do not infringe on the interests of others. When someone fails to comply with the duty to exercise reasonable care, a potentially tortious act may have been committed.

Failure to live up to a standard of care may be an act (accidentally setting fire to a building) or an omission (neglecting to put out a campfire). It may be a careless act or a carefully performed but nevertheless dangerous act that results in injury. In determining whether the duty of care has been breached, courts consider several factors:

1. The nature of the act (whether it is outrageous or commonplace).

2. The manner in which the act was performed (cau- tiously versus heedlessly).

3. The nature of the injury (whether it is serious or slight).

Creating even a very slight risk of a dangerous explosion might be unreasonable, whereas creating a distinct pos- sibility of someone’s burning his or her fingers on a stove might be reasonable.

The Reasonable Person Standard Tort law mea- sures duty by the reasonable person standard. In deter- mining whether a duty of care has been breached, the courts ask how a reasonable person would have acted in the same circumstances. The reasonable person standard is said to be objective. It is not necessarily how a particu- lar person would act. It is society’s judgment of how an would act. It is society’s judgment of how an would ordinarily prudent person should act. If the so-called reashould act. If the so-called reashould – sonable person existed, he or she would be careful, consci- entious, even tempered, and honest.

The degree of care to be exercised varies, depending on the defendant’s occupation or profession, her or his relationship with the plaintiff, and other factors. Gener- ally, whether an action constitutes a breach of the duty of

Intentional Torts against Property

Concept Summary 6.2

The intentional interference with an owner’s right to use, possess, or enjoy his or her personal property without the owner’s consent.

Trespass to Personal Property

The wrongful possession or use of another person’s personal property without just cause.

Conversion

The invasion of another’s real property without consent or privilege. Once a person is expressly or impliedly established as a trespasser, the property owner has specific rights, which may include the right to detain or remove the trespasser.

Trespass to Land

Any economically injurious falsehood that is made about another’s product or property; an inclusive term for the torts of slander of quality and slander of quality and slander of quality slander of title.

Disparagement of Property

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CHAPTER 6 Tort Law 127

care is determined on a case-by-case basis. The outcome depends on how the judge (or jury) decides that a reason- able person in the position of the defendant would have acted in the particular circumstances of the case.

Note that the courts frequently use the reasonable person standard in other areas of law as well as in neg- ligence cases. Indeed, the principle that individuals are required to exercise a reasonable standard of care in their activities is a pervasive concept in business law.

The Duty of Landowners Landowners are expected to exercise reasonable care to protect individuals coming onto their property from harm. In some jurisdictions, landowners may even have a duty to protect trespassers against certain risks. Landowners who rent or lease prem- ises to tenants are expected to exercise reasonable care to ensure that the tenants and their guests are not harmed in common areas, such as stairways, entryways, and laundry rooms.

The Duty to Warn Business Invitees of Risks. Retailers and other business operators who explicitly or implicitly invite persons to come onto their premises have a duty to exercise reasonable care to protect these business invitees. �e duty normally requires storeowners to warn business invitees of foreseeable risks, such as construction zones or wet �oors, about which the owners knew or should have known.

■ EXAMPLE 6.23 Liz enters Kwan’s neighborhood Liz enters Kwan’s neighborhood market, slips on a wet floor, and sustains injuries as a result. If there was no sign or other warning that the floor was wet at the time Liz slipped, the owner, Kwan, would be liable for damages. A court would hold that Kwan was negligent because he failed to exercise a reasonable degree of care to protect customers against foreseeable risks about which he knew or should have known. That a patron might slip on the wet floor and be injured was a foreseeable risk, and Kwan should have taken care to avoid this risk or warn the customer of it. ■

A business owner also has a duty to discover and remove any hidden dangers that might injure a customer or other invitee. Hidden dangers might include uneven surfaces or defects in the pavement of a parking lot or a walkway, or merchandise that has fallen off shelves in a store.

Obvious Risks Provide an Exception. Some risks are so obvious that an owner need not warn of them. For instance, a business owner does not need to warn custom- ers to open a door before attempting to walk through it. Other risks, however, even though they may seem obvious

to a business owner, may not be so in the eyes of another, such as a child. In addition, even if a risk is obvious, a business owner is not necessarily excused from the duty to protect customers from foreseeable harm from that risk.

■ CASE IN POINT 6.24 Giorgio’s Grill is a restaurant in Florida that becomes a nightclub after hours. At those times, traditionally, as the manager of Giorgio’s knew, the staff and customers throw paper napkins into the air as the music plays. The napkins land on the floor, but no one picks them up. One night, Jane Izquierdo went to Giorgio’s. Although she had been to the club on prior occasions and knew about the napkin-throwing tradi- tion, she slipped and fell, breaking her leg. She sued Giorgio’s for negligence, but lost at trial because a jury found that the risk of slipping on the napkins was obvi- ous. A state appellate court reversed, however, holding that the obviousness of a risk does not discharge a busi- ness owner’s duty to its invitees to maintain the premises in a safe condition.15 ■

The Duty of Professionals Persons who possess superior knowledge, skill, or training are held to a higher standard of care than others. Professionals—including physicians, dentists, architects, engineers, accountants, and lawyers, among others—are required to have a stan- dard minimum level of special knowledge and ability. In determining what constitutes reasonable care in the case of professionals, the law takes their training and expertise into account. Thus, an accountant’s conduct is judged not by the reasonable person standard, but by the reasonable accountant standard.

If a professional violates his or her duty of care toward a client, the client may bring a suit against the profes- sional, alleging malpractice, which is essentially profes- sional negligence. For instance, a patient might sue a physician for medical malpractice. A client might sue an attorney for legal malpractice.

6–4b Causation Another element necessary to a negligence action is cau- sation. If a person breaches a duty of care and someone suffers injury, the person’s act must have caused the harm for it to constitute the tort of negligence.

Courts Ask Two Questions In deciding whether the requirement of causation is met, the court must address two questions:

15. Izquierdo v. Gyroscope, Inc., 946 So.2d 115 (Fla.App. 2007).

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128 UNIT TWO The Public and International Environment

1. Is there causation in fact? Did the injury occur because Is there causation in fact? Did the injury occur because Is there causation in fact? of the defendant’s act, or would it have occurred any- way? If the injury would not have occurred without the defendant’s act, then there is causation in fact.

Causation in fact usually can be determined by use of the but for test: “but for” the wrongful act, the but for test: “but for” the wrongful act, the but for injury would not have occurred. This test seeks to determine whether there was a cause-and-effect rela- tionship between the act and the injury suffered. In theory, causation in fact is limitless. One could claim, for example, that “but for” the creation of the world, a particular injury would not have occurred. Thus, as a practical matter, the law has to establish limits, and it does so through the concept of proximate cause.

2. Was the act the proximate, or legal, cause of the injury? Proximate cause, or legal cause, exists when the con- nection between an act and an injury is strong enough to justify imposing liability. Proximate cause asks whether the injuries sustained were foreseeable or were too remotely connected to the incident to trigger lia- bility. Judges use proximate cause to limit the scope of the defendant’s liability to a subset of the total number of potential plaintiffs that might have been harmed by the defendant’s actions.

■ EXAMPLE 6.25 Ackerman carelessly leaves a Ackerman carelessly leaves a campfire burning. The fire not only burns down the forest but also sets off an explosion in a nearby chem- ical plant that spills chemicals into a river, killing all the fish for twenty miles downstream and ruining the economy of a tourist resort. Should Ackerman be liable to the resort owners? To the tourists whose vacations were ruined? These are questions of proxi- mate cause that a court must decide. ■

Both of these causation questions must be answered in the affirmative for liability in tort to arise. If there is causation in fact but a court decides that the defendant’s action is not the proximate cause of the plaintiff ’s injury, the causation requirement has not been met. Therefore, the defendant normally will not be liable to the plaintiff.

Foreseeability Questions of proximate cause are linked to the concept of foreseeability because it would be unfair to impose liability on a defendant unless the defen- dant’s actions created a foreseeable risk of injury. Gener- ally, if the victim or the consequences of a harm done were unforeseeable, there is no proximate cause.

Probably the most cited case on the concept of foresee- ability and proximate cause is the Palsgraf case, which estabPalsgraf case, which estabPalsgraf – lished foreseeability as the test for proximate cause. ■ CASE IN POINT 6.26 Helen Palsgraf was waiting for a train on a station platform. A man carrying a package was rushing to catch a train that was moving away from a platform across

the tracks from Palsgraf. As the man attempted to jump aboard the moving train, he seemed unsteady and about to fall. A railroad guard on the car reached forward to grab him, and another guard on the platform pushed him from behind to help him board the train.

In the process, the man’s package, which (unknown to the railroad guards) contained fireworks, fell on the railroad tracks and exploded. There was nothing about the package to indicate its contents. The repercussions of the explosion caused weighing scales at the other end of the train platform to fall on Palsgraf, causing injuries for which she sued the railroad company. At the trial, the jury found that the railroad guards had been negligent in their conduct. The railroad company appealed. New York’s highest state court held that the railroad company was not liable to Palsgraf. The railroad had not been negligent toward her, because injury to her was not foreseeable.16 ■

6–4c The Injury Requirement and Damages For tort liability to arise, the plaintiff must have suf-For tort liability to arise, the plaintiff must have suf-For tort liability to arise, the plaintiff must have suf fered a legally recognizable injury. To recover damages, the legally recognizable injury. To recover damages, the legally recognizable plaintiff must have suffered some loss, harm, wrong, or invasion of a protected interest. Essentially, the purpose of tort law is to compensate for legally recognized harms and injuries resulting from wrongful acts. If no harm or injury results from a given negligent action, there is noth- ing to compensate, and no tort exists.

For instance, if you carelessly bump into a passerby, who stumbles and falls as a result, you may be liable in tort if the passerby is injured in the fall. If the person is unharmed, however, there normally can be no lawsuit for damages, because no injury was suffered.

Compensatory damages are the norm in negligence cases. A court will award punitive damages only if the defendant’s conduct was grossly negligent, reflecting an intentional failure to perform a duty with reckless disre- gard of the consequences to others.

6–4d Good Samaritan Statutes Most states now have what are called Good Samaritan statutes.17 Under these statutes, someone who is aided voluntarily by another cannot turn around and sue the “Good Samaritan” for negligence. These laws were passed largely to protect physicians and medical personnel who

16. Palsgraf v. Long Island Railroad Co., 248 N.Y. 339, 162 N.E. 99 (1928). 17. These laws derive their name from the Good Samaritan story in the

Bible. In the story, a traveler who had been robbed and beaten lay along the roadside, ignored by those passing by. Eventually, a man from the region of Samaria (the “Good Samaritan”) stopped to render assistance to the injured person.

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CHAPTER 6 Tort Law 129

volunteer their services in emergency situations to those in need, such as individuals hurt in car accidents.

6–4e Dram Shop Acts Many states have also passed dram shop acts,18 under which a bar’s owner or bartender may be held liable for injuries caused by a person who became intoxicated while drinking at the bar. The owner or bartender may also be held responsible for continuing to serve a person who was already intoxicated.

Some states’ statutes also impose liability on social hosts (persons hosting parties) for injuries caused by guests who became intoxicated at the hosts’ homes. Under these stat- utes, it is unnecessary to prove that the bar owner, bar- tender, or social host was negligent. ■ EXAMPLE 6.27 Jane hosts a Super Bowl party at which Brett, a minor, sneaks alcoholic drinks. Jane is potentially liable for damages resulting from Brett’s drunk driving after the party. ■

6–5 Defenses to Negligence Defendants often defend against negligence claims by asserting that the plaintiffs have failed to prove

18. Historically, a dram was a small unit of liquid, and distilled spirits (strong alcoholic liquor) were sold in drams. Thus, a dram shop was a place where liquor was sold in drams.

the existence of one or more of the required elements for negligence. Additionally, there are three basic affirmative defenses in negligence cases (defenses that a defendant can use to avoid liability even if the facts are as the plaintiff states): assumption of risk, superseding cause, and contributory and comparative negligence.

6–5a Assumption of Risk A plaintiff who voluntarily enters into a risky situation, knowing the risk involved, will not be allowed to recover. This is the defense of assumption of risk, which requires two elements: 1. Knowledge of the risk. 2. Voluntary assumption of the risk. The defense of assumption of risk is frequently asserted when the plaintiff was injured during a recreational activ- ity that involves known risk, such as skiing or skydiving. (Courts do not apply the assumption of risk doctrine in emergency situations.)

Assumption of risk can apply not only to participants in sporting events, but also to spectators and bystanders who are injured while attending those events. In the fol- lowing Spotlight Case, the issue was whether a spectator at a baseball game voluntarily assumed the risk of being hit by an errant ball thrown while the players were warming up before the game.

Background and Facts Delinda Taylor went to a Seattle Mariners baseball game at Safeco Field with her boyfriend and her two minor sons. Their seats were four rows up from the field along the right field foul line. They arrived more than an hour before the game so that they could see the play- ers warm up and get their autographs. When she walked in, Taylor saw that a Mariners pitcher, Freddy Garcia, was throwing a ball back and forth with José Mesa right in front of their seats.

As Taylor stood in front of her seat, she looked away from the field, and a ball thrown by Mesa got past Garcia and struck her in the face, causing serious injuries. Taylor sued the Mariners for the alleg- edly negligent warm-up throw. The Mariners filed a motion for summary judgment in which they argued that Taylor, a longtime Mariners fan, was familiar with baseball and the inherent risk of balls entering the stands. Thus, the motion asserted, Taylor had assumed the risk of her injury. The trial court granted the motion and dismissed Taylor’s case. Taylor appealed.

In the Language of the Court DWYER, J. [Judge]

* * * * * * * For many decades, courts have required baseball stadiums to screen some seats—generally those

behind home plate—to provide protection to spectators who choose it.

Spotlight on the Seattle Mariners

Case 6.3 Taylor v. Baseball Club of Case 6.3 Taylor v. Baseball Club of Seattle, Leattle, LP Court of Appeals of Washington, 132 Wash.App. 32, 130 P.3d 835 (2006).Court of Appeals of Washington, 132 Wash.App. 32, 130 P.3d 835 (2006).

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130 UNIT TWO The Public and International Environment

A sport spectator’s assumption of risk and a defendant sports team’s duty of care are accordingly dis- cerned under the doctrine of primary assumption of risk. * * * “Implied primary assumption of risk arises primary assumption of risk arises primary where a plaintiff has impliedly consented (often in advance of any negligence by defendant) to relieve defendant of a duty to plaintiff regarding specific known and appreciated risks.”

* * * * Under this implied primary assumption of risk, defendant must show that plaintiff had full subjective

understanding of the specific risk, both its nature and presence, and that he or she voluntarily chose to encounter the risk.

* * * It is undisputed that the warm-up is part of the sport, that spectators such as Taylor purposely attend that portion of the event, and that the Mariners permit ticket-holders to view the warm-up.

* * * We find the fact that Taylor was injured during warm-up is not legally significant because that portion of the event is necessarily incident to the game.

* * * * Here, there is no evidence that the circumstances leading to Taylor’s injury constituted an unusual

danger. It is undisputed that it is the normal, every-day practice at all levels of baseball for pitchers to warm up in the manner that led to this incident. The risk of injuries such as Taylor’s are within the normal comprehension of a spectator who is familiar with the game. Indeed, the possibility of an errant ball enter- ing the stands is part of the game’s attraction for many spectators. [Emphasis added.]

* * * The record contains substantial evidence regarding Taylor’s familiarity with the game. She attended many of her sons’ baseball games, she witnessed balls entering the stands, she had watched Mariners’ games both at the Kingdome and on television, and she knew that there was no screen protect- ing her seats, which were close to the field. In fact, as she walked to her seat she saw the players warming up and was excited about being in an unscreened area where her party might get autographs from the players and catch balls.

Decision and Remedy The state intermediate appellate court affirmed the lower court’s judgment. As a spectator who chose to sit in an unprotected area of seats, Taylor voluntarily undertook the risk associated with being hit by an errant baseball thrown during the warm-up before the game.

Critical Thinking • What If the Facts Were Different? Would the result in this case have been different if it had been

Taylor’s minor son, rather than Taylor herself, who had been struck by the ball? Should courts apply the doctrine of assumption of risk to children? Discuss.

• Legal Environment What is the basis underlying the defense of assumption of risk? How does that basis support the court’s decision in this case?

6–5b Superseding Cause An unforeseeable intervening event may break the causal connection between a wrongful act and an injury to another. If so, the intervening event acts as a supersed- ing cause—that is, it relieves the defendant of liability for injuries caused by the intervening event.for injuries caused by the intervening event.for injuries caused by the intervening event.

■ EXAMPLE 6.28 While riding his bicycle, Derrick negligently runs into Julie, who is walking on the side- walk. As a result of the impact, Julie falls and fractures her hip. While she is waiting for help to arrive, a small aircraft crashes nearby and explodes, and some of the fiery debris hits her, causing her to sustain severe burns. Derrick will be liable for the damages related to Julie’s fractured hip, because the risk of injuring her with his

bicycle was foreseeable. Normally, though, Derrick will not be liable for the burns caused by the plane crash, because he could not have foreseen the risk that a plane would crash nearby and injure Julie. ■

6–5c Contributory Negligence All individuals are expected to exercise a reasonable degree of care in looking out for themselves. In the past, under the common law doctrine of contributory negliunder the common law doctrine of contributory negliunder the common law doctrine of – gence, a plaintiff who was also negligent (who failed to exercise a reasonable degree of care) could not recover anything from the defendant. Under this rule, no matter how insignificant the plaintiff ’s negligence was relative

Case 6.3 Continued

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CHAPTER 6 Tort Law 131

to the defendant’s negligence, the plaintiff would be pre- cluded from recovering any damages. Today, only a few jurisdictions still follow this doctrine.

6–5d Comparative Negligence In most states, the doctrine of contributory negligence has been replaced by a comparative negligence stan- dard. Under this standard, both the plaintiff ’s and the defendant’s negligence are computed, and the liability for damages is distributed accordingly.

Some jurisdictions have adopted a “pure” form of com- parative negligence that allows the plaintiff to recover,

even if the extent of his or her fault is greater than that of the defendant. Under pure comparative negligence, if the plaintiff was 80 percent at fault and the defendant 20 percent at fault, the plaintiff can recover 20 percent of his or her damages.

Many states’ comparative negligence statutes, how- ever, contain a “50 percent” rule that prevents the plaintiff from recovering any damages if she or he was more than 50 percent at fault. Under this rule, a plaintiff who was 35 percent at fault can recover 65 percent of his or her damages, but a plaintiff who was 65 percent (more than 50 percent) at fault can recover nothing.

Debate This . . . Each time a state legislature enacts a law that applies the assumption of risk doctrine to a particular sport, participants in that sport suffer.

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