8 Business Questions

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

FIFTH EDITION

ESSENTIALS of BUSINESS LAW

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Jeffrey F. Beatty Boston University

Susan S. Samuelson Boston UniversityPet

e r P e a rs o n /S to ck b y te /G

e tt y

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to

remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by

ISBN#, author, title, or keyword for materials in your areas of interest.

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Essentials of Business Law, Fifth Edition Jeffrey F. Beatty, Susan S. Samuelson

Senior Vice President, Global Product Manager, Higher Education: Jack W. Calhoun

Vice President, General Manager, Social Science & Qualitative Business: Erin Joyner

Product Director: Mike Worls

Sr. Product Manager: Vicky True Baker

Managing Developer: Jennifer King

Product Assistant: Tristann Jones

Sr. Content Project Manager: Holly Henjum

Sr. Media Developer: Kristen Meere

Manufacturing Planner: Kevin Kluck

Rights Acquisition Specialist: Anne Sheroff

Marketing Director: Kristen Hurd

Sr. Marketing Manager: Robin LeFevre

Marketing Coordinator: Christopher Walz

Production Service: Integra Software Services Pvt. Ltd.

Sr. Art Director: Michelle Kunkler

Cover and Internal Designer: Lou Ann Thesing

Cover Image: Peter Pearson/Stockbyte/Getty

© 2015, 2012 Cengage Learning

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher.

For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706

For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions

Further permissions questions can be emailed to [email protected]

Library of Congress Control Number: 2013952743

ISBN-13: 978-1-285-42700-3

ISBN-10: 1-285-42700-9

Cengage Learning 200 First Stamford Place, 4th Floor Stamford, CT 06902 USA

Cengage Learning is a leading provider of customized learning solutions with office locations around the globe, including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan. Locate your local office at: www.cengage.com/global

Cengage Learning products are represented in Canada by Nelson Education, Ltd.

To learn more about Cengage Learning Solutions, visit www.cengage.com

Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com

Printed in the United States of America 1 2 3 4 5 6 7 17 16 15 14 13

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

WCN: 02-200-206

CONTENTS: OVERVIEW

Preface xix

UNIT 1 The Legal Environment 1

1 Introduction to Law 2

2 Ethics and Corporate Social Responsibility 23

3 Dispute Resolution 51

4 Common Law, Statutory Law, and

Administrative Law 83

5 Constitutional Law 109

6 Torts and Product Liability 134

7 Crime 164

8 International Law 190

UNIT 2 Contracts 213

9 Introduction to Contracts 214

10 Agreement 234

11 Consideration 256

12 Legality 276

13 Capacity and Consent 295

14 Written Contracts 316

15 Third Parties 337

16 Performance and Discharge 356

17 Remedies 377

18 Practical Contracts 400

UNIT 3 Commercial Transactions 423

19 Introduction to Sales 424

20 Ownership, Risk, and Warranties 450

21 Performance and Remedies 477

22 Negotiable Instruments 501

23 Secured Transactions 528

24 Bankruptcy 562

25 Agency Law 587

UNIT 4 Employment, Business Organizations and Property 615

26 Employment and Labor Law 616

27 Employment Discrimination 644

28 Starting a Business: LLCs and

Other Options 673

29 Corporations 699

30 Government Regulation: Securities and

Antitrust 732

31 Consumer Protection 754

32 Cyberlaw 782

33 Intellectual Property 805

34 Real and Personal Property 832

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1

iii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CONTENTS

Preface xix

UNIT 1 The Legal Environment 1

Chapter 1 Introduction to Law 2 1-1 The Role of Law in Society 3

1-1a Power 3

1-1b Importance 3

1-1c Fascination 3

1-2 Origins of Our Law 4

1-2a English Roots 4

Case Summary: The Oculist’s Case (1329) 5

1-2b Law in the United States 6

1-3 Sources of Contemporary Law 6

1-3a United States Constitution 7

1-3b Statutes 9

1-3c Common Law 9

1-3d Court Orders 10

1-3e Administrative Law 10

1-3f Treaties 10

1-4 Classifications 10

1-4a Criminal and Civil Law 10

1-4b Law and Morality 11

1-5 Jurisprudence 11

1-5a Legal Positivism 11

1-5b Natural Law 12

1-5c Legal Realism 12

1-6 Working with the Book’s Features 13

1-6a Analyzing a Case 13

Case Summary: Kuehn v. Pub Zone 13

1-6b Devil’s Advocate 15

1-6c Exam Strategy 16

1-6d You Be the Judge 16

You Be the Judge: Soldano v. O’Daniels 17

Chapter Conclusion 17

Exam Review 18

Multiple-Choice Questions 19

Essay Questions 20

Discussion Questions 21

Chapter 2 Ethics and Corporate Social Responsibility 23

2-1 Introduction 24

2-2 The Role of Business in Society 26

2-3 Why Be Ethical? 27

2-3a Society as a Whole Benefits from

Ethical Behavior 27

2-3b People Feel Better When They

Behave Ethically 27

2-3c Unethical Behavior Can Be Very Costly 28

2-4 Theories of Ethics 28

2-4a Utilitarian Ethics 29

2-4b Deontological Ethics 29

2-4c Rawlsian Justice 30

2-4d Front Page Test 30

2-5 Ethics Traps 31

2-5a Money 31

2-5b Rationalization 32

2-5c Conformity 33

2-5d Following Orders 33

2-5e Euphemisms 34

2-5f Lost in a Crowd 34

2-5g Blind Spots 35

2-5h Avoiding Ethics Traps 35

2-6 Lying: A Special Case 36

2-7 Applying the Principles 37

2-7a Personal Ethics in the Workplace 37

2-7b The Organization’s Responsibility

to Society 38

2-7c The Organization’s Responsibility

to Its Employees 39

2-7d An Organization’s Responsibility

to Its Customers 40

2-7e Organization’s Responsibility

to Overseas Contract Workers 41

2-8 When the Going Gets Tough 42

2-8a Loyalty 42

2-8b Exit 43

2-8c Voice 43

2-9 Corporate Social Responsibility (CSR) 43

Chapter Conclusion 44

Exam Review 44

Multiple-Choice Questions 46

Essay Questions 47

Discussion Questions 48

Chapter 3 Dispute Resolution 51 3-1 Three Fundamental Areas of Law 52

3-1a Litigation versus Alternative Dispute

Resolution 52

v

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3-2 Court Systems 52

3-2a State Courts 52

Landmark Case: International Shoe Co. v.

State of Washington 55

3-2b Federal Courts 56

3-3 Litigation 60

3-3a Pleadings 60

Case Summary: Stinton v. Robin’s Wood, Inc. 65

Case Summary: Jones v. Clinton 67

3-4 Trial 69

3-4a Adversary System 69

3-4b Right to Jury Trial 69

3-4c Voir Dire 69

Case Summary: Pereda v. Parajon 70

3-4d Opening Statements 71

3-4e Burden of Proof 71

3-4f Plaintiff ’s Case 71

3-4g Rules of Evidence 72

3-4h Motion for Directed Verdict 72

3-4i Defendant’s Case 73

3-4j Closing Arguments 73

3-4k Jury Instructions 73

3-4l Verdict 73

3-4m Motions after the Verdict 74

3-5 Appeals 74

3-5a Appeals Court Options 74

3-6 Alternative Dispute Resolution 75

3-6a Negotiation 75

3-6b Mediation 76

3-6c Arbitration 76

Chapter Conclusion 77

Exam Review 78

Multiple-Choice Questions 80

Essay Questions 81

Discussion Questions 82

Chapter 4 Common Law, Statutory Law, and Administrative Law 83

4-1 Common Law 84

4-1a Stare Decisis 84

4-1b Bystander Cases 84

Case Summary: Tarasoff v. Regents of the

University of California 85

4-2 Statutory Law 87

4-2a Bills 87

4-2b Discrimination: Congress and the Courts 88

4-2c Debate 89

4-2d Statutory Interpretation 91

Landmark Case: Griggs v. Duke Power Co. 92

4-2e Changing Times 93

4-2f Voters’ Role 93

4-2g Congressional Override 93

4-3 Administrative Law 95

4-3a Background 95

4-3b Classification of Agencies 96

4-4 Power of Agencies 96

4-4a Rulemaking 96

4-4b Investigation 98

Landmark Case: United States v. Biswell 99

4-4c Adjudication 99

4-5 Limits on Agency Power 100

4-5a Statutory Control 100

4-5b Political Control 100

4-5c Judicial Review 100

Case Summary: Federal Communications

Commission v. Fox Television Stations, Inc. 101

4-5d Informational Control and the Public 102

Chapter Conclusion 103

Exam Review 104

Multiple-Choice Questions 106

Essay Questions 107

Discussion Questions 108

Chapter 5 Constitutional Law 109 5-1 Government Power 110

5-1a One in a Million 110

5-2 Overview 110

5-2a Separation of Powers 111

5-2b Individual Rights 111

5-3 Power Granted 111

5-3a Congressional Power 111

5-3b Executive Power 115

5-3c Judicial Power 115

Case Summary: Kennedy v. Louisiana 116

5-4 Protected Rights 117

5-4a Incorporation 118

5-4b First Amendment: Free Speech 118

Case Summary: Texas v. Johnson 119

Case Summary: Citizens United v. Federal

Election Commission 120

Case Summary: Salib v. City of Mesa 121

5-4c Fifth Amendment: Due Process and

the Takings Clause 122

Case Summary: Kelo v. City of New London,

Connecticut 125

5-4d Fourteenth Amendment: Equal

Protection Clause 126

vi CONTENTS

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Chapter Conclusion 129

Exam Review 129

Multiple-Choice Questions 131

Essay Questions 132

Discussion Questions 133

Chapter 6 Torts and Product Liability 134 6-1 Intentional Torts 136

6-1a Defamation 136

6-1b False Imprisonment 139

6-1c Intentional Infliction of Emotional

Distress 139

Case Summary: Jane Doe and Nancy Roe v.

Lynn Mills 140

6-1d Additional Intentional Torts 140

6-2 Damages 140

6-2a Compensatory Damages 140

6-2b Punitive Damages 142

Landmark Case: State Farm v. Campbell 143

6-3 Business Torts 144

6-3a Tortious Interference with Business

Relations 144

6-3b Privacy and Publicity 145

6-4 Negligence 146

6-4a Duty of Due Care 146

Case Summary: Hernandez v. Arizona Board

of Regents 147

6-4b Breach of Duty 149

6-4c Causation 149

6-4d Damages 151

6-5 Defenses 152

6-5a Contributory and Comparative

Negligence 152

6-5b Assumption of the Risk 153

Case Summary: Truong v. Nguyen 154

6-6 Strict Liability 154

6-6a Ultrahazardous Activity 155

6-6b Product Liability 155

Chapter Conclusion 157

Exam Review 157

Multiple-Choice Questions 160

Essay Questions 161

Discussion Questions 162

Chapter 7 Crime 164 7-1 The Differences between a Civil and Criminal

Case 165

7-1a Prosecution 165

7-1b Burden of Proof 166

7-1c Right to a Jury 166

7-1d Felony/Misdemeanor 166

7-2 Criminal Procedure 166

7-2a Conduct Outlawed 166

7-2b State of Mind 167

7-2c Gathering Evidence: The Fourth

Amendment 167

You Be the Judge: Ohio v. Smith 169

7-2d The Case Begins 171

Landmark Case: Miranda v. Arizona 172

7-2e Right to a Lawyer 173

7-2f After Arrest 173

Case Summary: Ewing v. California 174

7-3 Crimes that Harm Business 176

7-3a Larceny 176

7-3b Fraud 176

Case Summary: Skilling v. United States 177

7-3c Arson 179

7-3d Embezzlement 179

7-4 Crimes Committed by Business 179

Case Summary: Commonwealth v. Angelo

Todesca Corp. 179

7-4a Selected Crimes Committed by

Business 180

7-4b Punishing a Corporation 183

Chapter Conclusion 184

Exam Review 184

Multiple-Choice Questions 186

Essay Questions 187

Discussion Questions 188

Chapter 8 International Law 190 8-1 Trade Regulation: The Big Picture 191

8-1a Export Controls 191

8-1b Import Controls 192

You Be the Judge: Totes-Isotoner Co. v.

United States 192

8-1c Treaties 193

Case Summary: United States—Import

Prohibition of Certain Shrimp and Shrimp

Products 194

8-2 International Sales Agreements 197

8-2a The Sales Contract 197

Case Summary: Centrifugal Casting

Machine Co., Inc. v. American Bank &

Trust Co. 200

8-3 International Trade Issues 201

8-3a Repatriation of Profits 201

CONTENTS vii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

8-3b Expropriation 201

8-3c Foreign Corrupt Practices Act 202

Case Summary: United States v. King 203

8-3d Extraterritoriality 205

You Be the Judge: Carnero v. Boston

Scientific Corporation 205

Chapter Conclusion 206

Exam Review 207

Multiple-Choice Questions 209

Essay Questions 210

Discussion Questions 211

UNIT 2 Contracts 213

Chapter 9 Introduction to Contracts 214 9-1 Contracts 215

9-1a Elements of a Contract 215

9-1b Other Important Issues 215

9-1c All Shapes and Sizes 216

9-1d Contracts Defined 216

9-1e Development of Contract Law 217

Case Summary: Davis v. Mason 217

9-2 Types of Contracts 218

9-2a Bilateral and Unilateral Contracts 218

9-2b Executory and Executed Contracts 219

9-2c Valid, Unenforceable, Voidable, and

Void Agreements 219

Case Summary: Mr. W Fireworks, Inc. v.

Ozuna 220

9-2d Express and Implied Contracts 220

You Be the Judge: DeMasse v. ITT

Corporation 221

9-2e Promissory Estoppel and Quasi-

Contracts 222

Case Summary: Norton v. Hoyt 223

9-3 Sources of Contract Law 225

9-3a Common Law 225

9-3b Uniform Commercial Code 225

Case Summary: Fallsview Glatt Kosher

Caterers, Inc. v. Rosenfeld 226

Chapter Conclusion 227

Exam Review 227

Multiple-Choice Questions 230

Essay Questions 231

Discussion Questions 233

Chapter 10 Agreement 234 10-1 Meeting of the Minds 235

10-2 Offer 236

10-2a Statements That Usually Do Not

Amount to Offers 236

Landmark Case: Carlill v. Carbolic Smoke

Ball Company 238

10-2b Problems with Definiteness 239

Case Summary: Baer v. Chase 240

10-2c The UCC and Open Terms 241

10-2d Termination of Offers 242

Case Summary: Nadel v. Tom Cat Bakery 242

10-3 Acceptance 244

10-3a Mirror Image Rule 244

10-3b UCC and the Battle of Forms 245

10-3c Clickwraps and Shrinkwraps 247

Case Summary: Specht v. Netscape

Communications Corporation 247

10-3d Communication of Acceptance 249

Case Summary: Soldau v. Organon, Inc. 250

Chapter Conclusion 250

Exam Review 250

Multiple-Choice Questions 253

Essay Questions 254

Discussion Questions 255

Chapter 11 Consideration 256 11-1 What Is Consideration? 257

11-1a What Is Value? 257

Landmark Case: Hamer v. Sidway 258

You Be the Judge: Kim v. Son 259

11-1b Adequacy of Consideration 259

11-1c Illusory Promises 260

11-2 Applications of Consideration 261

11-2a The UCC: Consideration in

Requirements and Output Contracts 261

11-2b Preexisting Duty 262

YouBetheJudge:CitizensTrustBankv.White 263

11-3 Settlement of Debts 265

11-3a Liquidated Debt 265

11-3b Unliquidated Debt: Accord and

Satisfaction 265

Case Summary: Henches v. Taylor 266

11-4 Consideration: Trends 267

11-4a Employment Agreements 267

Case Summary: Snider Bolt & Screw v.

Quality Screw & Nut 268

11-4b Promissory Estoppel and “Moral

Consideration” 268

viii CONTENTS

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Chapter Conclusion 269

Exam Review 269

Multiple-Choice Questions 272

Essay Questions 273

Discussion Questions 274

Chapter 12 Legality 276 12-1 Contracts That Violate a Statute 277

12-1a Wagers 277

12-1b Insurance 278

12-1c Licensing Statutes 278

Case Summary: Authentic Home

Improvements v. Mayo 279

12-1d Usury 279

Case Summary: American Express Travel

Related Services Company, Inc. v. Assih 280

12-2 Contracts That Violate Public Policy 281

12-2a Restraint of Trade: Noncompete

Agreements 281

Case Summary: King v. Head Start Family

Hair Salons, Inc. 281

12-2b The Legality of Noncompetition

Clauses (Noncompetes) 283

12-2c Exculpatory Clauses 284

You Be the Judge: Ransburg v. Richards 285

12-2d Unconscionable Contracts 287

Case Summary: Worldwide Insurance v.

Klopp 288

Chapter Conclusion 289

Exam Review 289

Multiple-Choice Questions 291

Essay Questions 292

Discussion Questions 294

Chapter 13 Capacity and Consent 295 13-1 Capacity 296

13-1a Minors 296

13-1b Mentally Impaired Persons 298

Landmark Case: Babcock v. Engel 299

13-2 Reality of Consent 300

13-2a Fraud 300

Case Summary: Hess v. Chase Manhattan

Bank, USA, N.A. 304

13-2b Mistake 305

Case Summary: Donovan v. RRL Corporation 306

13-2c Duress 307

You Be the Judge: In Re RLS Legal

Solutions, LLC 308

13-2d Undue Influence 309

Case Summary: Sepulveda v. Aviles 310

Chapter Conclusion 310

Exam Review 311

Multiple-Choice Questions 313

Essay Questions 314

Discussion Questions 315

Chapter 14 Written Contracts 316 Landmark Case: The Lessee of Richardson

v. Campbell 317

14-1 Common Law Statute of Frauds: Contracts

That Must Be in Writing 319

14-1a Agreements for an Interest in Land 319

14-1b Agreements That Cannot Be

Performed within One Year 321

You Be the Judge: Sawyer v. Mills 321

14-1c Promise to Pay the Debt of Another 322

14-1d Promise Made by an Executor of an

Estate 323

14-1e Promise Made in Consideration of

Marriage 323

14-2 The Common Law Statute of Frauds: What

the Writing Must Contain 323

14-2a Signature 324

14-2b Reasonable Certainty 324

14-2c Electronic Contracts and Signatures 326

14-3 The UCC’s Statute of Frauds 326

14-3a UCC §2-201(1)—The Basic Rule 326

14-3b UCC §2-201(2)—The Merchants’

Exception 327

Case Summary: Seton Co. v. Lear Corp. 328

14-3c UCC §2-201(3)—Special

Circumstances 328

14-4 Parol Evidence 329

Case Summary: Mayo v. North Carolina

State University 330

14-4a Exception: An Incomplete or Ambiguous

Contract 331

14-4b Fraud, Misrepresentation, or Duress 331

Chapter Conclusion 331

Exam Review 332

Multiple-Choice Questions 334

Essay Questions 335

Discussion Questions 336

CONTENTS ix

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 15 Third Parties 337 15-1 Third Party Beneficiary 338

15-1a Intended Beneficiaries 338

Case Summary: Schauer v. Mandarin Gems

of California, Inc. 339

15-1b Incidental Beneficiaries 340

Case Summary: Unite Here Local 30 v.

California Department of Parks and

Recreation 340

15-2 Assignment and Delegation 341

15-2a Assignment 341

Case Summary: Tenet HealthSystem

Surgical, L.L.C. v. Jefferson Parish

Hospital Service District No. 1 343

You Be the Judge: Wells Fargo Bank

Minnesota v. BrooksAmerica Mortgage

Corporation 346

15-2b Delegation of Duties 347

Case Summary: Rosenberg v. Son, Inc. 349

Chapter Conclusion 350

Exam Review 350

Multiple-Choice Questions 352

Essay Questions 353

Discussion Questions 355

Chapter 16 Performance and Discharge 356 16-1 Conditions 358

16-1a How Conditions Are Created 358

16-1b Types of Conditions 359

Case Summary: American Electronic

Components, Inc. v. Agere Systems, Inc. 359

You Be The Judge: Anderson v. Country

Life Insurance Co. 361

16-2 Performance 362

16-2a Strict Performance and Substantial

Performance 363

16-2b Personal Satisfaction Contracts 364

16-2c Good Faith 365

Case Summary: Brunswick Hills Racquet

Club Inc. v. Route 18 Shopping Center

Associates 365

16-2d Time of the Essence Clauses 367

16-3 Breach 367

16-3a Material Breach 367

Case Summary: O’Brien v. Ohio State

University 368

16-3b Anticipatory Breach 368

16-3c Statute of Limitations 369

16-4 Impossibility 369

16-4a True Impossibility 369

16-4b Commercial Impracticability and

Frustration of Purpose 370

Chapter Conclusion 371

Exam Review 371

Multiple-Choice Questions 373

Essay Questions 374

Discussion Questions 376

Chapter 17 Remedies 377 17-1 Breaching a Contract 378

17-1a Identifying the “Interest” to Be

Protected 378

17-2 Expectation Interest 379

Landmark Case: Hawkins v. McGee 379

17-2a Direct Damages 381

17-2b Consequential Damages 381

Case Summary: Hadley v. Baxendale 381

You Be the Judge: Bi-Economy Market, Inc.

v. Harleysville Ins. Co. of New York 382

17-2c Incidental Damages 383

17-2d The UCC and Damages 383

17-3 Reliance Interest 385

17-3a Promissory Estoppel 386

Case Summary: Toscano v. Greene Music 386

17-4 Restitution Interest 387

17-4a Restitution in Cases of a Voidable

Contract 388

Case Summary: Putnam Construction &

Realty Co. v. Byrd 388

17-4b Restitution in Cases of a

Quasi-Contract 389

17-5 Other Remedies 389

17-5a Specific Performance 389

17-5b Injunction 390

Case Summary: Milicic v. Basketball

Marketing Company, Inc. 391

17-5c Reformation 392

17-6 Special Issues 392

17-6a Mitigation of Damages 392

17-6b Nominal Damages 392

17-6c Liquidated Damages 392

Chapter Conclusion 394

Exam Review 394

Multiple-Choice Questions 396

Essay Questions 397

Discussion Questions 399

x CONTENTS

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Chapter 18 Practical Contracts 400 18-1 The Lawyer 401

18-1a Lawyers and Clients 402

18-1b Hiring a Lawyer 402

18-2 The Contract 403

18-2a Who Drafts It? 403

18-2b How to Read a Contract 403

18-2c Mistakes 403

You Be the Judge: Quake Construction, Inc.

v. American Airlines, Inc. 404

Case Summary: Cipriano v. Patrons Mutual

Insurance Company of Connecticut 406

You Be the Judge: Heritage Technologies v.

Phibro-Tech 408

18-2d The Structure of a Contract 409

Case Summary: Lemond Cycling, Inc. v.

PTI Holding, Inc. 413

Chapter Conclusion 418

Exam Review 419

Multiple-Choice Questions 421

Essay Questions 421

Discussion Questions 422

UNIT 3 Commercial Transactions 423

Chapter 19 Introduction to Sales 424 19-1 Development of Commercial Law 425

19-1a Harold and Maude, Revisited 427

19-1b This Unit and This Chapter 427

19-2 UCC Basics 428

19-2a Code’s Purpose 428

19-2b Scope of Article 2 428

19-2c Mixed Contracts 429

19-2d Merchants 429

19-2e Good Faith and Unconscionability 429

19-3 Contract Formation 430

19-3a Formation Basics: §2-204 430

Case Summary: Jannusch v. Naffziger 431

19-3b Statute of Frauds 431

Case Summary: Delta Star, Inc. v. Michael’s

Carpet World 433

19-3c Added Terms: §2-207 433

Case Summary: Superior Boiler Works, Inc.

v. R. J. Sanders, Inc. 436

19-3d Open Terms: §§2-305 and 2-306 437

Case Summary: Mathis v. Exxon

Corporation 438

You Be the Judge: Lohman v. Wagner 440

19-3e Modification 441

Chapter Conclusion 444

Exam Review 444

Multiple-Choice Questions 447

Essay Questions 448

Discussion Questions 449

Chapter 20 Ownership, Risk, and Warranties 450

20-1 Legal Interest 451

20-2 Identification, Title, and Insurable Interest 452

20-2a Existence and Identification 452

20-2b Passing of Title 453

20-2c Insurable Interest 454

Case Summary: Valley Forge Insurance Co.

v. Great American Insurance Co. 455

20-3 Imperfect Title 455

20-3a Bona Fide Purchaser 455

Case Summary: Bakalar v. Vavra 457

20-3b Entrustment 457

20-4 Risk of Loss 458

20-4a Shipping Terms 459

20-4b When the Parties Fail to Allocate the

Risk 459

Case Summary: Harmon v. Dunn 463

20-5 Warranties 463

20-6 Express Warranties 464

20-6a Affirmation of Fact or Promise 464

20-6b Description of Goods 464

20-6c Sample or Model 465

20-6d Basis of Bargain 465

20-7 Implied Warranties 465

20-7a Implied Warranty of Merchantability 465

CaseSummary:Goodmanv.WencoFoods,Inc. 466

20-7b Implied Warranty of Fitness for a

Particular Purpose 467

20-7c Warranty of Title 467

20-8 Disclaimers and Defenses 468

20-8a Disclaimers 468

20-8b Remedy Limitations 469

20-8c Privity 470

Case Summary: Reed v. City of Chicago 471

20-8d Buyer’s Misuse 472

CONTENTS xi

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter Conclusion 472

Exam Review 472

Multiple-Choice Questions 473

Essay Questions 474

Discussion Questions 476

Chapter 21 Performance and Remedies 477 21-1 Obligation on All Parties: Good Faith 478

21-2 Seller’s Rights and Obligations 478

21-2a Perfect Tender Rule 479

21-2b Restrictions on the Perfect Tender

Rule 479

Case Summary: Zion Temple First

Pentecostal Church of Cincinnati, Ohio,

Inc. v. Brighter Day Bookstore & Gifts

& Murphy Cap & Gown Co. 481

You Be the Judge: United Aluminum

Corporation v. Linde, Inc. 483

21-3 Buyer’s Rights and Obligations 485

21-3a Inspection and Acceptance 485

Case Summary: Lile v. Kiesel 486

21-4 Seller’s Remedies 487

21-4a Stop Delivery 487

21-4b Identify Goods to the Contract 487

21-4c Resale 487

21-4d Damages for Non-Acceptance 488

21-4e Action for the Price 489

21-5 Buyer’s Remedies 489

21-5a Incidental Damages and

Consequential Damages 490

Case Summary: Smith v. Penbridge

Associates, Inc. 490

21-5b Specific Performance 491

21-5c Cover 491

Case Summary: Hessler v. Crystal Lake

Chrysler-Plymouth, Inc. 492

21-5d Non-Delivery 493

21-5e Acceptance of Non-Conforming Goods 493

21-5f Liquidated Damages 493

Chapter Conclusion 494

Exam Review 494

Multiple-Choice Questions 498

Essay Questions 499

Discussion Questions 500

Chapter 22 Negotiable Instruments 501 22-1 Commercial Paper 502

22-2 Types of Negotiable Instruments 502

22-3 The Fundamental “Rule” of Commercial

Paper 503

22-3a Negotiable 503

You Be the Judge: Blasco v. Money

Services Center 506

22-3b Negotiated 506

22-3c Holder in Due Course 507

Case Summary: Buckeye Check Cashing,

Inc. v. Camp 508

22-3d Defenses against a Holder in Due

Course 509

22-3e Consumer Exception 510

Case Summary: Antuna v. Nescor, Inc. 510

22-4 Liability for Negotiable Instruments 511

22-4a Primary versus Secondary Liability 511

22-5 Signature Liability 511

22-5a Maker 511

22-5b Drawer 511

22-5c Drawee 512

22-5d Indorser 513

22-5e Accommodation Party 513

22-6 Warranty Liability 514

22-6a Basic Rules of Warranty Liability 514

22-6b Transfer Warranties 515

You Be the Judge: Quimby v. Bank of

America 516

22-6c Comparison of Signature Liability

and Transfer Warranties 517

22-6d Presentment Warranties 517

22-7 Other Liability Rules 518

22-7a Conversion Liability 518

22-7b Impostor Rule 519

22-7c Fictitious Payee Rule 519

22-7d Employee Indorsement Rule 519

22-7e Negligence 520

Chapter Conclusion 521

Exam Review 521

Multiple-Choice Questions 525

Essay Questions 526

Discussion Questions 527

Chapter 23 Secured Transactions 528 23-1 Article 9: Terms and Scope 529

23-1a Article 9 Vocabulary 529

23-1b Scope of Article 9 530

23-2 Attachment of a Security Interest 532

23-2a Agreement 533

23-2b Control and Possession 533

xii CONTENTS

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Case Summary: In Re CFLC, Inc. 534 23-2c Value 535

23-2d Debtor Rights in the Collateral 535

23-2e Attachment to Future Property 535

23-3 Perfection 536

23-3a Nothing Less than Perfection 536

23-3b Perfection by Filing 536

Case Summary: Corona Fruits & Veggies,

Inc. v. Frozsun Foods, Inc. 538

23-3c Perfection by Possession or Control 540

Case Summary: Layne v. Bank One 541

23-3d Perfection of Consumer Goods 542

23-3e Perfection of Movable Collateral

and Fixtures 544

23-4 Protection of Buyers 545

23-4a Buyers in Ordinary Course of Business 546

You Be the Judge: Conseco Finance

Servicing Corp. v. Lee 547

23-4b Buyers of Consumer Goods 547

23-4c Buyers of Chattel Paper, Instruments,

and Documents 548

23-4d Liens 549

23-5 Priorities Among Creditors 550

23-5a Filing versus Control or Possession 551

23-5b Priority Involving a Purchase Money

Security Interest 552

Case Summary: In Re Roser 553 23-6 Default and Termination 553

23-6a Default 553

23-6b Termination 556

Chapter Conclusion 556

Exam Review 556

Multiple-Choice Questions 559

Essay Questions 560

Discussion Questions 561

Chapter 24 Bankruptcy 562 24-1 Overview of the Bankruptcy Code 563

24-1a Rehabilitation 563

24-1b Liquidation 564

24-1c Chapter Description 564

24-1d Goals 564

24-2 Chapter 7 Liquidation 564

24-2a Filing a Petition 565

24-2b Trustee 566

24-2c Creditors 566

24-2d Automatic Stay 567

Case Summary: Jackson v. Holiday Furniture 567

24-2e Bankruptcy Estate 568

24-2f Payment of Claims 570

24-2g Discharge 572

Case Summary: In Re Stern 573 Case Summary: In Re Grisham 575

24-3 Chapter 11 Reorganization 576

24-3a Debtor in Possession 576

24-3b Creditors’ Committee 576

24-3c Plan of Reorganization 577

24-3d Confirmation of the Plan 577

Case Summary: In Re Fox 577 24-3e Discharge 578

24-3f Small-Business Bankruptcy 579

24-4 Chapter 13 Consumer Reorganizations 579

You Be the Judge: Marrama v. Citizens

Bank of Massachusetts 579

24-4a Beginning a Chapter 13 Case 580

24-4b Plan of Payment 580

24-4c Discharge 581

Chapter Conclusion 581

Exam Review 582

Multiple-Choice Questions 583

Essay Questions 584

Discussion Questions 585

Chapter 25 Agency Law 587 25-1 Creating an Agency Relationship 588

25-1a Consent 588

25-1b Control 589

25-1c Fiduciary Relationship 589

25-1d Elements Not Required for an

Agency Relationship 589

25-2 Duties of Agents to Principals 590

25-2a Duty of Loyalty 590

Case Summary: Otsuka v. Polo Ralph

Lauren Corporation 590

Case Summary: Abkco Music, Inc. v.

Harrisongs Music, Ltd. 591

25-2b Other Duties of an Agent 593

25-2c Principal’s Remedies When the

Agent Breaches a Duty 594

25-3 Duties of Principals to Agents 595

25-3a Duty to Cooperate 596

25-4 Terminating an Agency Relationship 596

25-4a Termination by Agent or Principal 596

25-4b Principal or Agent Can No Longer

Perform Required Duties 597

25-4c Change in Circumstances 598

25-4d Effect of Termination 598

25-5 Liability 599

CONTENTS xiii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

25-6 Principal’s Liability for Contracts 599

25-6a Authority 599

25-6b Ratification 600

25-6c Subagents 601

25-7 Agent’s Liability for Contracts 601

25-7a Fully Disclosed Principal 601

25-7b Unidentified Principal 602

25-7c Undisclosed Principal 602

25-7d Unauthorized Agent 603

25-8 Principal’s Liability for Torts 604

25-8a Employee 604

25-8b Scope of Employment 605

You Be the Judge: Zankel v. United States

of America 606

25-8c Intentional Torts 607

Case Summary: Doe v. Liberatore 607

25-8d Physical or Nonphysical Harm 608

25-9 Agent’s Liability for Torts 609

Chapter Conclusion 609

Exam Review 609

Multiple-Choice Questions 612

Essay Questions 613

Discussion Questions 614

UNIT 4 Employment, Business Organizations and Property 615

Chapter 26 Employment and Labor Law 616 26-1 Introduction 617

26-2 Employment Security 618

26-2a Family and Medical Leave Act 618

Case Summary: Peterson v. Exide

Technologies 618

26-2b Health Insurance 619

26-2c Common Law Protections 619

Case Summary: Kozloski v. American Tissue

Services Foundation 621

26-2d Whistleblowing 624

26-3 Privacy in the Workplace 626

26-3a Lifestyle Laws 626

You Be the Judge: Rodrigues v. Scotts

Lawnservice 627

26-4 Workplace Safety 630

26-5 Financial Protection 630

26-5a Fair Labor Standards Act: Minimum

Wage, Overtime, and Child Labor 631

26-5b Workers’ Compensation 631

26-5c Social Security 631

26-5d Pension Benefits 632

26-6 Labor Law and Collective Bargaining 632

26-6a Key Pro-Union Statutes 632

26-6b Labor Unions Today 633

26-6c Organizing a Union 633

26-6d Collective Bargaining 635

Landmark Case: NLRB v. Truitt

Manufacturing Co. 636

26-6e Concerted Action 636

Chapter Conclusion 638

Exam Review 638

Multiple-Choice Questions 641

Essay Questions 642

Discussion Questions 643

Chapter 27 Employment Discrimination 644 27-1 Introduction 645

27-2 The United States Constitution 646

27-3 Civil Rights Act of 1866 646

27-4 Title VII of the Civil Rights Act of 1964 646

27-4a Prohibited Activities 646

You Be the Judge: Jespersen v. Harrah’s 647

Landmark Case: Griggs v. Duke Power Co. 648

Case Summary: Teresa Harris v. Forklift

Systems, Inc. 650

27-4b Religion 652

27-4c Sex 652

27-4d Family Responsibility Discrimination 653

27-4e Sexual Orientation 653

27-4f Gender Identity 653

27-4g Defenses to Charges of Discrimination 654

27-5 Equal Pay Act of 1963 656

27-6 Pregnancy Discrimination Act 656

27-7 Age Discrimination in Employment Act 656

27-7a Disparate Treatment 657

Case Summary: Reid v. Google, Inc. 657

27-7b Disparate Impact 658

27-7c Hostile Work Environment 658

27-7d Bona Fide Occupational Qualification 659

27-8 Discrimination on the Basis of Disability 659

27-8a The Rehabilitation Act of 1973 659

27-8b Americans with Disabilities Act 660

Case Summary: Allen v. SouthCrest Hospital 660

27-9 Genetic Information Nondiscrimination Act 664

27-10 Enforcement 664

27-10a Constitutional Claims 664

xiv CONTENTS

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

27-10b The Civil Rights Act of 1866 664

27-10c The Rehabilitation Act of 1973 664

27-10d Other Statutory Claims 664

Chapter Conclusion 666

Exam Review 666

Multiple-Choice Questions 669

Essay Questions 671

Discussion Questions 671

Chapter 28 Starting a Business: LLCs and Other Options 673

28-1 Sole Proprietorships 674

28-2 Corporations 675

28-2a Corporations in General 675

28-2b S Corporations 677

28-2c Close Corporations 678

28-3 Limited Liability Companies 679

You Be the Judge: Ridgaway v. Silk 680

Case Summary: Wyoming.com, LLC v.

Lieberman 681

Case Summary: BLD Products, Ltd. v.

Technical Plastics of Oregon, LLC 682

Case Summary: Tzolis v. Wolff 683

28-4 Socially Conscious Organizations 685

28-5 General Partnerships 685

Case Summary: Marsh v. Gentry 687

28-6 Limited Liability Partnerships 688

28-7 Limited Partnerships and Limited Liability

Limited Partnerships 689

28-8 Professional Corporations 690

28-9 Joint Ventures 691

28-10 Franchises 691

Case Summary: National Franchisee

Association v. Burger King Corporation 693

Chapter Conclusion 693

Exam Review 694

Multiple-Choice Questions 695

Essay Questions 696

Discussion Questions 697

Chapter 29 Corporations 699 29-1 Promoter’s Liability 700

29-2 Incorporation Process 700

29-2a Where to Incorporate? 700

29-2b The Charter 701

29-3 After Incorporation 704

29-3a Directors and Officers 704

29-3b Bylaws 705

29-3c Issuing Debt 705

29-4 Death of the Corporation 705

29-4a Piercing the Corporate Veil 706

Case Summary: Brooks v. Becker 706

29-4b Termination 707

29-5 The Role of Corporate Management 707

29-6 The Business Judgment Rule 708

29-6a Duty of Loyalty 709

29-6b Corporate Opportunity 709

Case Summary: Anderson v. Bellino 710

29-6c Duty of Care 712

29-7 The Role of Shareholders 713

29-7a Rights of Shareholders 714

Case Summary: Brehm v. Eisner 722

You Be the Judge: eBay Domestic Holdings,

Inc. v. Newmark 723

29-8 Enforcing Shareholder Rights 724

29-8a Derivative Lawsuits 724

29-8b Direct Lawsuits 725

Chapter Conclusion 725

Exam Review 725

Multiple-Choice Questions 728

Essay Questions 729

Discussion Questions 730

Chapter 30 Government Regulation: Securities and Antitrust 732

30-1 Securities Laws 733

30-1a What Is a Security? 733

30-1b Securities Act of 1933 733

30-1c Securities Exchange Act of 1934 735

Case Summary: Matrixx Initiatives, Inc. v.

Siracusano 736

30-1d Short-Swing Trading—Section 16 737

30-1e Insider Trading 737

Case Summary: Securities and Exchange

Commission v. Steffes 739

30-1f Blue Sky Laws 740

30-2 Antitrust Law 740

30-2a The Sherman Act 741

Landmark Case: United States v. Trenton

Potteries Company 741

Case Summary: Leegin Creative Leather

Products, Inc. v. PSKS, Inc. 742

30-2b The Clayton Act 745

Landmark Case: United States v. Waste

Management, Inc. 745

30-2c The Robinson-Patman Act 747

CONTENTS xv

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter Conclusion 748

Exam Review 748

Multiple-Choice Questions 751

Essay Questions 752

Discussion Questions 752

Chapter 31 Consumer Protection 754 31-1 Introduction 755

31-1a Federal Trade Commission 755

31-1b Consumer Financial Protection Bureau 756

31-2 Sales 756

31-2a Deceptive Acts or Practices 756

Case Summary: Federal Trade Commission

v. Direct Marketing Concepts, Inc. 756

31-2b Unfair Practices 757

31-2c Additional Sales Rules 758

31-3 Consumer Credit 759

31-3a Truth in Lending Act—General

Provisions 760

31-3b Home Loans 761

31-3c Credit Cards 763

Case Summary: Gray v. American

Express Co. 766

31-3d Debit Cards 766

31-3e Credit Reports 767

31-3f Debt Collection 769

You Be the Judge: Brown v. Card Service

Center 770

31-3g Equal Credit Opportunity Act 771

Case Summary: Treadway v. Gateway

Chevrolet Oldsmobile Inc. 771

31-3h Consumer Leasing Act 772

31-4 Magnuson-Moss Warranty Act 773

31-5 Consumer Product Safety 774

Chapter Conclusion 774

Exam Review 774

Multiple-Choice Questions 778

Essay Questions 779

Discussion Questions 781

Chapter 32 Cyberlaw 782 32-1 Privacy 784

32-1a Tracking Tools 784

32-1b Regulation of Online Privacy 785

You Be the Judge: Juzwiak v. John/Jane Doe 786

Case Summary: United States of America v.

Angevine 787

Case Summary: United States of America v.

Warshak 788

You Be the Judge: Scott v. Beth Israel

Medical Center Inc. 791

32-2 Spam 792

32-3 Internet Service Providers and Web Hosts:

Communications Decency Act of 1996 793

Case Summary: Carafano v. Metrosplash

.com, Inc. 794

32-4 Crime on the Internet 795

32-4a Hacking 795

32-4b Fraud 797

Chapter Conclusion 799

Exam Review 800

Multiple-Choice Questions 802

Essay Questions 803

Discussion Questions 804

Chapter 33 Intellectual Property 805 33-1 Introduction 806

33-2 Patents 806

33-2a Types of Patents 806

33-2b Requirements for a Patent 808

33-2c Patent Application and Issuance 809

33-3 Copyrights 812

Case Summary: Lapine v. Seinfeld 813

33-3a Copyright Term 813

33-3b Infringement 813

33-3c First Sale Doctrine 814

33-3d Fair Use 814

33-3e Digital Music and Movies 815

Case Summary: Metro-Goldwyn-Mayer

Studios, Inc. v. Grokster, Ltd. 816

33-3f International Copyright Treaties 818

33-4 Trademarks 818

33-4a Types of Marks 819

33-4b Ownership and Registration 819

33-4c Valid Trademarks 819

33-4d Infringement 821

You Be the Judge: Network Automation,

Inc. v. Advanced Systems Concepts, Inc. 822

33-4e Federal Trademark Dilution Act of 1995 823

33-4f Domain Names 823

33-4g International Trademark Treaties 824

33-5 Trade Secrets 825

Case Summary: Pollack v. Skinsmart

Dermatology and Aesthetic Center P.C. 826

xvi CONTENTS

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Chapter Conclusion 827

Exam Review 827

Multiple-Choice Questions 828

Essay Questions 829

Discussion Questions 831

Chapter 34 Real and Personal Property 832 34-1 Nature of Real Property 833

Case Summary: Freeman v. Barrs 833

34-2 Estates in Real Property 834

34-2a Concurrent Estates 834

Case Summary: Jackson v. Estate

of Green 835

34-3 Nonpossessory Interests 837

34-3a Easements 837

34-3b Profit 837

34-3c License 837

34-3d Mortgage 838

34-4 Land Use Regulation 838

34-4a Nuisance Law 838

34-4b Zoning 839

34-4c Eminent Domain 839

34-5 Landlord-Tenant Law 840

34-5a Three Legal Areas Combined 840

34-5b Lease 840

34-6 Types of Tenancy 840

34-6a Tenancy for Years 841

34-6b Periodic Tenancy 841

34-6c Tenancy at Will 841

34-6d Tenancy at Sufferance 841

34-7 Landlord’s Duties 841

34-7a Duty to Deliver Possession 841

34-7b Quiet Enjoyment 842

34-7c Duty to Maintain Premises 842

Case Summary: Mishkin v. Young 844

34-8 Tenant’s Duties 845

34-8a Duty to Pay Rent 845

34-8b Duty to Use Premises for Proper

Purpose 846

34-8c Duty Not to Damage Premises 846

34-8d Duty Not to Disturb Other Tenants 846

34-9 Injuries 847

34-9a Tenant’s Liability 847

34-9b Landlord’s Liability 847

34-10 Personal Property 848

34-11 Gifts 848

34-11a Intention to Transfer Ownership 848

34-11b Delivery 849

34-11c Inter Vivos Gifts and Gifts Causa Mortis 849

34-11d Acceptance 850

You Be the Judge: Albinger v. Harris 850

34-12 Bailment 852

34-12a Control 852

34-12b Rights of the Bailee 852

34-12c Duties of the Bailee 853

You Be the Judge: Johnson v. Weedman 854

34-12d Rights and Duties of the Bailor 854

Chapter Conclusion 854

Exam Review 855

Multiple-Choice Questions 857

Essay Questions 858

Discussion Questions 860

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1

CONTENTS xvii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

PREFACE

Looking for more examples for class? Do you want the latest develop-

ments? Visit our blog at bizlawupdate.com or our Facebook page at

Beatty Business Law. To be notified when we post updates, follow us

on Twitter @bizlawupdate.

NOTE FROM THE AUTHORS New to This Edition

A NEW CHAPTER: PRACTICAL CONTRACTS In this textbook, as well as other business law texts, contracts chapters focus on the theory of contract law. And that theory is important. But our students tell us that theory, by itself, is

not enough. They need to know how these abstract rules operate in practice. They want to understand the structure and content of a standard agreement. They have questions such as:

• Do I need a written agreement?

• What do these legal terms really mean?

• Are any important provisions missing?

• What happens if a term is unclear?

• Do I need to hire a lawyer? How can I use a lawyer most effectively?

We answer all these questions in Chapter 18, “Practical Contracts,” which is new to this

edition. As an illustration throughout the chapter, we use a real-life contract between a

movie studio and an actor.

A NEW CHAPTER: EMPLOYMENT DISCRIMINATION We have heard from faculty and students alike that employment law plays an increasingly

important role in the life of a businessperson. At the same time, fewer and fewer workers

belong to labor unions. Therefore, we have rewritten the labor law and employment law

chapters from the previous edition. Instead of one chapter on labor law and one on employ-

ment law, we now have a new Chapter 26, “Employment and Labor Law,” which covers

both common law employment issues and labor law. In addition, Chapter 27, “Employment

Discrimination,” focuses solely on employment discrimination and includes, among other

things, an expanded discussion of disparate impact cases, which have become increasingly

common and important.

NEW MATERIAL: ETHICS CHAPTER The Ethics chapter has been completely revised and is full of up-to-date examples, all

either from the news or true stories provided by executives. The section on the Theories of

Ethics has been enhanced and now includes, among others, John Rawls’ theory of justice.

This chapter also includes a discussion of the latest research on the ethics traps that prevent

us from doing what we know to be right. Students are asked to develop their own list of Life

xix

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Principles that they can use to make ethical decisions and avoid ethics traps. The chapter also

discusses the options that employees face when confronted with unethical behavior in

the workplace. And, finally, the chapter concludes with a discussion of Corporate Social

Responsibility—should companies practice it and, if so, how should they evaluate success?

LANDMARK CASES As a general rule, we want our cases to be as current as possible, reporting on the world as it

is now. However, sometimes students can benefit from reading vintage cases that are still

good law and provide a deep understanding of how and why the law has developed as it has.

Thus, for example, we have added a discussion about the famous Supreme Court case

Miranda v. Arizona. Reading this case provides students with a much better understanding of why the Supreme Court created Miranda rights, and this context helps students follow

the recent Supreme Court rulings on Miranda. Other landmark cases include Hawkins v. McGee (the case of the hairy hand), and Griggs v. Duke Power Co.

REORGANIZED AND REVISED MATERIAL In response to requests from faculty, product liability is now covered in Chapter 6, “Torts

and Product Liability.” It seems that most people like to teach these two subjects together.

The discussion of warranties is now found in the chapter on ownership and risk.

The new CPA exam no longer includes questions about banks and their customers, and

much of that material (such as how long it takes checks to clear) is not very relevant to our

students. Therefore we have deleted the chapter on Banks and Their Customers, and

combined the remaining material on Negotiable Instruments into one chapter, which now

covers how to create a negotiable instrument and liability.

The chapter on Securities Regulation has been expanded to include coverage of

antitrust law, under the title, “Government Regulation.” As the Justice Department

increases its oversight of mergers and with price-fixing violations increasingly common, it

is more important than ever for students to understand the basics of antitrust law.

In response to faculty requests, we have added a chapter on Consumer Protection. This

material is critical for all of us—everyone from the experienced executive to the young adult

with increasing financial responsibilities.

END OF CHAPTER MATERIAL To facilitate class discussion and student learning, we have overhauled the study questions

at the end of the chapters. They are now divided into three parts:

1. Multiple-choice questions. Because many instructors use this format in their tests, it seemed appropriate to provide practice questions. The answers to these multiple-

choice questions are available to students online at www.cengagebrain.com.

2. Essay questions. Students can use these as study questions, and professors can also assign them as written homework problems.

3. Discussion questions. Instructors can use these questions to enhance class discussion. If assigned in advance, students will have a chance to think about the answers before

class. This approach is similar to business cases, which often provide discussion

questions in advance.

OTHER NEW MATERIAL We have, of course, added substantial new material, with a particular focus on the Internet

and social media. Chapter 26, “Employment and Labor Law,” includes a section on

social media. Chapter 29, “Corporations,” uses Facebook as an example of how to

organize a corporation. There are also new cases involving eBay and craigslist. In addition,

xx PREFACE

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Chapter 28, “Starting a Business: LLCs and Other Options,” includes a new section about

socially conscious organizations.

STAYING CURRENT: OUR BLOG, FACEBOOK, AND TWITTER To find out about new developments in business law, visit our blog at Bizlawupdate.com or

our Facebook page at Beatty Business Law. If you follow us on Twitter @bizlawupdate, you

will receive a notification automatically whenever we post to the blog.

The Beatty/Samuelson Difference When we began work on the first edition of this textbook, our publisher warned us that

our undertaking was risky because there were already so many law texts. Despite these

warnings, we were convinced that there was a market for an Essentials book that was

different from all the others. Our goal was to capture the passion and excitement—the

sheer enjoyment—of the law. Business law is notoriously complex, and as authors we are

obsessed with accuracy. Yet this intriguing subject also abounds with human conflict and

hard-earned wisdom, forces that can make a law book sparkle.

Now, as this fifth edition goes to press, we look back over the intervening years and are

touched by the many unsolicited comments from students, such as these posted on Amazon:

• “Glad I purchased this. It really helps put the law into perspective and allows me as a leader to make intelligent decisions. Thanks.”

• “I enjoyed learning business law and was happy my college wanted this book. THUMBS UP!”

We think of the students who have emailed us to say, “In terms of clarity, comprehen-

siveness, and vividness of style, I think it’s probably the best textbook I’ve ever used in any

subject,” and “I had no idea business law could be so interesting.” Or the professor who

said, “With your book, we have great class discussions.” Comments such as these never

cease to thrill us and to make us grateful that we persisted in writing an Essentials text like

no other—a book that is precise and authoritative, yet a pleasure to read.

Comprehensive Staying comprehensive means staying current. This fifth edition contains over 25 new cases. Almost all were reported within the last two or three years.

We never include a new court opinion merely because it is recent, but the law evolves

continually, and our willingness to toss out old cases and add important new ones ensures

that this book—and its readers—remain on the frontier of legal developments.

Look, for example, at the important field of corporate governance. All texts cover par

value, and so do we. Yet a future executive is far likelier to face conflicts over Sarbanes-Oxley

(SOX), executive compensation, and shareholder proposals. We present a clear path through

this thicket of new issues. In Chapter 29, for example, read the section about the election and

removal of directors. Typically, students (even those who are high-level executives) have a

basic misconception about the process of removing a director from office. They think that it is

easy. Once they understand the complexity of this process, their whole view of corporate

governance—and compensation—changes. We want tomorrow’s business leaders to anticipate

the challenges that await them and then use their knowledge to avert problems.

Strong Narrative The law is full of great stories, and we use them. Your students and ours should come to class excited. Look at Chapter 3, “Dispute Resolution.” No tedious list

of next steps in litigation, this chapter teaches the subject by tracking a double-indemnity

lawsuit. An executive is dead. Did he drown accidentally, obligating the insurance company

to pay? Or did the businessman commit suicide, voiding the policy? The student follows the

action from the discovery of the body, through each step of the lawsuit, to the final appeal.

PREFACE xxi

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Students read stories and remember them. Strong narratives provide a rich context for

the remarkable quantity of legal material presented. When students care about the material

they are reading, they persevere. We have been delighted to find that they also arrive in

class eager to question, discuss, and learn more about issues.

Precise The great joy of using English accurately is the power it gives us to attack and dissect difficult issues, rendering them comprehensible to any lay reader. This text takes on

the most complex legal topics of the day, yet it is appropriate for all college and graduate-level students. Accessible prose goes hand in hand with legal precision. We take great pride in walking our readers through the most serpentine mazes this tough subject can offer.

As we explore this extraordinary discipline, we lure readers along with quirky anecdotes

and colorful diagrams. (Notice that the chart on page 713 clarifies the complex rules of the duty

of care in the business judgment rule.) However, before the trip is over, we insist that students:

• Gauge policy and political considerations,

• Grapple with legal and social history,

• Spot the nexus between disparate doctrines, and

• Confront tough moral choices.

Authoritative We insist, as you do, on a law book that is indisputably accurate. A professor must teach with assurance, confident that every paragraph is the result of

exhaustive research and meticulous presentation. Dozens of tough-minded people spent

thousands of hours reviewing this book, and we are delighted with the stamp of approval we

have received from trial and appellate judges, working attorneys, scholars, and teachers.

We reject the cloudy definitions and fuzzy explanations that can invade judicial

opinions and legal scholarship. To highlight the most important rules, we use bold print,

and then follow with vivacious examples written in clear, forceful English. (See, for

example, the discussion of factual cause on page 149.) We cheerfully venture into con-

tentious areas, relying on very recent appellate decisions. Can a creditor pierce the veil of an

LLC? What are the rights of an LLC member in the absence of an operating agreement?

(See pages 679–684.) Where there is doubt about the current (or future) status of a doctrine,

we say so. In areas of particularly heated debate, we footnote our work: we want you to have

absolute trust in this book.

A Book for Students We have written this book as if we were speaking directly to our students. We provide black letter law, but we also explain concepts in terms that hook

students. Over the years, we have learned how much more successfully we can teach when

our students are intrigued. No matter what kind of a show we put on in class, they are only learning when they want to learn.

Every chapter begins with a story, either fictional or real, to illustrate the issues in the

chapter and provide context. Chapter 32, “Cyberlaw,” begins with the true story of a college

student who discovers nude pictures of himself online. These photos had been taken in the

locker room without his knowledge. What privacy rights do any of us have? Does the

Internet jeopardize them? Students want to know—right away.

Many of our students were not yet born when Bill Clinton was elected president. They

come to college with varying levels of preparation; many now arrive from other countries.

We have found that to teach business law most effectively, we must provide its context.

Chapter 26, on employment law, provides the historical setting for the employment-at-will

doctrine. Chapter 33, on intellectual property, explains the difference between intellectual

and other types of property.

At the same time, we enjoy offering “nuts-and-bolts” information that grabs students.

For example, in Chapter 31, “Consumer Protection,” we offer advice about how students

can obtain a free credit report (page 768).

xxii PREFACE

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Students respond enthusiastically to this approach. One professor asked a student to

compare our book with the one that the class was then using. This was the student’s

reaction: “I really enjoy reading the [Beatty & Samuelson] textbook and I have decided

that I will give you this memo ASAP, but I am keeping the book until Wednesday so that I

may continue reading. Thanks! :-).”

Along with other professors, we have used this text in courses for undergraduates,

MBAs, and Executive MBAs, with the students ranging in age from 18 to 55. The book

works, as some unsolicited comments indicate:

• An undergraduate wrote, “This is the best textbook I have had in college, on any subject.”

• A business law professor stated that the “clarity of presentation is superlative. I have never seen the complexity of contract law made this readable.”

• An MBA student commented, “I think the textbook is great. The book is relevant, easy to understand, and interesting.”

• A state supreme court justice wrote that the book is “a valuable blend of rich scholarship and easy readability. Students and professors should rejoice with this

publication.”

• A Fortune 500 vice president, enrolled in an Executive MBA program, commented, “I really liked the chapters. They were crisp, organized and current. The information

was easy to understand and enjoyable.”

• An undergraduate wrote, “The textbook is awesome. A lot of the time I read more than what is assigned—I just don’t want to stop.”

Humor Throughout the text, we use humor—judiciously—to lighten and enlighten. Not surprisingly, students have applauded—but is it appropriate? How dare we employ levity in

this venerable discipline? We offer humor because we take the law seriously. We revere the

law for its ancient traditions; its dazzling intricacy; its relentless, though imperfect, attempt

to give order and decency to our world. Because we are confident of our respect for the law,

we are not afraid to employ some levity. Leaden prose masquerading as legal scholarship

does no honor to the field.

Humor also helps retention. Research shows that the funnier or more bizarre the

example, the longer students will remember it. Students are more likely to remember a

contract problem described in a fanciful setting, and from that setting recall the underlying

principle. By contrast, one widget is hard to distinguish from another.

Features We chose the features for our book with great care. Each one supports an essential

pedagogical goal. Here are some of those goals and the matching feature.

EXAM STRATEGY GOAL: To help students learn more effectively and to prepare for exams. In preparing this fifth edition, we asked ourselves: What do students want? The short answer is—a good

grade in the course. How many times a semester does a student ask you, “What can I do to

study for the exam?” We are happy to help them study and earn a good grade because that

means they are learning.

About six times per chapter, we stop the action and give students a two-minute quiz.

In the body of the text, again in the end-of-chapter review, and also in the Instructor’s

Manual, we present a typical exam question. Here lies the innovation: We guide the

PREFACE xxiii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

student in analyzing the issue. We teach the reader—over and over—how to approach a

question: To start with the overarching principle, examine the fine point raised in the

question, apply the analysis that courts use, and deduce the right answer. This skill is

second nature to lawyers, but not to students. Without practice, too many students panic,

jumping at a convenient answer and leaving aside the tools that they have spent the

course acquiring. Let’s change that. Students tell us that they love the Exam Strategy

feature.

YOU BE THE JUDGE GOAL: Get students to think independently. When reading case opinions, students tend to accept the court’s “answer.” Judges, of course, try to reach decisions that appear

indisputable, when in reality they may be controversial—or wrong. From time to time

we want students to think through the problem and reach their own answer. Almost

every chapter contains a You Be the Judge feature, providing the facts of the case and

conflicting appellate arguments. The court’s decision, however, appears only in the

Instructor’s Manual. Because students do not know the result, class discussions are

more complex and lively.

ETHICS GOAL: Make ethics real. We ask ethical questions about cases, legal issues, and commercial practices. Is it fair for one party to void a contract by arguing, months after the fact, that

there was no consideration? What is a manager’s ethical obligation when asked to provide a

reference for a former employee? What is wrong with bribery? We believe that asking the

questions and encouraging discussion reminds students that ethics is an essential element of

justice and of a satisfying life.

CASES GOAL: Bring Case Law Alive. Each case begins with a summary of the facts followed by a statement of both the issue and the decision. Next comes a summary of the court’s

opinion. We have written this summary ourselves to make the judges’ reasoning

accessible to all readers while retaining the court’s focus and the decision’s impact.

We cite cases using a modified bluebook form. In the principal cases in each chapter,

we provide the state or federal citation, the regional citation, and the LEXIS or

Westlaw citation. We also give students a brief description of the court. Because many

of our cases are so recent, some will have only a regional reporter and a LEXIS or

Westlaw citation.

EXAM REVIEW GOAL: Help students to remember and practice! At the end of every chapter, we provide a list of review points and several additional Exam Strategy exercises in a Question/Strategy/

Result format. We also challenge the students with 15 or more problems—Multiple-Choice,

Essay Questions, and Discussion Questions. The questions include the following:

• You Be the Judge Writing Problem. The students are given appellate arguments on both sides of the question and must prepare a written opinion.

• Ethics. This question highlights the ethical issues of a dispute and calls upon the student to formulate a specific, reasoned response.

• CPA Questions. Where relevant, practice tests include questions from previous CPA exams administered by the American Institute of Certified Public Accountants.

Answers to all the Multiple-Choice questions are available to students online through

www.cengagebrain.com.

xxiv PREFACE

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

TEACHING MATERIALS For more information about any of these ancillaries, contact your Cengage Learning/

SouthWestern Legal Studies Sales Representative for more details, or visit the Beatty &

Samuelson Essentials, fifth edition web page, accessed through www.cengagebrain.com.

Instructor’s Manual Available through cengagebrain.com, this manual includes answers to the You Be the Judge cases and also to the questions at the end of each

chapter. In addition, the Instructors’ Manual provides additional cases to use as the basis

of class discussion as well as other pedagogical features.

PowerPoint Lecture Review Slides PowerPoint slides are available for instructors to use with their lectures, and can be accessed through cengagebrain.com.

Test Bank The test bank offers hundreds of essay, short-answer, and multiple-choice problems. Editable files of the test bank are available at cengagebrain.com, and the test

bank is also available through the Cognero Testing Software.

Cognero Testing Software—Computerized Testing Software This online testing system contains all of the questions in the test bank. Instructors can add or edit

questions, instructions, and answers; and select questions by previewing them on the

screen, selecting them randomly, or selecting them by number. Instructors can also create

and administer quizzes online.

CengageNOW This robust, online course management system gives you more control in less time and delivers better student outcomes—NOW. CengageNOW for Essentials 5e includes six homework types that align with the six levels of Bloom’s taxonomy:

Knowledge: Chapter Review; Comprehension: Business Law Scenarios; Application:

Legal Reasoning; Analysis: IRAC; Synthesis: Exam Strategy; and Evaluation: Business

Wisdom. With all these elements used together, CengageNOW will ensure that students

develop the higher-level thinking skills they need to reach an advanced understanding of

the material.

Business Law CourseMate Cengage Learning’s Business Law CourseMate brings course concepts to life with interactive learning, study, and exam preparation tools—

including an e-book—that supports the printed textbook. Designed to address a variety of

learning styles, students will have access to flashcards, Learning Objectives, and the Key

Terms for quick reviews. A set of auto-gradable, interactive quizzes will allow students to

instantly gauge their comprehension of the material. For instructors, all quiz scores and

student activity are mapped within Engagement Tracker, a set of intuitive student

performance analytical tools that help identify at-risk students. An interactive blog helps

connect book concepts to real-world situations happening now.

Business Law Digital Video Library This dynamic online video library features over 90 video clips that spark class discussion and clarify core legal principles. The library is

organized into six series:

• Legal Conflicts in Business includes specific modern business and e-commerce scenarios.

• Ask the Instructor contains straightforward explanations of concepts for student review.

• Drama of the Law features classic business scenarios that spark classroom participation.

PREFACE xxv

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

• Real World Legal takes students out of the classroom and into real-life situations, encouraging them to consider the legal aspects of decision making in the business

world.

• Business Ethics in Action challenges students to examine ethical dilemmas in the world of business.

Access to the Business Law Digital Video Library is available as an optional package with

each new student text at no additional charge. Students with used books can purchase

access to the video clips online. For more information about the Business Law Digital Video

Library, visit www.cengagebrain.com.

A Handbook of Basic Law Terms, Blacks Law Dictionary Series This paperback dictionary, prepared by the editor of the popular Black’s Law Dictionary, can

be packaged for a small additional cost with any new South-Western Legal Studies in

Business text.

Student Guide to the SOX This brief overview for business students explains SOX, what is required of whom, and how it might affect students in their business lives. Available

as an optional package with the text.

Interaction with the Author This is my standard: Every professor who adopts this book must have a superior experience. I am available to help in any way I can. Adopters of

this text often call me or email me to ask questions, obtain a syllabus, offer suggestions,

share pedagogical concerns, or inquire about ancillaries. One of the pleasures of working on

this project has been this link to so many colleagues around the country. I value those

connections, am eager to respond, and would be happy to hear from you.

Susan S. Samuelson Phone: (617) 353-2033

Email: [email protected]

ACKNOWLEDGMENTS We appreciate the thoughtful insights of the reviewers for this fifth edition:

Randall Berens Ohio University-Lancaster

Machiavelli Chao University of California, Irvine

Raven Davenport Houston Community College System

Terry L. Dimmick Lakeshore Technical College

Craig Dokken Hamline University

Philip Ettman Westfield State University

Sheryl Fitzpatrick North Iowa Area Community College

Janet L. Grange Chicago State University

John Gray Faulkner University

Jack Green MiraCosta College

Anne-Marie Hakstian Salem State University

Nancy Johnson Mt. San Jacinto Community College

Sandra Leigh King Sullivan University

xxvi PREFACE

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

Ken Knox Eastern Gateway Community

College

Joni Koegel Cazenovia College

Greg Lauer North Iowa Area Community College

Donald Letourneau Pacific University

Magdalena Lorenz State University of New York College of

Oneonta

Bill Mills East Texas Baptist University

Jack Neveaux Saint Mary’s University of Minnesota

Brad Reid Lipscomb University

Alan Rosenbloom Baruch College

Tom Severance MiraCosta College

Frank Wetterau Delaware Technical Community College

Kim Wong Central New Mexico Community College

Bruce Zucker California State University, Northridge

And we are continually grateful to the following reviewers who gave such helpful comments

on the first four editions of this book:

Manzoor Ahmad Compton Educational Center, El Camino

College

Steven J. Arsenault College of Charleston

Lois Beier Kent State University

Martha Broderick University of Maine

Amy Chataginer Mississippi Gulf Coast Community

College

Burke Christensen Eastern Kentucky University

Linda Christiansen Indiana University Southeast

Michael Costello University of Missouri, St. Louis

G. Howard Doty Nashville State Technical Community

College

Teri Elkins University of Houston

Lizbeth G. Ellis New Mexico State University

Paul Fiorelli Xavier University

Suzanne M. Gradisher University of Akron

Gary Greene Manatee Community College

Wendy Hind Doane College

Elizabeth Grimm-Howell University of Missouri—St. Louis

Richard Guarino California State University, Sacramento

Stephen Hearn Louisiana Tech University

Timothy Jackson School of Business, California Baptist

University

William C. Kostner Doane College

Ronald B. Kowalczyk Elgin Community College

Colleen Arnott Less Johnson & Wales University

Maurice J. McCann Southern Illinois University Carbondale

PREFACE xxvii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Russ Meade Gardner-Webb University

Michael Monhollon Hardin-Simmons University

Carol Nielsen Bemidji State University

Margaret A. Parker Owens Community College

Barbara Redman Gainesville State College

Bruce L. Rockwood Bloomsburg University

Rebecca Rutz Mississippi Gulf Coast Community

College—Jackson County Campus

Rachel Spooner Boston University School

of Management

Cheryl Staley Lake Land College

Paulette L. Stenzel Michigan State University

Kenneth Ray Taurman, Jr. Indiana University Southeast

Daphyne Saunders Thomas James Madison University

Glen M. Vogel Hofstra University

Deborah Walsh Middlesex Community College

ABOUT THE AUTHORS Jeffrey F. Beatty was an associate professor of business law at the Boston University School

of Management. After receiving his B.A. from Sarah Lawrence and his J.D. from Boston

University, he practiced with the Greater Boston Legal Services representing indigent

clients. At Boston University, he won the Metcalf Cup and Prize, the university’s highest

teaching award. Professor Beatty also wrote plays and television scripts that were performed

in Boston, London, and Amsterdam.

Susan S. Samuelson is a professor of business law at Boston University’s School of

Management. After earning her undergraduate and law degrees at Harvard University,

Professor Samuelson practiced with the firm of Choate, Hall, and Stewart. She has written

many articles on legal issues for scholarly and popular journals, including the American Business Law Journal, Ohio State Law Journal, Boston University Law Review, Harvard Journal on Legislation, National Law Journal, Sloan Management Review, Better Homes and Gardens, and Boston Magazine. At Boston University, she won the Broderick Prize for excellence in teaching. For 12 years, Professor Samuelson was the faculty director of the Boston Uni-

versity Executive MBA program.

xxviii PREFACE

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

UNIT1

The Legal Environment

n u tt ak it /S h u tt er st o ck .c o m ;©

S ta s V o lik /S h u tt er st o ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 1 INTRODUCTION TO LAW The Pagans were a motorcycle gang with a repu-

tation for violence. Two of its rougher members,

Rhino and Backdraft, entered a tavern called the

Pub Zone, shoving their way past the bouncer. The pair wore gang insignia, in violation of the

bar’s rules. For a while, all was quiet, as the two

sipped drinks at the bar. Then they followed an

innocent patron toward the men’s room, and

things happened fast.

“Wait a moment,” you may be thinking. “Are we

reading a chapter on business law or one about biker

crimes in a roadside tavern?” Both.

Law is powerful, essential, and fascinating. We hope

this book will persuade you of all three ideas. Law can

also be surprising. Later in the chapter we will return to

the Pub Zone (with armed guards) and follow Rhino and Backdraft to the back of the pub. Yes, the pair engaged

in street crime, which is hardly a focus of this text.

However, their criminal acts will enable us to explore

one of the law’s basic principles, negligence. Should a

pub owner pay money damages to the victim of gang

violence? The owner herself did nothing aggressive.

Should she have prevented the harm? Does her failure

to stop the assault make her liable?

We place great demands on our courts, asking them to make our large, complex, and

sometimes violent society into a safer, fairer, more orderly place. The Pub Zone case is a good example of how judges reason their way through the convoluted issues involved. What

began as a gang incident ends up as a matter of commercial liability. We will traipse after

Rhino and Backdraft because they have a lesson to teach anyone who enters the world of

business.

For a while, all was quiet, as the two sipped drinks at the bar. Then they followed an innocent

patron toward the men’s room…

n u tt a ki t/ S h u tt e rs to ck .c o m ; ©

S ta s V o li k/ S h u tt e rs to ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-1 THE ROLE OF LAW IN SOCIETY 1-1a Power The strong reach of the law touches nearly everything we do, especially at work. Consider a

mid-level manager at Sublime Corp., which manufactures and distributes video games.

During the course of a day’s work, she might negotiate a deal with a game developer

(contract law). Before signing any deals, she might research whether similar games already exist,

which might diminish her ability to market the proposed new game (intellectual property law).

One of her subordinates might complain about being harassed by a coworker (employment law).

Another worker may complain about being required to work long hours (administrative law).

And she may consider investing her own money in her company’s stock, but she may wonder

whether she will get into trouble if she invests based on inside information (securities law).

It is not only as a corporate manager that you will confront the law. As a voter, investor,

juror, entrepreneur, and community member, you will influence and be affected by the law.

Whenever you take a stance about a legal issue, whether in the corporate office, in the

voting booth, or as part of local community groups, you help to create the fabric of our

nation. Your views are vital. This book will offer you knowledge and ideas from which to

form and continually reassess your legal opinions and values.

1-1b Importance Law is also essential. Every society of which we have any historical record has had some system of laws. For example, consider the Visigoths, a nomadic European people who

overran much of present-day France and Spain during the fifth and sixth centuries C.E.

Their code admirably required judges to be “quick of perception, clear in judgment, and

lenient in the infliction of penalties.” It detailed dozens of crimes.

Our legal system is largely based upon the English model, but many societies contributed

ideas. The Iroquois Native Americans, for example, played a role in the creation of our own

government. Five major nations made up the Iroquois group: the Mohawk, Cayuga, Oneida,

Onondaga, and Seneca. Each nation governed its own domestic issues. But each nation also

elected “sachems” to a League of the Iroquois. The league had authority over any matters that

were common to all, such as relations with outsiders. Thus, by the fifteenth century, the Iroquois

had solved the problem of federalism: how to have two levels of government, each with specified powers. Their system impressed Benjamin Franklin and others and influenced the drafting of

our Constitution, with its powers divided between state and federal governments. 1

1-1c Fascination In 1835, the young French aristocrat Alexis de Tocqueville traveled through the United

States, observing the newly democratic people and the qualities that made them unique.

One of the things that struck de Tocqueville most forcefully was the American tendency to

file suit: “Scarcely any political question arises in the United States that is not resolved,

sooner or later, into a judicial question.” 2 De Tocqueville got it right: For better or worse,

we do expect courts to solve many problems.

Not only do Americans litigate—they watch each other do it. Every television season

offers at least one new courtroom drama to a national audience breathless for more

cross-examination. Almost all of the states permit live television coverage of real trials.

One of the most heavily viewed events in the history of courtroom television was the 1995

1 Jack Weatherford, Indian Givers (New York: Fawcett Columbine, 1988), pp. 133–150.

2 Alexis de Tocqueville, Democracy in America (1835), Vol. 1, Ch. 16.

CHAPTER 1 Introduction to Law 3

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

murder trial of former football star O.J. Simpson: 150 million viewers tuned in. In most

nations, coverage of judicial proceedings is not allowed. 3

The law is a big part of our lives, and it is wise to know something about it. Within a few

weeks, you will probably find yourself following legal events in the news with keener

interest and deeper understanding. In this chapter, we develop the background for our

study. We look at where law comes from: its history and its present-day institutions. In the

section on jurisprudence, we examine different theories about what “law” really means. And

finally we see how courts—and students—analyze a case.

1-2 ORIGINS OF OUR LAW It would be nice if we could look up “the law” in one book, memorize it, and then apply it.

But the law is not that simple, and cannot be that simple, because it reflects the complexity of contemporary life. In truth, there is no such thing as “the law.” Principles and rules of law

actually come from many different sources. Why is this so? In part because we inherited a complex structure of laws from England.

Additionally, ours is a nation born in revolution and created, in large part, to protect the

rights of its people from the government. The Founding Fathers created a national government

but insisted that the individual states maintain control in many areas. As a result, each state has

its own government with exclusive power over many important areas of our lives. To top it off,

the Founders guaranteed many rights to the people alone, ordering national and state govern- ments to keep clear. This has worked, but it has caused a multilayered system, with 50 state

governments and one federal government all creating and enforcing law.

1-2a English Roots England in the tenth century was a rustic agricultural community with a tiny population and

very little law or order. Vikings invaded repeatedly, terrorizing the Anglo-Saxon peoples.

Criminals were hard to catch in the heavily forested, sparsely settled nation. The king used

a primitive legal system to maintain a tenuous control over his people.

England was divided into shires, and daily administration was carried out by a “shire

reeve,” later called a sheriff. The shire reeve collected taxes and did what he could to keep

peace, apprehending criminals and acting as mediator between feuding families. Two or

three times a year, a shire court met; lower courts met more frequently. Today, this method

of resolving disputes lives on as mediation, which we will discuss in Chapter 3.

Because there were so few officers to keep the peace, Anglo-Saxon society created an

interesting method of ensuring public order. Every freeman belonged to a group of 10 freemen

known as a “tithing,” headed by a “tithingman.” If anyone injured a person outside his tithing

or interfered with the king’s property, all 10 men of the tithing could be forced to pay. Today,

we still use this idea of collective responsibility in business partnerships. All partners are

personally responsible for the debts of the partnership. They could potentially lose their homes

and all assets because of the irresponsible conduct of one partner. That liability has helped

create new forms of business organization, including limited liability companies.

When cases did come before an Anglo-Saxon court, the parties would often be represented

by a clergyman, by a nobleman, or by themselves. There were few professional lawyers. Each

party produced “oath helpers,” usually 12, who would swear that one version of events was

correct. The Anglo-Saxon oath helpers were forerunners of our modern jury of 12 persons.

3 Regardless of whether we allow cameras, it is an undeniable benefit of the electronic age that we can

obtain information quickly. From time to time, we will mention websites of interest. Some of these are

for nonprofit groups, while others are commercial sites. We do not endorse or advocate on behalf of

any group or company; we simply wish to alert you to what is available.

4 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

In 1066, the Normans conquered England. William the Conqueror made a claim never

before made in England: that he owned all of the land. The king then granted sections of his

lands to his favorite noblemen, as his tenants in chief, creating the system of feudalism. These

tenants in chief then granted parts of their land to tenants in demesne, who actually occupied a particular estate. Each tenant in demesne owed fidelity to his lord (hence, “landlord”). So

what? Just this: land became the most valuable commodity in all of England, and our law still

reflects that. One thousand years later, American law still regards land as special. The Statute

of Frauds, which we study in the section on contracts, demands that contracts for the sale or

lease of property be in writing. And landlord-tenant law, vital to students and many others, still

reflects its ancient roots. Some of a landlord’s rights are based on the 1,000-year-old tradition

that land is uniquely valuable.

In 1250, Henry de Bracton (d. 1268) wrote a legal treatise that still influences us. De Legibus et Consuetudinibus Angliae (On the Laws and Customs of England), written in Latin, summarized many of the legal rulings in cases since the Norman Conquest. De Bracton was teaching judges to rule based

on previous cases. He was helping to establish the idea of precedent. The doctrine of precedent, which developed gradually over centuries, requires that judges decide current cases based on

previous rulings. This vital principle is the heart of American common law. Precedent ensures

predictability. Suppose a 17-year-old student promises to lease an apartment from a landlord, but

then changes her mind. The landlord sues to enforce the lease. The student claims that she cannot

be held to the agreement because she is a minor. The judge will look for precedent, that is, older

cases dealing with the same issue, and he will find many holding that a contract generally may not be

enforced against a minor. That precedent is binding on this case, and the student wins. The

accumulation of precedent, based on case after case, makes up the common law. In the end, today’s society is dramatically different from that of medieval English

society. But interestingly, legal disputes from hundreds of years ago are often quite recog-

nizable today. Some things have changed but others never do.

Here is an actual case from more than six centuries ago, in the court’s own language.

The plaintiff claims that he asked the defendant to heal his eye with “herbs and other

medicines.” He says the defendant did it so badly that he blinded the plaintiff in that eye.

THE OCULIST’S CASE (1329)

LI MS. Hale 137 (1), fo. 150, Nottingham4

C A S E S U M M A R Y

Attorney Launde [for defendant]: Sir, you plainly see how [the plaintiff claims] that he had submitted himself to

[the defendant’s] medicines and his care; and after that he

can assign no trespass in his person, inasmuch as he sub-

mitted himself to his care: but this action, if he has any,

sounds naturally in breach of covenant. We demand [that

the case be dismissed].

Excerpts from Judge Denum’s Decision: I saw a New- castle man arraigned before my fellow justice and me for the

death of a man. I asked the reason for the indictment, and it

was said that he had slain a man under his care, who

died within four days afterwards. And because I saw

that he was a [doctor] and that he had not done the

thing feloniously but [accidentally] I ordered him to be

discharged. And suppose a blacksmith, who is a man of

skill, injures your horse with a nail, whereby you lose

your horse: you shall never have recovery against him.

No more shall you here.

Afterwards the plaintiff did not wish to pursue his

case any more.

Common law Judge-made law.

4 J. Baker and S. Milsom, Sources of English Legal History (London: Butterworth & Co., 1986).

Precedent The tendency to decide current cases based on previous rulings.

CHAPTER 1 Introduction to Law 5

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

This case from 1329 is an ancient medical malpractice action. Attorney Launde does not

deny that his client blinded the plaintiff. He claims that the plaintiff has brought the wrong

kind of lawsuit. Launde argues that the plaintiff should have brought a case of “covenant”;

that is, a lawsuit about a contract.

Judge Denum decides the case on a different principle. He gives judgment to

the defendant because the plaintiff voluntarily sought medical care. He implies that

the defendant would lose only if he had attacked the plaintiff. As we will see when

we study negligence law, this case might have a different outcome today. Note also

the informality of the judge’s ruling. He rather casually mentions that he came across

a related case once before and that he would stand by that outcome. The idea of

precedent is just beginning to take hold.

1-2b Law in the United States The colonists brought with them a basic knowledge of English law, some of which

they were content to adopt as their own. Other parts, such as religious restrictions,

were abhorrent to them. Many settlers had made the dangerous trip to America

precisely to escape persecution, and they were not interested in recreating their

difficulties in a new land. Finally, some laws were simply irrelevant or unworkable

in a world that was socially and geographically so different. American law ever since

has been a blend of the ancient principles of English common law and a zeal and

determination for change.

During the nineteenth century, the United States changed from a weak, rural

nation into one of vast size and potential power. Cities grew, factories appeared,

and sweeping movements of social migration changed the population. Changing

conditions raised new legal questions. Did workers have a right to form industrial

unions? To what extent should a manufacturer be liable if its product injured

someone? Could a state government invalidate an employment contract that

required 16-hour workdays? Should one company be permitted to dominate an

entire industry?

In the twentieth century, the rate of social and technological change increased,

creating new legal puzzles. Were some products, such as automobiles, so inherently

dangerous that the seller should be responsible for injuries even if no mistakes were

made in manufacturing? Who should clean up toxic waste if the company that had

caused the pollution no longer existed? If a consumer signed a contract with a

billion-dollar corporation, should the agreement be enforced even if the consumer

never understood it? New and startling questions arise with great regularity. Before

we can begin to examine the answers, we need to understand the sources of con-

temporary law.

1-3 SOURCES OF CONTEMPORARY LAW Throughout the text, we will examine countless legal ideas. But binding rules come from

many different places. This section describes the significant categories of laws in the United States.

6 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-3a United States Constitution America’s greatest legal achievement was the writing of the United States Constitution in 1787.

It is the supreme law of the land. 5

Any law that conflicts with it is void. This federal

Constitution does three basic things. First, it establishes the national government of the United

States, with its three branches. Second, it creates a system of checks and balances among the

branches. And third, the Constitution guarantees many basic rights to the American people.

BRANCHES OF GOVERNMENT The Founding Fathers sought a division of government power. They did not want all power

centralized in a king or in anyone else. And so, the Constitution divides legal authority into

three pieces: legislative, executive, and judicial power.

Legislative power gives the ability to create new laws. In Article I, the Constitution gives this power to the Congress, which is comprised of two chambers—a Senate and a House of

Representatives. Voters in all 50 states elect representatives who go to Washington, D.C., to

serve in the Congress and debate new legal ideas.

The House of Representatives has 435 voting members. A state’s voting power is based

on its population. Large states (Texas, California, and Florida) send dozens of representa-

tives to the House. Some small states (Wyoming, North Dakota, and Delaware) send only

one. The Senate has 100 voting members—two from each state.

Executive power is the authority to enforce laws. Article II of the Constitution establishes the President as commander in chief of the armed forces and the head of the executive

branch of the federal government.

Judicial power gives the right to interpret laws and determine their validity. Article III places the Supreme Court at the head of the judicial branch of the federal government.

Interpretive power is often underrated, but it is often every bit as important as the ability to

create laws in the first place. For instance, the Supreme Court ruled that privacy provisions

of the Constitution protect a woman’s right to abortion, although neither the word “privacy”

nor “abortion” appears in the text of the Constitution. 6

At times, courts void laws altogether. For example, in 1995, the Supreme Court ruled

that the Gun-Free School Zones Act of 1990 was unconstitutional because Congress did not

have the authority to pass such a law. 7

CHECKS AND BALANCES Sidney Crosby might score 300 goals per season if checking were not allowed in the

National Hockey League. But because opponents are allowed to hit Crosby and the rest

of his teammates on the Penguins, he is held to a much more reasonable 50 goals per year.

Political checks work in much the same way. They allow one branch of the government

to trip up another.

The authors of the Constitution were not content merely to divide government power

three ways. They also wanted to give each part of the government some power over the

other two branches. Many people complain about “gridlock” in Washington, but the

government is slow and sluggish by design. The Founding Fathers wanted to create a

system that, without broad agreement, would tend towards inaction.

The President can veto Congressional legislation. Congress can impeach the President.

The Supreme Court can void laws passed by Congress. The President appoints judges to

5 The Constitution took effect in 1788, when 9 of 13 colonies ratified it. Two more colonies ratified it

that year, and the last of the 13 did so in 1789, after the government was already in operation. The

complete text of the Constitution appears in Appendix A. 6Roe v. Wade, 410 U.S. 113 (1973). 7United States v. Alfonso Lopez, Jr., 514 U.S. 549 (1995).

CHAPTER 1 Introduction to Law 7

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Sources of Law

Legislative Branch

Executive Branch

Judicial Branch

State Legislature • passes statutes on state law

• creates state agencies

Governor

• proposes statutes • signs or vetoes statutes • oversees state agencies

State Courts • create state common law • interpret statutes • review constitutionality of statutes and other acts

50 State Governments

State Constitution • establishes the state government • guarantees the rights of state residents

One Federal Government

United States Constitution • establishes limited federal government • protects states’ power • guarantees liberty of citizens

Administrative Agencies oversee day-to-day application of law in dozens of commercial and other areas

Legislative Branch

Executive Branch

Judicial Branch

Congress

• passes statutes • ratifies treaties • creates administrative agencies

President

• proposes statutes • signs or vetoes statutes • oversees administrative agencies

Federal Courts • interpret statutes • create (limited) federal common law • review the constitutionality of statutes and other legal acts

Administrative Agencies oversee day-to-day application of law in dozens of commercial and other areas

Federal Form of Government. Principles and rules of law come from many sources. The government in Washington creates and enforces law throughout the nation. But 50 state governments exercise great power in local affairs. And citizens enjoy constitutional protection from both state and federal government. The Founding Fathers wanted this balance of power and rights, but the overlapping authority creates legal complexity.

© C e n g a g e L e a rn in g

8 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

the federal courts, including the Supreme Court, but these nominees do not serve unless

approved by the Senate. Congress (with help from the 50 states) can override the Supreme

Court by amending the Constitution. The President and the Congress influence the

Supreme Court by controlling who is placed on the court in the first place.

Many of these checks and balances will be examined in more detail later in this book,

starting in Chapter 4.

FUNDAMENTAL RIGHTS The Constitution also grants many of our most basic liberties. For the most part, they are found

in the amendments to the Constitution. The First Amendment guarantees the rights of free

speech, free press, and the free exercise of religion. The Fourth, Fifth, and Sixth Amendments

protect the rights of any person accused of a crime. Other amendments ensure that the

government treats all people equally and that it pays for any property it takes from a citizen.

By creating a limited government of three branches and guaranteeing basic liberties to

all citizens, the Constitution became one of the most important documents ever written.

1-3b Statutes The second important source of law is statutory law. The Constitution gave to the United

States Congress the power to pass laws on various subjects. These laws are called statutes, and they can cover absolutely any topic, so long as they do not violate the Constitution.

Almost all statutes are created by the same method. An idea for a new law—on taxes,

health care, texting while driving, or any other topic, big or small—is first proposed in the

Congress. This idea is called a bill. The House and Senate then independently vote on the bill. To pass Congress, the bill must win a simple majority vote in each of these chambers.

If Congress passes a bill, it goes to the White House for the President’s approval. If

the President signs it, a new statute is created. It is no longer a mere idea; it is the law of the

land. If the President refuses to approve, or vetoes a bill, it does not become a statute unless Congress overrides the veto. To do that, both the House and the Senate must approve the

bill by a two-thirds majority. If this happens, it becomes a statute without the President’s

signature.

1-3c Common Law Binding legal ideas often come from the courts. Judges generally follow precedent. When courts decide a case, they tend to apply the legal rules that other courts have used in

similar cases.

The principle that precedent is binding on later cases is called stare decisis, which means “let the decision stand.” Stare decisis makes the law predictable, and this in turn enables businesses and private citizens to plan intelligently.

It is important to note that precedent is binding only on lower courts. For example, if the Supreme Court decided a case in one way in 1965, it is under no obligation to follow

precedent if the same issue arises in 2015.

Sometimes, this ability to change is quite beneficial. In 1896, the Supreme Court

decided (unbelievably) that segregation—separating people by race in schools, hotels,

public transportation, and other public services—was legal under certain conditions. 8 In

1954, on the exact same issue, the court changed its mind. 9

In other circumstances, it is more difficult to see the value in breaking with an

established rule.

8Plessy v. Ferguson, 163 U.S. 537 (1896). 9Brown v. Board of Education of Topeka, 347 U.S. 483 (1954).

Statute A law created by a legislative body.

CHAPTER 1 Introduction to Law 9

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-3d Court Orders Judges have the authority to issue court orders that place binding obligations on specific

people or companies. An injunction, for example, is a court order to stop doing something. A

judge might order a stalker to stay more than 500 yards away from an ex-lover. Lindsay

Lohan might be ordered to stop drinking and enter rehab. Courts have the authority to

imprison or fine those who violate their orders.

1-3e Administrative Law In a society as large and diverse as ours, the executive and legislative branches of govern-

ment cannot oversee all aspects of commerce. Congress passes statutes about air safety, but

United States senators do not stand around air traffic towers, serving coffee to keep every-

one awake. The executive branch establishes rules concerning how foreign nationals enter

the United States, but Presidents are reluctant to sit on the dock of the bay, watching the

ships come in. Administrative agencies do this day-to-day work.

Most government agencies are created by Congress.

Familiar examples are the Environmental Protection

Agency (EPA), the Securities and Exchange Commis-

sion (SEC), and the Internal Revenue Service (IRS),

whose feelings are hurt if it does not hear from you

every April 15. Agencies have the power to create laws

called regulations.

1-3f Treaties The Constitution authorizes the President to make treaties

with foreign nations. These agreements must then be

ratified by the United States Senate by a two-thirds vote.

When they are ratified, they are as binding upon all citi-

zens as any federal statute. In 1994, the Senate ratified the

North American Free Trade Agreement (NAFTA) with Mexico and Canada. NAFTA was

controversial then and remains so today—but it is the law of the land.

1-4 CLASSIFICATIONS We have seen where law comes from. Now we need to classify the various types of laws.

First, we will distinguish between criminal and civil law. Then, we will take a look at the

intersection between law and morality.

1-4a Criminal and Civil Law It is a crime to embezzle money from a bank, to steal a car, to sell cocaine. Criminal law concerns behavior so threatening that society outlaws it altogether. Most criminal laws are

statutes, passed by Congress or a state legislature. The government itself prosecutes the

wrongdoer, regardless of what the bank President or car owner wants. A district attorney,

paid by the government, brings the case to court. The injured party, for example the owner

of the stolen car, is not in charge of the case, although she may appear as a witness. The

government will seek to punish the defendant with a prison sentence, a fine, or both.

If there is a fine, the money goes to the state, not to the injured party.

Civil law is different, and most of this book is about civil law. The civil law regulates the rights and duties between parties. Tracy agrees in writing to lease you a 30,000-square-foot store in her shopping mall. She now has a legal duty to make the space available. But then

United States senators do not stand around air traffic towers,

serving coffee to keep everyone awake.

Criminal law Criminal law prohibits certain behavior.

Civil law Civil law regulates the rights and duties between parties.

10 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

another tenant offers her more money, and she refuses to let you move in. Tracy has

violated her duty, but she has not committed a crime. The government will not prosecute

the case. It is up to you to file a civil lawsuit. Your case will be based on the common law

of contract. You will also seek equitable relief, namely, an injunction ordering Tracy not to

lease to anyone else. You should win the suit, and you will get your injunction and some

money damages. But Tracy will not go to jail.

Some conduct involves both civil and criminal law. Suppose Tracy is so upset over

losing the court case that she becomes drunk and causes a serious car accident. She has

committed the crime of driving while intoxicated, and the state will prosecute. Tracy may

be fined or imprisoned. She has also committed negligence, and the injured party will file a

lawsuit against her, seeking money. We will again see civil and criminal law joined together

in the Pub Zone case, later in the chapter.

1-4b Law and Morality Law is different from morality, yet the two are obviously linked. There are many instances

when the law duplicates what all of us would regard as a moral position. It is negligent to

drive too fast in a school zone, and few would dispute the moral value of seeking to limit

harm to students. And the same holds with contract law: If the owner of land agrees in

writing to sell property to a buyer at a stated price, both the buyer and the seller must

go through with the deal, and the legal outcome matches our moral expectations.

On the other hand, we have had laws that we now clearly regard as immoral. At the turn

of the century, a factory owner could typically fire a worker for any reason at all—including,

for example, his religious or political views. It is immoral to fire a worker because she is

Jewish—and today the law prohibits it.

Finally, there are legal issues where the morality is less clear. You are walking down a

country lane and notice a three-year-old child playing with matches near a barn filled with

hay. Are you obligated to intervene? No, says the law, though many think that is preposter-

ous. (See Chapter 4, on common law, for more about this topic.) A company buys property

and then discovers, buried under the ground, toxic waste that will cost $300,000 to clean up.

The original owner has gone bankrupt. Should the new owner be forced to pay for the

cleanup? If the new owner fails to pay for the job, who will?

Chapter 2 will further examine the bond between law and morality.

1-5 JURISPRUDENCE We have had a glimpse of legal history and a summary of the present-day sources of American

law. But what is law? That question is the basis of a field known as jurisprudence. What is the real nature of law? Can there be such a thing as an “illegal” law?

1-5a Legal Positivism This philosophy can be simply stated: Law is what the sovereign says it is. The sovereign is the recognized political power whom citizens obey, so in the United States, both state and

federal governments are sovereign. A legal positivist holds that whatever the sovereign

declares to be the law is the law, whether it is right or wrong. The primary criticism of legal positivism is that it seems to leave no room for questions

of morality. A law permitting a factory owner to fire a worker because she is Catholic

is surely different from a law prohibiting arson. Do citizens in a democracy have a duty to

consider such differences? Consider the following example.

Most states allow citizens to pass laws directly at the ballot box, a process called voter

referendum. California voters often do this, and during the 1990s, they passed one of the

Sovereign The recognized political power, whom citizens obey.

Jurisprudence The philosophy of law.

CHAPTER 1 Introduction to Law 11

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

state’s most controversial laws. Proposition 187 was designed to curb illegal immigration into

the state by eliminating social spending for undocumented aliens. Citizens debated the

measure fiercely but passed it by a large margin. One section of the new law forbade public

schools from educating illegal immigrants. The law obligated a principal to inquire into the

immigration status of all children enrolled in the school and to report undocumented

students to immigration authorities. Several San Diego school principals rejected the new

rules, stating that they would neither inquire into immigration status nor report undocu-

mented aliens. Their statements produced a heated response. Some San Diego residents

castigated the school officials as lawbreakers, claiming that:

• A school officer who knowingly disobeyed a law was setting a terrible example for students, who would assume they were free to do the same;

• The principals were advocating permanent residence and a free education for anyone able to evade our immigration laws; and

• The officials were scorning grass-roots democracy by disregarding a law passed by popular referendum.

Others applauded the principals’ position, asserting that:

• The referendum’s rules would transform school officials from educators into border police, forcing them to cross-examine young children and their parents;

• The new law was foolish because it punished innocent children for violations committed by their parents; and

• Our nation has long respected civil disobedience based on humanitarian ideals, and these officials were providing moral leadership to the whole community.

Ultimately, no one had to decide whether to obey Proposition 187. A federal court ruled

that only Congress had the power to regulate immigration and that California’s attempt was

unconstitutional and void. The debate over immigration reform—and ethics—did not end,

however. It continues to be a thorny issue.

1-5b Natural Law St. Thomas Aquinas (1225–1274) answered the legal positivists even before they had spoken.

In his Summa Theologica, he argued that an unjust law is no law at all and need not be obeyed. It is not enough that a sovereign makes a command. The law must have a moral basis.

Where do we find the moral basis that would justify a law? Aquinas says that “good is that

which all things seek after.” Therefore, the fundamental rule of all laws is that “good is to be

done and promoted, and evil is to be avoided.” This sounds appealing, but also vague. Exactly

which laws promote good and which do not? Is it better to have a huge corporation dominate a

market or many smaller companies competing? Did the huge company get that way by being

better than its competitors? If Wal-Mart moves into a rural area, establishes a mammoth store,

and sells inexpensive products, is that “good”? Yes, if you are a consumer who cares only about

prices. No, if you are the owner of a Main Street store driven into bankruptcy. Maybe, if you are

a resident who values small-town life but wants lower prices.

1-5c Legal Realism Legal realists take a very different tack. They claim it does not matter what is written as law.

What counts is who enforces that law and by what process. All of us are biased by issues

such as income, education, family background, race, religion, and many other factors. These

personal characteristics, they say, determine which contracts will be enforced and which

ignored, why some criminals receive harsh sentences while others get off lightly, and so on.

12 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Judge Jones hears a multimillion dollar lawsuit involving an airplane crash. Was the

airline negligent? The law is the same everywhere, but legal realists say that Jones’s

background will determine the outcome. If she spent 20 years representing insurance

companies, she will tend to favor the airline. If her law practice consisted of helping the

“little guy,” she will favor the plaintiff.

Other legal realists argue, more aggressively, that those in power use the machinery of the

law to perpetuate their control. The outcome of a given case will be determined by the needs of

those with money and political clout. A court puts “window dressing” on a decision, they say, so

that society thinks there are principles behind the law. A problem with legal realism, however,

is its denial that any lawmaker can overcome personal bias. Yet clearly some do act unselfishly.

SUMMARY OF JURISPRUDENCE

Legal Positivism Law is what the sovereign says.

Natural Law An unjust law is no law at all.

Legal Realism Who enforces the law counts more than what is in writing.

No one school of jurisprudence is likely to seem perfect. We urge you to keep the

different theories in mind as you read cases in the book.

1-6 WORKING WITH THE BOOK’S FEATURES In this section, we introduce a few of the book’s features and discuss how you can use them

effectively. We will start with cases.

1-6a Analyzing a Case A law case is the decision a court has made in a civil lawsuit or criminal prosecution. Cases

are the heart of the law and an important part of this book. Reading them effectively takes

practice. This chapter’s opening scenario is based on a real case. Who can be held liable for

the assault? Let’s see.

KUEHN V. PUB ZONE

364 N.J. Super. 301, 835 A.2d 692 Superior Court of New Jersey, Appellate Division, 2003

C A S E S U M M A R Y

Facts: Maria Kerkoulas owned the Pub Zone bar. She knew that several motorcycle gangs frequented the

tavern. From her own experience tending bar, and con-

versations with city police, she knew that some of the

gangs, including the Pagans, were dangerous and prone

to attack customers for no reason. Kerkoulas posted a sign

prohibiting any motorcycle gangs from entering the bar

while wearing “colors,” that is, insignia of their gangs. She

believed that gangs without their colors were less prone to

violence, and experience proved her right.

© C e n g a g e L e a rn in g

CHAPTER 1 Introduction to Law 13

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ANALYSIS Let’s take it from the top. The case is called Kuehn v. Pub Zone. Karl Kuehn is the plaintiff, the person who is suing. The Pub Zone is being sued, and is called the defendant. In this example, the plaintiff’s name happens to appear first, but that is not always true. When a defendant loses a trial and files an appeal, some courts reverse the names of the parties.

The next line gives the legal citation, which indicates where to find the case in a law

library. We explain in the footnote how to locate a case if you plan to do research. 10

The Facts section provides a background to the lawsuit, written by the authors of this text. The court’s own explanation of the facts is often many pages long, and may involve

complex matters irrelevant to the subject covered in this book, so we relate only what

is necessary. This section will usually include some mention of what happened at the

Rhino, Backdraft, and several other Pagans, all wear-

ing colors, pushed their way past the tavern’s bouncer and

approached the bar. Although Kerkoulas saw their colors,

she allowed them to stay for one drink. They later moved

towards the back of the pub, and Kerkoulas believed

they were departing. In fact, they followed a customer

named Karl Kuehn to the men’s room where, without any

provocation, they savagely beat him. Kuehn was knocked

unconscious and suffered brain hemorrhaging, disc hernia-

tion, and numerous fractures of facial bones. He was

forced to undergo various surgeries, including eye

reconstruction.

Although the government prosecuted Rhino and Back-

draft for their vicious assault, our case does not concern that

prosecution. Kuehn sued the Pub Zone, and that is the case we will read. The jury awarded him $300,000 in damages.

However, the trial court judge overruled the jury’s verdict.

He granted a judgment for the Pub Zone, meaning that the tavern owed nothing. The judge ruled that the pub’s owner

could not have foreseen the attack on Kuehn, and had no

duty to protect him from an outlaw motorcycle gang. Kuehn

appealed, and the appeals court’s decision follows.

Issue: Did the Pub Zone have a duty to protect Kuehn from the Pagans’ attack?

Decision: Yes, the Pub Zone had a duty to protect Kuehn. The decision is reversed, and the jury’s verdict is reinstated.

Reasoning: Whether a duty exists depends on the fore- seeability of the harm, its potential severity, and the

defendant’s ability to prevent the injury. A court should

also evaluate society’s interest in the dispute.

A business owner generally has no duty to protect a

customer from acts of a third party unless experience

suggests that there is danger. However, if the owner could

in fact foresee injury, she is obligated to take reasonable

safety precautions.

Kerkoulas knew that the Pagans engaged in random

violence. She realized that when gang members entered

the pub, they endangered her customers. That is why she

prohibited bikers from wearing their colors—a reasonable

rule. Regrettably, the pub failed to enforce the rule.

Pagans were allowed to enter wearing their colors, and

the pub did not call the police. The pub’s behavior was

unreasonable and it is liable to Kuehn.

Plaintiff The party who is suing.

Defendant The party being sued.

10 If you want to do legal research, you need to know where to find particular legal decisions. A case

citation guides you to the correct volume(s). The full citation of our case is Kuehn v. Pub Zone, 364 N. J. Super. 301, 835 A. 2d 692. The string of numbers identifies two different books in which you can find

the full text of this decision. The first citation is to “N. J. Super,” which means the official court

reporter of the state of New Jersey. New Jersey, like most states, reports its law cases in a series of

numbered volumes. This case appears in volume 364 of the New Jersey Superior Court reporters. If

you go to a law library and find that book, you can then turn to page 301 and—voilà!—you have the case. The decision is also reported in another set of volumes, called the regional reporters. This series

of law reports is grouped by geographic region. New Jersey is included in the Atlantic region, so our

case appears in reporters dedicated to that region. The “A” stands for Atlantic. After a series of

reporters reaches volume 999, a second set begins. Our case appears in volume 835 of the second set of

the Atlantic reporters (“A. 2d”), at page 692. In addition, cases are now available online, and your

professor or librarian can show you how to find them electronically.

14 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

trial court. Lawsuits always begin in a trial court. The losing party often appeals to a court of

appeals, and it is usually an appeals court decision that we are reading. The trial judge ruled

in favor of Pub Zone, but later, in the decision we are reading, Kuehn wins. The Issue section is very important. It tells you what the court had to decide—and also

why you are reading the case. In giving its decision, a court may digress. If you keep in mind

the issue and relate the court’s discussion to it, you will not get lost.

The Decision is the court’s answer to the issue posed. A court’s decision is often referred to as its holding. The court rules that the Pub Zone did have a duty to Kuehn. The appellate court reverses the trial court’s decision, meaning that it declares the trial judge’s ruling wrong and void. The appellate judges also reinstate the jury verdict. The appellate court could

have remanded the case if the judges had wished, meaning to send it back down to the lower court for a new trial. If the appeals court had agreed with the trial court’s decision, the

judges would have affirmed the lower court’s ruling, meaning to uphold it. The Reasoning section explains why the court reached its decision. The actual written

decision may be three paragraphs or 75 pages. Some judges offer us lucid prose, while others

seem intent on torturing the reader. Judges frequently digress and often discuss matters that

are irrelevant to the issue on which this text is focusing. For those reasons, we have taken

the court’s explanation and recast it in our own words. If you are curious about the full

opinion, you can always look it up.

Let us examine the reasoning. The court begins with a set of guidelines concerning a

business owner’s duty. Whether a defendant has such a duty depends on the foreseeability

and severity of the harm, whether the business person could have prevented it, and society’s

interest. The court emphasizes that a bar owner is not an ensurer of its patrons’ safety. Not

every assault in a pub results in the defendant’s liability. The judges are emphasizing that

courts do not reach decisions arbitrarily. They attempt to make thoughtful choices, consistent

with earlier rulings, which make good sense for the general public.

Having laid out the ground rules, the court describes the key facts, from this case, that it

will use to decide whether the Pub Zone had a duty to Kuehn. The judges note that the bar’s owner knew that gang members were dangerous. The rule against wearing colors made sense.

When Pagans entered wearing their insignia, the pub had a duty to protect its patrons. The

pub’s owner was still not obligated to guarantee the safety of its patrons, but she had to do a

reasonable job of reacting to the foreseeable danger. All Kerkoulas reasonably had to do was

enforce the pub’s no-colors rule and telephone the police if gang members refused to obey it.

When she failed to take those steps, she violated her duty to Kuehn and became liable. The

court reversed the trial judge’s decision and reinstated the jury’s verdict.

1-6b Devil’s Advocate Each chapter has several cases. After some of them, a “Devil’s Advocate” feature offers you

a contrasting view of the legal issue. This is not part of the case but is instead a suggestion of

another perspective on the problem discussed. The authors take no position for or against

the court’s decision, but merely want you to consider an alternate view, and decide which

analysis of the law makes more sense to you—that of the court or the Devil’s Advocate. Is

the following view persuasive?

Devil’s Advocate A court should not force small businesses to guarantee their customers’ safety. Two or three violent men,

whether motorcycle gang members or frustrated professors, could enter a grocery store or clothing retailer at anytime and mindlessly attack innocent visitors. Random attacks are just that—random, unforeseeable. No merchant should be required to anticipate them. Send the criminals to jail, but do not place the burden on honest businesspeople.

CHAPTER 1 Introduction to Law 15

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1-6c Exam Strategy This feature gives you practice analyzing cases the way lawyers do—and the way you must on tests. Law exams are different from most others because you must determine the issue

from the facts provided. Too frequently, students faced with a law exam forget that the

questions relate to the issues in the text and those discussed in class. Understandably,

students new to law may focus on the wrong information in the problem or rely on material

learned elsewhere. Exam Strategies teach you to figure out exactly what issue is at stake,

and then analyze it in a logical, consistent manner. Here is an example, relating to the

element of “duty,” which the court discussed in the Pub Zone case.

EXAM Strategy

The Big Red Traveling (BRT) Carnival is in town. Tony arrives at 8:00 p.m., parks in

the lot—and is robbed at gunpoint by a man who beats him and escapes with his

money. There are several police officers on the carnival grounds, but no officer is in

the parking lot at the time of the robbery. Tony sues, claiming that brighter lighting

and more police in the lot would have prevented the robbery. There has never before

been any violent crime—robbery, beating, or otherwise—at any BRT carnival. BRT

claims it had no duty to protect Tony from this harm. Who is likely to win?

Strategy: Begin by isolating the legal issue. What are the parties disputing? They are debating whether BRT had a duty to protect Tony from an armed robbery,

committed by a stranger. Now ask yourself: How do courts decide whether a business

has a duty to prevent this kind of harm? The Pub Zone case provides our answer. A business owner is not an ensurer of the visitor’s safety. The owner generally has no

duty to protect a customer from the criminal act of a third party, unless the owner

knows the harm is occurring or could foresee it is about to happen. (In the Pub Zone case, the business owner knew of the gang’s violent history, and could have foreseen

the assault.) Now apply that rule to the facts of this case.

Result: There has never been a violent attack of any kind at a BRT carnival. BRT cannot foresee this robbery, and has no duty to protect against it. The carnival wins.

1-6d You Be the Judge Many cases involve difficult decisions for juries and judges. Often both parties have

legitimate, opposing arguments. Most chapters in this book will have a feature called

“You Be the Judge,” in which we present the facts of a case but not the court’s holding.

We offer you two opposing arguments based on the kinds of claims the lawyers made in

court. We leave it up to you to debate and decide which position is stronger or to add your

own arguments to those given.

The following case is another negligence lawsuit, with issues that overlap those of the Pub Zone case. This time the court confronts a fight that resulted in a death. The victim’s distraught family sued the owner of a bar, claiming that one of his employees was partly responsible for the

death. Once again, the defendant asked the court to dismiss the case, claiming that he owed no

duty to protect the victim—the same argument made by the Pub Zone. But there is a difference here—this time the defendant owned the bar across the street,

not the one where the fight took place. Could he be held legally responsible for the death?

You be the judge.

16 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter Conclusion We depend upon the law to give us a stable nation and economy, a fair society, a safe place to live and work. These worthy goals have occupied ancient kings and twenty-first-century lawmakers alike. But while law is a vital tool for crafting the society we want, there are no

easy answers about how to create it. In a democracy, we all participate in the crafting. Legal

rules control us, yet we create them. A working knowledge of the law can help build a successful career—and a solid democracy.

You Be the Judge

Facts: In the days before cell phones, a fight broke

out at Happy Jack’s Saloon.

A good Samaritan ran across

the street to the Circle Inn,

whereheaskedthebartender

to let him use the telephone

to call the police. The bartender refused.

Back at Happy Jack’s Saloon, the fight escalated, and a

man shot and killed Soldano’s father. Soldano sued the

owner of the Circle Inn for negligence. He argued the

bartender violated a legal duty when he refused to hand over

the inn’s telephone, and that, as the employer of the bar-

tender, O’Daniels was partially liable for his father’s death.

The lower court dismissed the case, citing the princi-

ple that generally, a person does not have a legal respon-

sibility to help another unless he created the dangerous

situation in the first place. Soldano appealed.

You Be the Judge: Did the bartender have a duty to allow the use of the Circle Inn’s telephone? Argument for the Defendant: Your honors, my client did not act wrongfully. He did nothing to create the

danger. The fight was not even on his property. We

sympathize with the plaintiff, but it is the shooter,

and perhaps the bar where the fight took place, who are

responsible for his father’s death. Our client was not

involved. Liability can be stretched only so far.

The court would place a great burden on the citi-

zens of California by going against precedent. The

Circle Inn is Mr. O’Daniel’s private property. If the

court imposes potential liability on him in this case,

would citizens be forced to open the doors of their

homes whenever a stranger claims an emergency?

Criminals would delight

in their newfound ability

to gain access to busi-

nesses and residences

by simply demanding to

use a phone to “call the

police.”

The law has developed sensibly. People are left to

decide for themselves whether to help in a dangerous

situation. They are not legally required to place them-

selves in harm’s way.

Argument for the Plaintiff: Your honors, the Circle Inn’s bartender had both a moral and a legal duty to allow

the use of his establishment’s telephone. The Circle Inn

may be privately owned, but it is a business open to the

public. Anyone in the world is invited to stop by and order

a drink or a meal. The good Samaritan had every right to

be there.

We do not argue that the bartender had an obligation

to break up the fight or endanger himself in any way. We

simply argue he had a responsibility to stand aside and

allow a free call on his restaurant’s telephone. Any “bur-

den” on him or on the Circle Inn was incredibly slight.

The potential benefits were enormous. The trial court

made a mistake in concluding that a person never has a duty to help another. Such an interpretation makes for

poor public policy.

There is no need to radically change the . Residences

can be excluded from this ruling. People need not be

required to allow strangers into their homes. This court

can simply determine that businesses have a legal duty to

allow the placement of emergency calls during normal

business hours.

SOLDANO V. O’DANIELS 141 Cal. App. 3d 443

Court of Appeal of California, 5th Appellate District,1983

CHAPTER 1 Introduction to Law 17

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

EXAM REVIEW

1. THE FEDERAL SYSTEM Our federal system of government means that law comes from a national government in Washington, D.C., and from 50 state

governments. (pp. 7–9)

2. LEGAL HISTORY The history of law foreshadows many current legal issues, including mediation, partnership liability, the jury system, the role of witnesses,

the special value placed on land, and the idea of precedent. (pp. 4–5)

3. PRIMARY SOURCES OF LAW The primary sources of contemporary law are:

• United States Constitution and state constitutions;

• Statutes, which are drafted by legislatures;

• Common law, which is the body of cases decided by judges, as they follow earlier cases, known as precedent;

• Court orders, which place obligations on specific people or companies;

• Administrative law, the rules and decisions made by federal and state administrative agencies; and

• Treaties, agreements between the United States and foreign nations. (pp. 6–10).

Question: The stock market crash of 1929 and the Great Depression that followed were caused in part because so many investors blindly put their money

into stocks they knew nothing about. During the 1920s, it was often impossible for

an investor to find out what a corporation was planning to do with its money, who

was running the corporation, and many other vital things. Congress responded by

passing the Securities Act of 1933, which required a corporation to divulge more

information about itself before it could seek money for a new stock issue. What

kind of law did Congress create?

Strategy: What is the question seeking? The question asks you which type of law Congress created when it passed the 1933 Securities Act. What are the primary

kinds of law? Administrative law consists of rules passed by agencies. Congress is

not a federal agency. Common law is the body of cases decided by judges.

Congress is not a judge. Statutes are laws passed by legislatures. Congress is a

legislature. (See the “Result” at the end of this section.)

4. CRIMINAL LAW Criminal law concerns behavior so threatening to society that it is outlawed altogether. Civil law deals with duties and disputes between parties, not

with outlawed behavior. (pp. 10–11)

E X A M

S tr

a te

g y

18 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Question: Bill and Diane are hiking in the woods. Diane walks down a hill to fetch fresh water. Bill meets a stranger, who introduces herself as Katrina. Bill sells

a kilo of cocaine to Katrina, who then flashes a badge and mentions how much she

enjoys her job at the Drug Enforcement Agency. Diane, heading back to camp

with the water, meets Freddy, a motorist whose car has overheated. Freddy is late

for a meeting where he expects to make a $30 million profit; he’s desperate for

water for his car. He promises to pay Diane $500 tomorrow if she will give him the

pail of water, which she does. The next day, Bill is in jail and Freddy refuses to

pay for Diane’s water. Explain the criminal law/civil law distinction and what it

means to Bill and Diane. Who will do what to whom, with what results?

Strategy: You are asked to distinguish between criminal and civil law. What is the difference? The criminal law concerns behavior that threatens society and

is therefore outlawed. The government prosecutes the defendant. Civil law deals

with the rights and duties between parties. One party files a suit against the other.

Apply those different standards to these facts. (See the “Result” at the end of

this section.)

5. JURISPRUDENCE Jurisprudence is concerned with the basic nature of law. Three theories of jurisprudence are

1. Legal positivism: The law is what the sovereign says it is. 2. Natural law: An unjust law is no law at all. 3. Legal realism: Who enforces the law is more important than what the law says.

(pp. 11–13)

3. Result: The Securities Act of 1933 is a statute.

4. Result: The government will prosecute Bill for dealing in drugs. If convicted, he will go

to prison. The government will take no interest in Diane’s dispute. However, if she chooses,

she may sue Freddy for $500, the amount he promised her for the water. In that civil lawsuit,

a court will decide whether Freddy must pay what he promised; however, even if Freddy

loses, he will not go to jail.

MULTIPLE-CHOICE QUESTIONS 1. The United States Constitution is among the finest legal accomplishments in the

history of the world. Which of the following influenced Benjamin Franklin, Thomas

Jefferson, and the rest of the Founding Fathers?

(a) English common law principles

(b) the Iroquois’s system of federalism

(c) Both (a) and (b)

(d) None of the above

E X A M

S tr

a te

g y

CHAPTER 1 Introduction to Law 19

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

2. Which of the following parts of the modern legal system are “borrowed” from medieval England?

(a) Jury trials

(b) Special rules for selling land

(c) Following precedent

(d) All of the above

3. Union organizers at a hospital wanted to distribute leaflets to potential union members, but hospital rules prohibited leafleting in areas of patient care, hallways,

cafeterias, and any areas open to the public. The National Labor Relations Board,

a government agency, ruled that these restrictions violated the law and ordered the

hospital to permit the activities in the cafeteria and coffee shop. What kind of law

was it creating?

(a) A statute

(b) Common law

(c) A constitutional amendment

(d) Administrative regulation

4. If the Congress creates a new statute with the President’s support, it must pass the idea by a___majority vote in the House and the Senate. If the President vetoes a

proposed statute and the Congress wishes to pass it without his support, the idea must

pass by a___majority vote in the House and Senate.

(a) simple; simple

(b) simple; two-thirds

(c) simple; three-fourths

(d) two-thirds; three-fourths

5. What part of the Constitution addresses the most basic liberties?

(a) Article I

(b) Article II

(c) Article III

(d) Amendments

ESSAY QUESTIONS 1. Burglar Bob breaks into Vince Victim’s house. Bob steals a flat-screen television

and laptop and does a significant amount of damage to the property before he

leaves. Fortunately, Vince has a state-of-the-art security system. It captures

excellent images of Bob, who is soon caught by police. Assume that two legal

actions follow, one civil and one criminal. Who will be responsible for bringing

the civil case? What will be the outcome if the jury believes that Bob burgled

Vince’s house? Who will be responsible for bringing the criminal case? What

will be the outcome if the jury believes that Bob burgled Vince’s house?

20 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

2. As “The Oculist’s Case” indicates, the medical profession has faced a large number of lawsuits for centuries. In Texas, a law provides that, so long as a doctor was not

reckless and did not intentionally harm a patient, recovery for “pain and suffering”

is limited to $750,000. In many other states, no such limit exists. If a patient will suffer

a lifetime of pain after a botched operation, for example, he might recover millions

in compensation. Which rule seems more sensible to you—the “Texas” rule or the

alternative?

3. YOU BE THE JUDGE WRITING PROBLEM Should trials be televised? Here are a few arguments on both sides of the issue. You be the judge. Arguments against live television coverage: We have tried this experiment and it has failed. Trials fall into two categories: those that create great public interest and those that do not.

No one watches dull trials, so we do not need to broadcast them. The few that are

interesting have all become circuses. Judges and lawyers have shown that they cannot

resist the temptation to play to the camera. Trials are supposed to be about justice,

not entertainment. If a citizen seriously wants to follow a case, she can do it by reading

the daily newspaper. Arguments for live television coverage: It is true that some televised trials have been unseemly affairs, but that is the fault of the presiding

judges, not the media. Indeed, one of the virtues of television coverage is that

millions of people now understand that we have a lot of incompetent people running

our courtrooms. The proper response is to train judges to run a tight trial by

prohibiting grandstanding by lawyers. Access to accurate information is the foundation

on which a democracy is built, and we must not eliminate a source of valuable data

just because some judges are ill-trained or otherwise incompetent.

4. Leslie Bergh and his two brothers, Milton and Raymond, formed a partnership to help build a fancy saloon and dance hall in Evanston, Wyoming. Later, Leslie met

with his friend and drinking buddy, John Mills, and tricked Mills into investing in the

saloon. Leslie did not tell Mills that no one else was investing cash or that the

entire enterprise was already bankrupt. Mills mortgaged his home, invested $150,000

in the saloon—and lost every penny of it. Mills sued all three partners for fraud.

Milton and Raymond defended on the grounds that they did not commit the fraud;

only Leslie did. The defendants lost. Was that fair? By holding them liable, what

general idea did the court rely on? What Anglo-Saxon legal custom did the ruling

resemble?

5. Kuehn v. Pub Zone and Soldano v. O’Daniels both involve attacks in a bar. Should they have the same result? If so, in which way—in favor of the injured plaintiffs or owner-

defendants? If not, why should they have different outcomes? What are the key facts

that lead you to believe as you do?

DISCUSSION QUESTIONS 1. Do you believe that there are too many lawsuits in the

United States? If so, do you place more blame for the

problem on lawyers or on individuals who go to court?

Is there anything that would help the problem, or will

we always have large numbers of lawsuits?

2. In the 1980s, the Supreme Court ruled that it is legal for protesters to burn the American flag.

This activity counts as free speech under

the Constitution. If the Court hears a

new flag-burning case in this decade, should

it consider changing its ruling, or should it

follow precedent? Is following past precedent

something that seems sensible to you:

always, usually, sometimes, rarely, or never?

CHAPTER 1 Introduction to Law 21

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3. When should a business be held legally responsible for customer safety? Consider the following

statements, and consider the degree to which you

agree or disagree:

• A business should keep customers safe from its own employees.

• A business should keep customers safe from other customers.

• A business should keep customers safe from themselves. (Example: an intoxicated customer who can no longer walk straight.)

• A business should keep people outside its own establishment safe if it is reasonable to do so.

4. In his most famous novel, The Red and the Black, the French author Stendhal (1783–1842) wrote:

“There is no such thing as ‘natural law’: this

expression is nothing but old nonsense. Prior to

laws, what is natural is only the strength of the lion,

or the need of the creature suffering from hunger

or cold, in short, need.” What do you think? Does

legal positivism or legal realism seem more

sensible to you?

5. At the time of this writing, voters are particularly disgruntled. A good many people seem to be

disgusted with government. For this question, we

intentionally avoid distinguishing between

Democrats and Republicans, and we intentionally

do not name any particular President. Consider the

following statements, and consider the degree to

which you agree or disagree:

• I believe that members of Congress usually try to do the right thing for America.

• I believe that Presidents usually try to do the right thing for America.

• I believe that Supreme Court justices usually try to do the right thing for America.

22 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 2 ETHICS AND CORPORATE SOCIAL RESPONSIBILITY Eating is one of life’s most fundamental needs and

greatest pleasures. Yet all around the world many

people go to bed hungry. Food companies have

played an important role in reducing hunger by producing vast quantities of food cheaply.

So much food, so cheaply that, in America, one in three adults and one in five children are obese.

Some critics argue that food companies bear responsibility for this overeating because they make

their products too alluring. Many processed food products are calorie bombs of fat (which is linked to heart disease), sugar (leading to diabetes), and salt (causing high blood pressure). What

obligation do food producers and restaurants have to their customers? After all, no one is forcing

anyone to eat. Do any of the following examples cross the line into unethical behavior?

1. Increasing Addiction. Food with high levels of fat, sugar, and salt not only taste better,

they are also more addictive to consumers. Food processors hire neuroscientists who

perform MRIs on consumers to gauge the precise

level of fat, sugar, and salt that will create the most

powerful cravings, the so-called bliss point. To take

one example, in some Prego tomato sauces, sugar is

the second most important ingredient after

tomatoes. Did you know you were getting a large

dose of sugar with your pasta?

2. Increasing Quantity. Food companies also work hard

to create new categories of products that increase the

number of times a day that people eat and the amount

of calories in each session. For example, they have

created a new category of food that is meant to be more than a snack but less than a meal,

such as Hot Pockets. But some versions of this product have more than 700 calories, which

Food with high levels of fat, sugar and salt not

only taste better, they are also more addictive to

consumers.

n u tt a ki t/ S h u tt e rs to ck .c o m ; ©

S ta s V o li k/ S h u tt e rs to ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

would be a lot for lunch, never mind for just a snack. And candy companies

carefully package their products to encourage consumers to nibble all day.

For example, when Hershey’s learned that the wrappers on a Reese’s

Peanut Butter Cup act as a deterrent to nonstop eating, the company

created Reese’s minis, which are unwrapped candies in a resealable bag.

Feel free to chow down!

Food executives argue that they are just providing what consumers want.

3. Increasing Calories. Uno Chicago Grill serves a macaroni and cheese

dish that, by itself, provides more than two-thirds of the calories that a

moderately active man should eat in one day, and almost three times

the amount of saturated fat. But this dish is at least food. Dunkin Donuts offers a Frozen Caramel Coffee Coolatta with more than one-

third the calories that a male should have in a day and 50 percent more

saturated fat. Of course, these items are even worse choices for women

and children. Should restaurants serve items such as these? If they do,

what disclosure should they make?

4. Targeting Children. Kraft Food developed Lunchables, packaged food

designed for children to take to school. The first version contained

bologna, cheese, crackers, and candy—all of which delivered unhealthy

levels of fat, sugar, and salt. The company lured children by advertising

on Saturday morning cartoons.

5. Targeting the Poor. Traditionally, Coca Cola focused its marketing

efforts on low-income areas in the United States. It then took this effort

overseas, selling Coke in the slums of Brazil. One of its strategies is to

provide small bottles that cost only 20 cents. Said Jeffrey Dunn, the

former president and chief operating officer for Coca Cola in North and

South America, “These people need a lot of things, but they don’t

need a Coke. I almost threw up.” 1 When Dunn tried to develop more

healthful strategies for Coke, he was fired.

2-1 INTRODUCTION This text, for the most part, covers legal ideas. The law dictates how a person must behave. This chapter examines ethics, or how people should behave. Any choice that affects people or animals is an ethics decision. This chapter will explore ethical dilemmas that commonly arise in workplaces, and present tools for making decisions when the law does not require or

prohibit any particular choice.

Ethics decision Any choice that affects people or animals.

Ethics How people should behave.

1 Michael Moss, “The Extraordinary Science of Addictive Junk Food,” New York Times, February 20, 2013.

24 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

If a person is intent on lying, cheating, and stealing his way through a career, then he is

unlikely to be dissuaded by anything in this or any other course. But for the large majority of

people who want to do the right thing, it is useful to study new ways of approaching difficult

problems.

Laws represent society’s view of basic ethical rules. And most people agree that certain

activities such as murder, assault, and fraud are wrong. However, laws may permit behavior that some feel is wrong, and it may criminalize acts that some feel are right. For example, assisted suicide is legal in a few states. Some people believe that it is wrong under all

circumstances, while others think that it is the right thing to do for someone suffering horribly

from a terminal illness. Likewise, many people feel that it is ethical to record videos of farm

animals being mistreated, although some states now prohibit secret videotaping on farms.

In this chapter, the usual legal cases are replaced by Ethics Cases with discussion

questions. The goal of these scenarios is to generate classroom debates on right and wrong.

It is important for everyone to hear a variety of different points of view. In your career, you

will work with and manage diverse groups of people, so it is good to have insight into how

different people perceive ethical issues.

We also hope that hearing these various points of view will help you develop your own

Life Principles. These principles are the rules by which you live your life. As we will see,

research shows that people who think about the right rules for living are less likely to do

wrong. Developing your own Life Principles, based on your values, may be the most

important outcome of reading this chapter and studying ethics.

How do you go about preparing a list of Life Principles? Think first of important

categories. A list of Life Principles should include your rules on:

• Lying

• Stealing

• Cheating

• Applying the same or different standards at home and at work

• Your responsibility as a bystander when you see other people doing wrong

Specific is better than general. Many people say, for example, that they will maintain a

healthy work life balance, but such a vow is not as effective as promising to set aside certain

specific times each week for family activities. Many religions honor the Sabbath for this

reason. Another common Life Principle is: “I will always put my family first.” But what does

that mean? That you are willing to engage in unethical behavior at work to make sure that

you keep your job? Increase your income by cheating everyone you can? Or live your life so

that you serve as a good example?

Some Life Principles focus not so much on right versus wrong but rather serve as a

general guide for living a happier, more engaged life: I will keep promises, forgive those

who harm me, say I’m sorry, appreciate my blessings every day, understand the other

person’s point of view, try to say “yes” when asked for a favor.

Remember that, no matter what you say, every ethics decision you make illustrates your actual Life Principles. For example, one MBA student told the story of how his boss had ordered him to cheat on his expense report. The company did not require any receipts for

meals that cost less than $25. He and his fellow salespeople ate at fast food restaurants

where it was almost impossible to spend $25. Everyone else was reporting a lot of $24 meals

while he was submitting bills for $12. His boss told him he was making everyone else look

bad and he needed to increase the amounts he claimed. What is your Life Principle in this

case? Understand that if you cheat in this situation, your Life Principle is effectively: I am

willing to cheat if it involves small sums or I am willing to cheat if I am unlikely to get

caught. An alternative would be: I won’t cheat even if my boss tells me to—I’ll look for

another job instead.

CHAPTER 2 Ethics and Corporate Social Responsibility 25

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

It is important to think through your Life Principles now, so that you will be prepared

when facing ethical dilemmas in the future.

In this chapter, we will present eight topics:

1. The Role of Business in Society

2. Why Be Ethical?

3. Theories of Ethics

4. Ethics Traps

5. Lying

6. Applying the Principles

7. When the Going Gets Tough (responding to unethical behavior)

8. Corporate Social Responsibility

2-2 THE ROLE OF BUSINESS IN SOCIETY Nobel Prize-winning economist Milton Friedman is famous for arguing that a corporate

manager’s primary responsibility is to the owners of the organization, that is, to shareholders.

Unless the owners explicitly provide otherwise, managers should make the company as

profitable as possible while also complying with the law. 2

Others have argued that corporations should instead consider all company stakeholders,

not just the shareholders. Stakeholders include employees, customers, and the communities

and countries in which a company operates. This choice can create an obligation to such

broad categories as “society” or “the environment.” For example, after the shooting in

Newtown, Connecticut, in which 20 first-graders and 6 educators were murdered, General

Electric Co. stopped lending money to shops that sell guns. GE headquarters are near

Newtown. Many of its employees lived in the area, and some had children in the Sandy

Hook Elementary School where the shooting took place. In this case, GE was putting its

employees ahead of its investors.

Every executive will treat employees well if she believes that doing so leads to

increased profits. All executives are in favor of giving money to charity if the donation

improves the company’s image and thereby increases profits enough to pay for itself. But

such win-win cases are not ethical dilemmas. In a true dilemma, a company considers an

action that would not increase shareholder returns in any certain or measureable way but

would benefit other stakeholders. Neither side is obviously right in the sense that everyone

agrees or that the law requires one particular outcome.

As we will see in this chapter, managers face many choices in which the most profitable

option is not the most ethical choice. For example, Michael Mudd, a former executive vice

president of global corporate affairs for Kraft Foods, had this to say about his fellow

executives:

In so many other ways, these are good people. But, little by little, they strayed from the honorable

business of feeding people appropriately to the deplorable mission of “increasing shareholder value”

by enticing people to consume more and more high-margin, low-nutrition branded products. 3

2 He also mentions that managers should comply with “ethical custom” but never explains what that

means. Milton Friedman, New York Times Magazine, September 13, 1970. 3 Michael Moss, “How to Force Ethics on the Food Industry,” New York Times, March 16, 2013.

26 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Of course, when profitability increases and, with it, a company’s stock price, managers

also benefit because their compensation is often tied to corporate results, either explicitly

or through ownership of stock and options. Thus, managers who say that they are just acting

in the best interest of shareholders are also conveniently benefiting themselves. That

connection creates an incentive to ignore stakeholders.

Conversely, doing the right thing will sometimes lead to a loss of profits or even one’s

job. For example, Hugh Aaron worked for a company that sold plastic materials. 4 One of

the firm’s major clients hired a new purchasing agent who refused to buy any product

unless he was provided with expensive gifts, paid vacations, and sex. When Aaron refused

to comply with these requests, the man bought from someone else. And that was that—

the two companies never did business again. Aaron did not regret his choice—he believed

that his employees’ self-respect was as important as profits. But if your only concern is maximizing your company’s profitability in the short run, you will find yourself in a

position of making unethical choices.

2-3 WHY BE ETHICAL? An ethical decision may not be the most profitable, but it does generate a range of benefits

for employees, companies, and society.

2-3a Society as a Whole Benefits from Ethical Behavior John Akers, the former chairman of IBM, argues that without ethical behavior, a society

cannot be economically competitive. He puts it this way:

Ethics and competitiveness are inseparable. We compete as a society. No society anywhere will

compete very long or successfully with people stabbing each other in the back; with people trying

to steal from each other; with everything requiring notarized confirmation because you can’t trust

the other fellow; with every little squabble ending in litigation; and with government writing

reams of regulatory legislation, tying business hand and foot to keep it honest. That is a recipe not

only for headaches in running a company, but for a nation to become wasteful, inefficient, and

noncompetitive. There is no escaping this fact: the greater the measure of mutual trust and

confidence in the ethics of a society, the greater its economic strength. 5

In short, ethical behavior builds trust, which is important in all of our relationships. It is

the ingredient that allows us to live and work together happily.

2-3b People Feel Better When They Behave Ethically Every businessperson has many opportunities to be dishonest. But each of us must ask

ourselves: What kind of person do we want to be? In what kind of world do we want to live?

You might think about how you would like people who know you to describe you to others.

Managers want to feel good about themselves and the decisions they have made; they

want to sleep well at night. Their decisions—to lay off employees, install safety devices in

4 Virtually all of the examples in this chapter are true events involving real people. Only first names are

used if the person prefers privacy. Full names are used when the individual has consented or the

events are a matter of public record. 5 David Grier, “Confronting Ethical Dilemmas,” unpublished manuscript of remarks at the Royal Bank

of Canada, September 19, 1989.

CHAPTER 2 Ethics and Corporate Social Responsibility 27

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

cars, burn a cleaner fuel—affect people’s lives. And their unethical decisions are painful to

remember.

To take an example, an executive, whom we will call “Hank,” told a story that still haunts

him. His boss had refused to pay his tuition for an MBA program so Hank went over his head

and asked Sam, an executive several levels higher. Sam interceded immediately and person-

ally approved the tuition reimbursement. He then took Hank under his wing, checking with

him regularly to find out how the program and his work were going. Naturally, Hank felt

grateful and indebted. Then one day, some other higher ups told him that they were planning

a coup against Sam. They were trying to get him fired in a complete blindside. They offered

Hank a big promotion in return for his help. All went according to plan and Sam was fired.

When Sam found out about Hank’s betrayal, he called to tell the younger man exactly what

he thought of his character. Hank said that he will carry that phone call and his guilt forever.

And because he was so untrustworthy, he finds it hard to trust others.

2-3c Unethical Behavior Can Be Very Costly Unethical behavior is a risky business strategy—it can harm not only the bad actors but

entire industries and even countries. For example, when VIPshop recently offered its shares

publicly in the United States, they plummeted in price. This was the first Chinese company

to go public in the United States in nine months, since a series of accounting frauds in other

Chinese companies had caused billions of dollars in losses. Although VIPshop had done

nothing wrong, investors were skeptical of all Chinese companies. Although unethical decisions may increase short-term profits, they can create a lot of long-

term harm. Johnson & Johnson (J&J) manufactured a new artificial hip that had more metal

parts than the old version. In theory, the hip would last longer and thereby let the patient avoid

difficult replacement surgery. But the theory turned out to be wrong. The two parts ground

together, releasing microscopic bits of metal that not only failed quickly but also irreparably

damaged the patient’s bone and tissue. Even when Johnson & Johnson (J&J) had data from an

English surgeon revealing these problems, it denied and stonewalled while continuing to sell

the product. J&J now faces over 10,000 lawsuits. The company has not only taken a $3 billion

charge in its financial statements to cover legal and medical costs, it finds its reputation sullied.

What is the cost of a lost reputation? Research indicates that consumers are willing to pay more

for a product that they believe to be ethically produced. And much less if they believe it was made

using shoddy ethical practices. 6 Unethical behavior can also cause other, subtler damage. In one

survey, a majority of those questioned said that they had witnessed unethical behavior in their

workplace and that this behavior had reduced productivity, job stability, and profits. Unethical

behavior in an organization creates a cynical, resentful, and unproductive workforce.

Although there is no guarantee that ethical behavior pays in the short or long run, there is evidence that the ethical company is more likely to win financially. Ethical companies tend to have a better reputation, more creative employees, and higher returns than those that

engage in wrongdoing. 7

But if we decide that we want to behave ethically, how do we know what ethical behavior is?

2-4 THEORIES OF ETHICS When making ethical decisions, people sometimes focus on the reason for the decision—

they want to do what is right. Thus, if they think it is wrong to lie, then they will tell the

truth no matter what the consequence. Other times, people think about the outcome

6 Remi Trudel and June Cotte, “Does it Pay to Be Good,” Sloan Management Review, January 8, 2009.

7 For sources, see “Ethics: A Basic Framework,” Harvard Business School case 9-307-059.

28 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

of their actions. They will do whatever it takes to achieve the right result, no matter what.

This choice—between doing right and getting the right result—has been the subject of

much philosophical debate.

2-4a Utilitarian Ethics In 1863, Englishman John Stuart Mill wrote Utilitarianism. To Mill, a correct decision was one that would maximize overall happiness and minimize overall pain, thereby producing the greatest net benefit. As he put it, his goal was to produce the greatest good for the greatest number of people. Risk management and cost-benefit analyses are examples of

utilitarian business practices.

Suppose that an automobile manufacturer could add a device to its cars that would

reduce air pollution. As a result, the incidence of strokes and lung cancer would decline

dramatically, saving society hundreds of millions of dollars over the life of the cars. But by

charging a higher price to cover the cost of the device, the company would sell fewer cars

and shareholders would earn lower returns. A utilitarian would argue that, despite the

decline in profits, the company should install the device.

Consider this example that a student told us:

During college, I used drugs—some cocaine, but mostly prescription painkillers. Things got pretty

bad. At one point, I would wait outside emergency rooms hoping to buy drugs from people who

were leaving. But that was three years ago. I went into rehab and have been clean ever since.

I don’t even drink. I’ve applied for a job, but the application asks if I have ever used drugs illegally.

I am afraid that if I tell the truth, I will never get a job. What should I say on the application?

A utilitarian would ask: What harm will be caused if she tells the truth? She will be less

likely to get that job, or maybe any job—a large and immediate harm. What if she lies? She

might argue that no harm would result because she is now clean, and her past drug addiction

will not have an adverse impact on her new employer.

There are many critics of utilitarian thought. Some argue that it is very difficult to measure utility accurately, at least in the way that one would measure distance or the passage of time.

The car company does not really know how many lives will be saved or how much its profits

might decline if the device is installed. It is also difficult to predict benefit and harm accurately. The recovered drug addict may relapse, or her employer may find out about her lie.

A focus on outcome can justify some really terrible behavior. Among other things, it can

be used to legitimize torture. After the 9/11 terrorist attacks, Americans debated the

acceptability of torture. Is it ethical to torture a terrorist with the hope of obtaining the

details of an upcoming attack?

Or suppose that wealthy old Ebenezer has several chronic illnesses that cause him great

suffering and prevent him from doing any of the activities that once gave meaning to his

life. Also, he is such a nasty piece of work that everyone who knows him hates him. If he

were to die, all his heirs would benefit tremendously from the money that they inherited

from him, including a disabled grandchild who then could afford medical care that would

improve his life dramatically. Would it be ethical to kill Ebenezer?

2-4b Deontological Ethics The word deontological comes from the Greek word for obligation. Proponents of deontological ethics believe that utilitarians have it all wrong and that the results of a decision are not as important as the reason for which it is made. To a deontological thinker, the ends do not justify the means. Rather, it is important to do the right thing, no matter the result.

The best-known proponent of the deontological model was the eighteenth-century

German philosopher Immanuel Kant. He believed in what he called the categorical imperative. He argued that you should not do something unless you would be willing to have everyone else do it, too. Applying this idea, he concluded that one should always tell

Deontological From the Greek word for obligation. The duty to do the right thing, regardless of the result.

Kant’s categorical imperative An act is only ethical if it would be acceptable for everyone to do the same thing.

CHAPTER 2 Ethics and Corporate Social Responsibility 29

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

the truth because if everyone lied, the world would become an awful place. Thus, Kant would say that the drug user should tell the truth on job applications, even if that meant she could

not find work. The truth should be told, no matter the outcome.

Kant also believed that human beings possess a unique dignity and that no decision that

treats people as commodities could be considered just, even if the decision tended to

maximize overall happiness, or profit, or any other quantifiable measure. Thus, Kant would

argue against killing Ebenezer, no matter how unpleasant the man was.

Although many people disagree with some of Kant’s specific ideas, most people do

acknowledge that a utilitarian approach is incomplete, and that winning in the end does not

automatically make a decision right.

2-4c Rawlsian Justice How did you manage to get into college or graduate school? Presumably due to some

combination of talent, hard work, and support from family and friends. Imagine that you had

been born into different circumstances—say, a country where the literacy rate is only 25

percent and almost all of the population lives in desperate poverty. Would you be reading

this book now? Most likely not. People are born with wildly different talents into very

different circumstances, all of which dramatically affect their outcomes.

John Rawls (1921–2002) was an American philosopher who referred to these circum-

stances into which we are born as life prospects. In his view, hard work certainly matters, but so does luck. Rawls argued that we should think about what rules for society we would

propose if we faced a “veil of ignorance.” In other words, suppose that there is going to be a lottery tomorrow that would determine all our attributes. We could be a winner, ending up a

hugely talented, healthy person in a loving family, or we could be the most miserable person

on the face of the earth.

What type of society would we establish now, if we did not know whether we would

be one of life’s winners or losers? First, we would design some form of a democratic

system that provided equal liberty to all and important rights such as freedom of speech

and religion. Second, we would apply the difference principle. Under this principle we would not plan a system in which everyone received an equal income because society is better off if people have an incentive to work hard. But we would reward the type of work

that provides the most benefit to the community as a whole. We might decide, for

example, to pay doctors more than baseball players. But maybe not all doctors—perhaps just the ones who research cancer cures or provide care for the poor, not cosmetic surgeons

operating on the affluent. Rawls argues that everyone should have the opportunity to earn

great wealth so long as the tax system provides enough revenue to provide decent health,

education, and welfare for all. In thinking about ethical decisions, it is worth remembering

that many of us have been winners in life’s lottery and that the unlucky are deserving of

our compassion.

2-4d Front Page Test There you are, trying to decide what to do in a difficult situation. How would you feel if your

actions were going to be reported on the Huffington Post, your Facebook page, the front page

of a national newspaper or would be tweeted to all of your followers? Would that help you

decide what to do? Would such exposure have caused Hank to tell Sam about the planned

coup? Make the Johnson & Johnson executives manage their hip implant differently?

The Front Page test is not completely foolproof—there are times you might want to do

something private for legitimate reasons. You might, for example, think that having an

abortion is completely ethical, but still not want everyone to know. Or, if you live in a state

that prohibits the videotaping of mistreated farm animals, you would not want everyone to

know that you had done so, even if you thought it the right thing to do.

Difference principle Rawls’ suggestion that society should reward behavior that provides the most benefit to the community as a whole.

Life prospects The opportunities one has at birth, based on one’s natural attributes and initial place in society.

“Veil of ignorance” The rules for society that we would propose if we did not know how lucky we would be in life's lottery.

30 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

^ Ethics Case: Lincoln at War ^ In 1865, toward the end of the American civil war, President Abraham Lincoln had to

choose between two rival goals: an immediate end to a devastating, bloody war or a change

to the Constitution that would make slavery illegal. If he ended the war immediately, the

Southern states would return to the Union and then be eligible to vote on the anti-slavery

amendment. They would have enough votes to defeat it. He ultimately decided to delay

peace with the South, a decision that cost thousands of lives.

To obtain the votes he needed, Lincoln did whatever it took. He figured out how to

win over each individual Congressman, appealing to one man’s sense of idealism, another’s

greed. He made threats and promises, handed out jobs and cash. And, in the end, he

succeeded in ending the barbarous practice of slavery. 8

QUESTIONS

• What would Mill, Kant, and Rawls have said about Lincoln’s actions?

• What would have been the result if Lincoln had applied the Front Page test?

• Lincoln risked people’s lives for his principles and made decisions that affected millions. Can you think of a similar scenario in a business context?

2-5 ETHICS TRAPS Very few people wake up one morning and think, “Today I’ll do something unethical.”

Then why do so many unethical things happen? Sometimes our brains trick us into

believing wrong is right. It is important to understand the ethics traps that create great

temptation to do what we know to be wrong or fail to do what we know to be right.

2-5a Money Money is a powerful lure because most people believe that they would be happier if only

they had more. But that is not necessarily true. Good health, companionship, and enjoyable

leisure activities all contribute more to happiness than money does. And, regardless of

income, 85 percent of Americans feel happy on a day-to-day basis anyway.

Money can, of course, provide some protection against the inevitable bumps in the road of life. Being hungry is no fun. If you lose your winter coat, you will be happier if you can

replace it. It is easier to maintain friendships if you can afford to go out together occasion-

ally. So money can contribute to happiness, but research indicates that this impact disap-

pears when household income exceeds $75,000. Above that level, income seems to have

no impact on day-to-day happiness. Indeed, there is some evidence that higher income

levels actually reduce the ability to appreciate small pleasures. Interestingly, too, people who come into a windfall are happier if they spend it on others or save it rather than blowing

it in a spree. 9

Money is also a way of keeping score. If my company pays me more, that must mean

I am a better employee. So although an increase in income above $75,000 does not affect

8 The Steven Spielberg movie Lincoln illustrates this process.

9 Elizabeth Dunn and Michael Norton, “Don’t Indulge, Be Happy,” New York Times, July 8, 2012; and Daniel Kahneman and Angus Deaton, “High Income Improves Evaluation of Life but not Emotional

Well-Being,” Proceedings of the National Academy of Sciences of the United States of America, August 4, 2010.

CHAPTER 2 Ethics and Corporate Social Responsibility 31

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

day-to-day happiness, higher pay can make people feel more satisfied with their lives. They consider themselves more successful and feel that their life is going better.

In short, the relationship between money and happiness is complicated. Above a certain

level, more money does not make for more day-to-day happiness. Higher pay can increase

general satisfaction with life but when people work so hard or so dishonestly that their

health, friendships, and leisure activities suffer, it has the reverse effect.

2-5b Rationalization A recent study found that more creative people tend to be less ethical. The reason? They

are better at rationalizing their bad behavior. Virtually any foul deed can be rationalized.

Some common rationalizations:

• If I don’t do it, someone else will.

• I deserve this because…

• They had it coming.

• I am not harming a person—it is just a big company.

• This is someone else’s responsibility.

For example, Dan Ariely has found in his ground-breaking research that almost every-

one is willing to cheat, just a little. That is because we want to maximize results (and

enhance our belief in how smart we are) but we also want to think of ourselves as being

honest. If we cheat—just a little—then we can tell ourselves that it does not really count.

Ariely did an experiment in which people were asked to solve math problems and he paid

them for each correct answer. When participants knew that he was going to check their

results, they averaged four correct answers. But when they were allowed to self-report the

number they got correct, suddenly people averaged six correct answers. 10

You can imagine

how they might have rationalized that behavior—“I was close on this one. I normally would

have gotten that one right. Today was an off day for me.” Surprisingly, when the partici-

pants were paid a lot for each correct answer ($10 as opposed to $0.50), they cheated less. Presumably, they would have felt worse about themselves if they stole a lot of money rather

than a little.

To take a real example, the gift shop at the Kennedy Center for the Performing Arts in

Washington, D.C., was mostly run by elderly volunteers. The shop had revenues of $400,000 a

year, but someone was stealing $150,000 of that. It turned out there was not one thief. Instead,

dozens of volunteers were each stealing a little bit, which added up. These people felt good

about themselves for being volunteers so they thought that stealing a little was fine. 11

Rationalization allows us to expect less of ourselves than we do other people. When we

do something wrong, we are creative at explaining why it did not really count. For example,

participants in a study were put in the position of deciding whether they or someone else

got an easy assignment. When asked in the abstract what would be a fair method for

assigning tasks, everyone said that the computer should make the assignments randomly.

But when another group of people was actually given the authority to decide, three quarters

ignored the computer option and just assigned themselves the easy jobs. And then they

rated themselves high on a fairness scale. 12

In making a decision that affects you, it is

important to remember that you are unlikely to be objective.

10 Dan Ariely, “Why We Lie,” Wall Street Journal, May 26, 2012.

11 David Brooks, “The Moral Diet,” New York Times, June 7, 2012.

12 John Tierney, “Deep Down, We Can’t Fool Even Ourselves,” New York Times, July 1, 2008.

32 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

2-5c Conformity Warren Buffett has been quoted as saying, “The five most dangerous words in business may

be: ‘Everybody else is doing it.’ ” Humans are social animals who are often willing to follow

the leader, even to a place where they do not really want to go. If all the salespeople in a

company cheat on their expense accounts, a new hire is much more likely to view this

behavior as acceptable.

^ Ethics Case: Diamonds in the Rough ^ When Orlanda graduated from college, she got a job as a software engineer in Silicon Valley.

After two years working in technical support, one of her customers offered her a job at his

company. It turned out that her new firm was in shambles but, after months of killer hours, she

managed to get the company on a better path. One of her biggest accomplishments was to help

a major supplier solve its technical problems so that its product would work reliably. On her

birthday, her contact at the supplier (who was a friend of her boss) gave her a diamond watch.

Her company had no policy on accepting gifts, so she kept it. Afterwards, she realized that she

was spending even more time working on this supplier’s issues. But, she said to herself, this was

good for her company, too. Also, no one at her company had high ethical standards anyway.

Some months later, the same supplier offered to buy her a diamond necklace if she

would make his company a preferred supplier. He said the necklace would look just like the

one he had given her boss.

QUESTIONS

1. What ethics traps is Orlanda facing?

2. Is there anything wrong with accepting these gifts?

2-5d Following Orders When someone in authority issues orders, even to do some-

thing clearly wrong, it is very tempting to comply. Fear of

punishment, the belief in authority figures, and the ability to

rationalize all play a role. In a true story (with the facts dis-

guised), Amanda worked at a private school that was struggling

to pay its bills. As a result, it kept the lights turned off in the

hallways. On a particularly cloudy day, a visitor tripped and fell

in one of these darkened passages. When he sued, the princi-

pal told Amanda to lie on the witness stand and say that the

lights had been on. The school’s lawyer reinforced this advice.

Amanda did as she was told. When asked why, she said,

“I figured it must be the right thing to do if the lawyer said

so. Also, if I hadn’t lied, the principal would have fired me,

and I might not have been able to get another job in teaching.”

It seems likely that you will be faced many times with the dilemma of a boss who orders

you to do something wrong. Executives have told us that they have been ordered to:

• Misrepresent data in a presentation to the board (so the boss could take on a project that was not as profitable as it should have been)

• Avoid hiring certain ethnic groups or pregnant women

• “Smooth” numbers, that is, report sales that had not, actually, taken place yet

• Support the boss’ position, even if it was clearly wrong

“File sharing” sounds friendly and helpful—it has a very different ring than “stealing intellectual property,” which is what

it really is.

CHAPTER 2 Ethics and Corporate Social Responsibility 33

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Be aware, too, that setting goals for your subordinates carries risks. Especially if the

goals are too narrowly focused. A law firm partner once said, “If we tell associates they have

to bill 2,000 hours a year, they will bill 2,000 hours. Whether they will work 2,000 hours is another matter.” Research supports this view. Participants in an experiment were more

likely to cheat if they had been assigned specific goals, whether or not they were actually

being paid for meeting the targets. 13

As you might expect, employees who work for firms with a culture of blind obedience

are twice as likely to report having seen unethical behavior as are workers at companies with

a more collaborative environment. 14

2-5e Euphemisms To “smooth earnings” sounds a lot better than to “cook the books” or “commit fraud.” And

“file sharing” sounds friendly and helpful—it has a very different ring from “stealing

intellectual property,” which is what it really is. In making ethical decisions, it is important

to use accurate terminology. Anything else is just a variation on rationalization.

2-5f Lost in a Crowd After being struck by a car, a two-year-old child lies at the side of the road as people walk

and ride by. No one stops to help, and the child dies. On a busy street, a man picks up a

seven-year-old girl and carries her away while she screams, “You’re not my dad—someone

help me!” No one responds. The first incident was real; the second one was a test staged

by a news station. It took hours and many repetitions before anyone tried to prevent

the abduction.

When in a group, people are less likely to take responsibility, because they assume

(hope?) that someone else will. They tend to check the reactions of others, and if everyone

else seems calm, they assume that all is right. Bystanders are much more likely to react if

they are alone and have to form an independent judgment.

Thus, in a business, if everyone is cheating on their expense accounts, smoothing

earnings, or sexually harassing the staff, it is tempting to go with the flow rather than

protest the wrongdoing. In the example about food companies that began this chapter,

one former executive says that producers shrug off responsibility for obesity in America

by pointing to all the “other” causes: a car culture; too much screen time; less outdoor

play; fewer women at home to cook. And, Americans spend half of their food money

outside the home anyway.

^ Ethics Case: Train Spotting ^ Wesley Autrey was standing on a train platform with his two young daughters and a man he

did not know. Suddenly, this man had a seizure, causing him to fall on the tracks. Autrey

could hear a train approaching so he knew he had only seconds to act. Leaping on to

the track, he pulled the man between the rails and lay on top of him to protect him from

the train. The train engineer tried to stop, but five cars passed over the two men. Both were

unharmed.

Some years later in New York City, a homeless man pushed Ki-Suck Han onto subway

tracks, in view of many people. No one reacted, except a photographer who took photos as

Han was killed by a train.

13 Alina Tugend, “Experts’ Advice to the Goal-Oriented: Don’t Overdo It,” New York Times, October 5,

2012. 14 “The view from the top and bottom,” The Economist, September 24, 2011.

34 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

QUESTIONS

• Why was Autrey more likely to act than the crowds watching Han?

• What are your ethical obligations to respond when someone needs help? Or you observe wrongdoing?

• Imagine that, at your work, you know that someone is:

� Lying on an expense account � Wrongly booking sales that have not yet occurred � Sexually harassing staff members

What is your ethical obligation? What would you do, under what circumstances?

2-5g Blind Spots As Bob Dylan memorably sang, “How many times can a man turn his head and

pretend that he just doesn’t see?” The answer is: a whole lot. For example, Bernard

Madoff will long be remembered for running one of the biggest frauds ever through

his brokerage house. One of the mysteries yet unresolved is: Who else knew what was

going on? His brother, Peter, was second in command at his brother’s firm. He

admitted that he had committed many crimes, including income tax evasion and filing

false documents with regulators. But he has always insisted that he had no idea his

brother was committing fraud.

And then there is the case of Barry Bonds, one of the greatest baseball players ever.

Although he quickly gained tremendous weight and muscle mass that was consistent with

the illegal use of steroids, neither his team nor baseball executives took any action against

him until the federal government began an investigation. (To see the change in Bonds’

physique, google “steroids, Barry Bonds.”)

Or a partner in a law firm was consistently billing 2,000+ hours a year. Yet he seemed to

have time to attend his children’s school functions in the middle of the day and was rarely in

the office early or late. Firm executives were shocked to discover that he had been over-

billing clients. 15

2-5h Avoiding Ethics Traps As we see from these ethics traps, circumstances affect our decision making. You are, for

example, more likely to act if alone rather than in a crowd.

Being in a hurry also makes a difference. A group of students at Princeton Theological

Seminary (i.e., people in training to be ministers) were told to go to a location across campus to

give a talk. On their walk over, they encountered a man lying in distress in a doorway. Only

one-tenth of those participants who had been told they were late for their talk stopped to help

the ill man while almost two-thirds of those who thought they had plenty of time did stop. 16

The topic of the talk also mattered. Those who were speaking on the Parable of the

Good Samaritan (in which a man offers aid to an injured person from a different clan) were

twice as likely to provide help than those who were giving a talk on careers for seminarians.

15 For more on this topic, see Max Bazerman and Ann Tenbrunsel, Blind Spots: Why We Fail to Do

What’s Right and What to Do about It (Princeton, NJ: Princeton University Press). 16 John M. Darley and Daniel C. Batson, “From Jerusalem to Jericho”: A study of situational and

dispositional variables in helping behavior,” Journal of Personality and Social Psychology 27, no.1 (July 1973): 100–108.

CHAPTER 2 Ethics and Corporate Social Responsibility 35

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Two thoughts about how to avoid ethics traps:

1. Do not trust your first instinct. Being in a hurry, or in a crowd, being able to rationalize easily, using euphemisms, doing what every else does, receiving an order,

being dazzled by money; these can all lead you to make a quick and wrong decision.

Test your initial reaction by asking whether you have fallen into any of these traps.

2. Remember your Life Principles. In his research, Ariely found that participants were less likely to cheat if they were reminded of their school honor code or the Ten

Commandments (the fundamental rules of both the Christian and Jewish religions).

This result was true even if the participants were atheists.

2-6 LYING: A SPECIAL CASE We are taught from an early age to tell the truth. Yet research shows that we tell

between one and two lies a day. 17

Is honesty the best policy? The consequences of

lying can be severe: students are suspended, employees are fired, and witnesses are

convicted of perjury. Sometimes the problems are subtler but still significant: a loss of

trust or of opportunities.

When is lying acceptable? If poker players bluff their way through lousy hands, we

consider them skilled because that is an accepted part of the game. What about white

lies to make others feel better: I love your lasagna. You’re not going bald. No, that

sweater doesn’t make you look fat. When Victoria McGrath suffered a terrible wound to

her leg in the Boston Marathon bombing, Tyler Dodd comforted her at the scene by

telling her that he had recovered from a shrapnel wound in Afghanistan. His story was

not true—he had never been in combat or Afghanistan. McGrath was grateful to him for

his lie because it gave her strength and hope. Was he right or wrong? What are your

rules on lying?

Kant felt that any lie violated his principle of the categorical imperative. Because the world would be intolerable if everyone lied all the time, no one should lie ever. He gave the

example of the murderer who knocks on your door and asks, “Where’s Lukas?” You know

Lukas is cowering just inside, but you might be tempted to lie and send the murderer off in

the opposite direction. Kant preferred that you tell what is now called a Kantian Evasion or a palter. That is, you would make a truthful statement that is nonetheless misleading. So, you might say, truthfully, “I saw Lukas in the park just an hour ago.” And off the murderer

would go.

Is a Kantian Evasion really more ethical than a lie? For example, when a candidate for

the presidency, Bill Clinton was asked if he had ever smoked marijuana. He answered that

he “never broke the laws of my state or of the United States.” Later, it was revealed that he

had used marijuana while a student in England. So, although technically correct, his

statement was misleading. Was that really better than lying about marijuana use?

What are your Life Principles on this issue? There may indeed be good reasons to lie

but what are they? Would it be right to say that you would only lie to benefit other people?

Lukas hiding from the murderer? Children who believe in Santa Claus? It is useful to

analyze this issue now rather than to rationalize later.

What about in business? Does the presence of competition make a difference? When do the ends justify the means?

Kantian evasion or palter A truthful statement that is nonetheless misleading.

17 Bella M. DePaulo, Deborah A. Kashy, Susan E. Kirkendol, and Melissa M. Wyer, “Lying in

Everyday Life,” Journal of Personality and Social Psychology 70, no. 5, (1996): 979–995.

36 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

^ Ethics Case: Truth (?) in Borrowing ^ Rob is in the business of buying dental practices. He finds solo practitioners, buys their

assets, signs them to a long-term contract and then improves their management and billing

processes so effectively that both he and the dentists are better off.

Rob has just found a great opportunity with a lot of potential profit. There is only one problem. The bank will not give him a loan to buy the practice without checking the

dentist’s financial record. Her credit rating is fine, but it turns out that she filed for bank-

ruptcy twenty years ago. That event no longer appears on her credit rating, but the bank

asked about bankruptcies on the form it required her to sign. She is perfectly willing to lie.

Rob refused to turn in the form with a lie. But when the bank learned about the bankruptcy,

it denied his loan even though her bankruptcy in no way affects his ability to pay the loan. And the incident is ancient history—the dentist’s current finances are strong. Four other

banks also refused to make the loan.

Rob is feeling pretty frustrated. He figures the return on this deal would be 20 percent.

Everyone would benefit—the dentist would earn more, her patients would have better

technology, he could afford a house in a better school district, and the bank would make a

profit. There is one more bank he could try.

QUESTIONS

1. Should Rob file loan documents with the bank, knowing the dentist has lied?

2. Who would be harmed by this lie?

3. What if Rob pays back the loan without incident, as he knew he would? Was what he

did wrong? Do the ends justify the means?

4. What is your Life Principle about telling lies? When is making a misrepresentation

acceptable? To protect someone’s life or physical safety? To protect a job?

To protect another person’s feelings? To gain an advantage? When others are

doing the same?

5. Do you have the same rule when lying to protect yourself, as opposed to others?

2-7 APPLYING THE PRINCIPLES Having thought about ethical principles and traps, let’s now practice applying them to

situations that are similar to those that you are likely to face in your life. Be aware that

some of these ethical dilemmas illustrate the tradeoff between shareholders and stake-

holders. Note also that sometimes the right decision will be obvious, but difficult to do

because of the risk or expense. Other times, the right answer is unclear, because someone

will be harmed no matter what choice you make. In both of these situations, it is important

to recognize explicitly the forces that push or pull you when making a decision. Unless you

are aware of these forces, you cannot make a truly informed decision.

2-7a Personal Ethics in the Workplace Should you behave in the workplace the way you do at home, or do you have a separate set

of ethics for each part of your life? What if your employees behave badly outside of work—

should that affect their employment? Consider the following case.

CHAPTER 2 Ethics and Corporate Social Responsibility 37

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

^ Ethics Case: No Sheen on Sheen ^ Charlie Sheen, who starred in the hit CBS television show Two and a Half Men, admitted to using large quantities of cocaine. He was hospitalized with drug overdoses and had been

charged with both misdemeanor and felony drug offenses, which led to probation several

times. When asked about entering rehab, he said that only losers go to recovery programs

and he could cure himself with his mind. He openly spent tens of thousands of dollars on

prostitutes. His second wife filed a restraining order against him, alleging that he had

pushed her down the stairs and threatened to kill her. He was also charged with a felony

for threatening his third wife. She claimed that he held a knife to her throat and said, “You

better be in fear. If you tell anybody, I’ll kill you.” Then there was the widely reported

incident in the Plaza Hotel in New York City in which the police escorted him to the

hospital after he trashed his room and threatened the prostitute whom he had hired—all

while his ex-wife and children slept in a room across the hall. Five months later, the police

removed his twin sons from his house after their mother obtained a restraining order. On a

radio show, Sheen made anti-Semitic comments about his boss, called him a clown and a

charlatan, and said that he “violently hated him.” This boss was the most successful

producer of comedy shows in the business.

QUESTIONS

1. If CBS fired Sheen from his television show, the network would lose tens of millions

of dollars. At what point, if any, should CBS have fired him? If not for this, then for

what?

2. Would you fire a warehouse worker who behaved this way? How much revenue does

an employee have to bring in to be able to buy his way out of bad behavior?

3. What would you say to someone who argues that the goal at work is to make as much

money as possible, but at home it is to be a kind and honorable human being?

4. What would Kant and Mill say is the right thing to do in this case? What result under

the Front Page Test?

5. What ethics traps did Sheen’s bosses face in this situation?

6. What is your Life Principle? What behavior are you willing to tolerate in the interest of

profitability?

2-7b The Organization’s Responsibility to Society Many products can potentially cause harm to customers or employees. Does it matter if the

customers and employees willingly accept exposure to these products? What constitutes

informed agreement? What is the company’s responsibility to those who are unwittingly

harmed by its products?

^ Ethics Case: Breathing the Fumes ^ Every other year, the National Institutes of Health publish the “Report on Carcinogens,”

which lists products that cause cancer. Among those in the most recent report was formal-

dehyde, found in furniture, cosmetics, building products, carpets, and fabric softeners.

Unless we take heroic efforts to avoid this chemical, we are all exposed to it when inside.

Indeed, almost all homes have formaldehyde levels that exceed government safety rules. In

an effort to shoot the messenger, the American Chemistry Council, which is an industry

38 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

trade group, lobbied Congress to cut off funding for the “Report on Carcinogens”—not

improve it, but defund it.

QUESTIONS

1. If you were one of the many companies using products that contain formaldehyde,

what would you do? What would you be willing to pay to provide a safer product?

2. If you were an executive at Exxon, Dow, or DuPont, all members of the American

Chemistry Council, what would you do?

3. What would Mill and Kant recommend?

4. What ethics traps would you face in making a decision?

5. What Life Principle would you apply?

2-7c The Organization’s Responsibility to Its Employees Organizations cannot be successful without good workers. In many circumstances, the

shareholder and stakeholder models agree that employees should be treated well. Dis-

gruntled workers are likely to be unmotivated and unproductive. But sometimes looking

out for employees may not lead to higher profits. In these cases, does an organization have a

duty to take care of its workers? The shareholder model says no; the stakeholder model

takes the opposite view.

Corporate leaders are often faced with difficult decisions when the issue of layoffs

arises. Choices can be particularly difficult to navigate when outsourcing is an option.

Outsourcing refers to cutting jobs at home and relocating operations to another country. That is the issue in the following scenario.

^ Ethics Case: The Storm After the Storm ^ Yanni is the CEO of Cloud Farm, a company that provides online data centers for Internet

companies. Because these data centers are enormous, they are located in rural areas where

they are often the main employer. A series of tornados has just destroyed a data center near

Farmfield, Arkansas, a town with a population of roughly 5,000 people. Farmfield is a three-

hour drive from the nearest city, Little Rock.

Here is the good news: The insurance payout will cover the full cost of rebuilding.

Indeed, the payout will be so generous that Cloud Farm could build a bigger and better

facility than the one destroyed. The bad news? Data centers are much more expensive to

build and operate in the United States than in Africa, Asia, or Latin America. Yanni could

take the money from the insurance company and build three data centers overseas. He has

asked Adam and Zoe to present the pros and cons of relocating.

Adam says, “If we rebuild overseas, our employees will never find equivalent jobs. We

pay $20 an hour, and the other jobs in town are mostly minimum-wage. And remember how

some of the guys worked right through Christmas to set up for that new client. They have

been loyal to us—we owe them something in return. Going overseas is not just bad for

Farmfield or Arkansas, it’s bad for the country. We can’t continue to ship jobs overseas.”

Zoe responds, “That is the government’s problem, not ours. We’ll pay to retrain the

workers, which, frankly, is a generous offer. Our investors get a return of 4 percent;

the industry average is closer to 8 percent. If we act like a charity to support Farmfield,

we could all lose our jobs. It is our obligation to do what’s best for our shareholders— which,

in this case, happens to be what’s right for us, too.”

CHAPTER 2 Ethics and Corporate Social Responsibility 39

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

QUESTIONS

1. Do you agree with Zoe’s argument that it is the government’s responsibility to create

and protect American jobs, and that it is a CEO’s job to increase shareholder wealth?

2. Imagine that you personally own $10,000 worth of shares in Cloud Farm. Would you

be upset with a decision to rebuild the data center in the United States?

3. If you were in Yanni’s position, would you rebuild the plant in Arkansas or relocate

overseas?

4. If Cloud Farm decides to rebuild in Arkansas, should it pay the workers while the

center is being rebuilt? If yes, should it apply to all the workers, or just the high-level

ones who might leave if they were not paid?

5. What ethics traps does Yanni face in this situation?

6. What is your Life Principle on this issue? Would you be willing to risk your job to

protect your employees?

2-7d An Organization’s Responsibility to Its Customers Customers are another group of essential stakeholders. A corporation must gain and retain

loyal buyers if it is to stay in business for long. Treating customers well usually increases

profits and helps shareholders.

But when, if ever, does an organization go too far? Is a leader acting appropriately when

she puts customers first in a way that significantly diminishes the bottom line? The share-

holder model says no. What do you say?

^ Ethics Case: Mickey Weighs In ^ As we have seen, many food companies manipulate products to maximize their appeal,

without regard to the health of their customers. Disney is taking a different approach—

announcing recently that only healthy foods can be advertised on its children’s television

channels, radio stations, and websites. Candy, fast food, and sugared cereals are banned from

Mickey land. Kicked to the curb are such childhood favorites as Lunchables and Capri Sun drinks.

In addition, sodium must be reduced by one quarter in food served at its theme parks. Nor does

Disney permit its characters to associate with unhealthy foods. No more Mickey Pop-Tarts or Buzz

Lightyear Happy Meals. Said Disney chairman, Robert Iger, “Companies in a position to help with

solutions to childhood obesity should do just that.” 18

Disney will certainly lose advertising, but would not say how much. Food sales at its theme

parks may decline if children find the options less appealing. Its licensing revenues are also

affected by its decisions to remove Disney characters from the likes of Pop-Tarts and Happy

Meals.

On the other hand, this healthy initiative will enhance its reputation, at least with

parents, who increasingly seek healthy food options for their children. Disney will profit

from license fees it receives for the use of a Mickey Check logo on healthy food in grocery

aisles and restaurants. This food initiative may also help forestall more onerous government

regulation.

18 Brooks Barnes, “Promoting Nutrition, Disney to Restrict Junk-Food Ads,” New York Times, June 5,

2012.

40 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

QUESTIONS

1. What obligation does Disney have to its young customers? Does it owe them anything

other than entertainment?

2. How much advertising and licensing revenue would you be willing to give up to

protect children from ads for unhealthy foods? Does your answer depend on how

profitable the division is?

3. Does this information make you more likely to buy Disney products or allow your

children to watch Disney TV?

4. What if this initiative had not come down from the highest levels in the company?

Would you have been willing to fight for it?

5. What would Mill or Kant have said? What result with the Front Page Test?

6. What ethics traps does Disney face?

7. What is your Life Principle? How much profitability (or income) are you willing to

give up to protect children you do not know?

2-7e Organization’s Responsibility to Overseas Contract Workers Do an American company’s ethical obligations end at the border? What ethical duties does

an American manager owe to stakeholders in countries where the culture and economic

circumstances are very different? Should American companies (and consumers) buy goods

that are produced in sweatshop factories?

Industrialization has always been the first stepping stone out of dire poverty—it was in

England in centuries past, and it is now in the developing world. Eventually, higher

productivity leads to higher wages. In China, factory managers have complained that their

employees want to work even longer hours to earn more money. The results in China have

been nothing short of remarkable. During the Industrial Revolution in England, per capita

output doubled in 58 years; in China, it took only 10 years.

During the past 50 years, Taiwan and South Korea welcomed sweatshops. During the

same period, India resisted what it perceived to be foreign exploitation. Although all three

countries started at the same economic level, Taiwan and South Korea today have much

lower levels of infant mortality and much higher levels of education than India. 19

In theory, then, sweatshops might not be all bad. But are there limits? Consider the

following case.

^ Ethics Case: A Worm in the Apple ^ “Riots, Suicides and More,” blares an Internet headline about a FoxConn factory where

iPhones and other Apple products are assembled. Apple is not alone in facing supplier

scandals. So have Nike, Coca-Cola, and Gap, among many others. Do companies have

an obligation to the employees of their suppliers? If so, how can they, or anyone, be sure

what is really going on in a factory on the other side of the world? Professor Richard Locke

of MIT has studied supply chain issues. 20

His conclusions:

19 The data in this and the preceding paragraph are from Nicholas D. Kristof and Sheryl Wu Dunn,

“Two Cheers for Sweatshops,” New York Times Magazine, September 24, 2000, p. 70. 20 “When the jobs inspector calls,” The Economist, March 31, 2012.

CHAPTER 2 Ethics and Corporate Social Responsibility 41

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

• The first step that many companies took to improve working conditions overseas was to establish a code of conduct and then perform audits. Professor Locke found that

these coercive practices do not work and that compliance is at best sporadic. For

example, despite Hewlett-Packard’s best efforts, only a handful of its 276 overseas

factories consistently met its standards.

• A more collaborative approach worked better—when the auditors sent by multinationals saw their role as less of a police officer and more as a partner,

committed to problem-solving and sharing of best practices.

• It can be hard to improve conditions without also changing a company’s business model. One of the reasons that Apple uses Chinese manufacturers such as FoxConn

is that its workers have fewer overtime restrictions. Just before the first iPhone was

released, Steve Jobs decided that the screens had to be unscratchable glass instead of

plastic. One Chinese company supplied a team of engineers that was housed in a

dormitory and willing to work around the clock to design the right glass. When the

glass arrived at FoxConn in the middle of the night, thousands of assemblers were put

to work immediately.

What would you do in the following circumstances if you were in charge:

• In clothing factories, workers often remove the protective guards from their sewing machines, because the guards slow the flow of work. As a result, many workers suffer

needle punctures. Factories resist the cost of buying new guards because the workers

just take them off again. Is there a solution?

• In a factory in Central America, powerful chemicals were used to remove stains from clothing. The fumes from these chemicals were a health hazard but ventilation

systems were too expensive. What could be done? 21

• Timberland, Nike, and Hewlett-Packard have recognized that selling large numbers of new products creates great variation in demand and therefore pressure on factory

workers to work overtime. What can a company do to reduce this pressure?

2-8 WHEN THE GOING GETS TOUGH We have talked about the kinds of ethical issues that you are likely to face in your career. If

you find yourself working for a company that tolerates an intolerable level of unethical

behavior, you face three choices.

2-8a Loyalty It is always important to pick one’s battles. For example, a firm’s accounting department must

make many decisions about which reasonable people could disagree. Just because their

judgment is different from yours does not mean that they are behaving unethically. Being a

team player means allowing other people to make their own choices sometimes. However, the

difference between being a team player and starting down the slippery slope can be very

narrow. If you are carrying out a decision, or simply observing one, that makes you uncomfor-

table, then it is time to consult your Life Principles and review the section on ethics traps.

21 These examples are from Richard Locke, Matthew Amengual, and Akshay Mangla, “Virtue out of

Necessity?: Compliance, Commitment and the Improvement of Labor Conditions in Global Supply

Chains,” available at Princeton.edu.

42 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

2-8b Exit When faced with the unacceptable, one option is to walk out the door quietly. You resign “to

spend more time with your family,” “to explore other opportunities,” or “to accept an offer that

is too good to refuse.” This approach may be the safest for you because you are not ruffling any

feathers or making any enemies. It is a small world, and you never know when someone you

have offended will be in a position to do you harm. But a quiet exit leaves the bad guys in

position to continue the unsavory behavior. For example, the CEO was sexually harassing

Laura, but she left quietly for fear that if she reported him, he would harm her career. No one

likes to hire a troublemaker. So the CEO proceeded to attack other women at the company

until finally a senior man got wind of what was going on and confronted the chief. In short, the

braver option is to exit loudly—reporting the wrong-doing on the way out the door.

2-8c Voice As we saw in our discussion of conformity, wrong-doing often occurs because everyone just

goes along to get along. One valiant soul with the courage to say, “This is wrong,” can be a

powerful force for the good. But confrontation may not be the only, or even the best, use of

your voice. Learning to persuade, cajole, or provide better options are all important leadership

skills. For example, Keith felt that the CEO of his company was about to make a bad decision,

but he was unable to persuade the man to choose a different alternative. When Keith turned

out to be correct, the CEO gave him no credit, saying, “You are equally responsible because

your arguments weren’t compelling enough.” Keith thought the man had a point.

2-9 CORPORATE SOCIAL RESPONSIBILITY (CSR) So far, we have largely been talking about a company’s duty not to cause harm. But do

companies have a corporate social responsibility—that is, an obligation to contribute posi- tively to the world around it? Do businesses have an affirmative duty to do good? You

remember Milton Friedman’s view that a manager’s obligation is to make the company as

profitable as possible while also complying with the law. Harvard Professor Michael Porter

has written that CSR often benefits a company. For example, improving economic and

social conditions overseas can create new customers with money to spend. Educational

programs may provide a better workforce. However, Porter observes:

The acid test of good corporate philanthropy is whether the desired social change is so beneficial to

the company that the organization would pursue the change even if no one ever knew about it. 22

Thus, for example, Yoplait has periodically run a “Save Lids to Save Lives” campaign.

For every Yoplait lid mailed in, the company makes a donation to the Susan G. Komen breast

cancer charity. During these campaigns, Yoplait gains market share. Should companies be

willing to improve the world even if their efforts reduce profitability?

^ Ethics Case: The Beauty of a Well-Fed Child ^ Cosmetic companies often use gift-with-purchase offers to promote their products. For

example, with any $45 Estee Lauder purchase at Bloomingdale’s, you can choose a free

Corporate social responsibility An organization’s obligation to contribute positively to the world around it.

22 Michael E. Porter and Mark R. Kramer, “The Competitive Advantage of Corporate Philanthropy,”

Harvard Business Review (December 2002).

CHAPTER 2 Ethics and Corporate Social Responsibility 43

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

seven piece gift of creams and makeup valued at over $165, plus a special-edition Lily

Pulitzer cosmetic bag.

But Clarins has put a new spin on these offers with what it calls “gift with purpose.”

Buy two Clarins items at Macy’s and you will receive six trial-size products and the company will pay the United Nations World Food Program enough for 10 school meals.

Because so many cosmetic companies do gift-with-purchase offers, it is difficult for any

one company to stand out from the crowd. That is Clarins’ goal with this offer. The

company hopes that cosmetic buyers, many of whom are women with children, will find

this opportunity to feed children particularly compelling. Says the Macy’s vice president for

national media relations and cause marketing, “With no energy or lift on the customers’ part,

they get this really feel-good element with the shopping experience.” 23

QUESTIONS

1. If you were an executive at Clarins or Macy’s, what would you want to know before

approving this promotion?

2. Howimportantisittoimprovetheimageofthesetwocompanies?Wouldthispromotiondoso?

3. Would you approve this promotion if it were not profitable on its own account? How

much of a subsidy would you be willing to grant?

Chapter Conclusion Many times in your life, you will be tempted to do something that you know in your heart of

hearts is wrong. Referring to your own Life Principles, being aware of potential traps, will

help you to make the right decisions. But it is also important that you be able to afford to do

the right thing. Having a reserve fund to cover six months’ living expenses makes it easier

for you to leave a job that does not agree with your personal ethics. Too many times, people

make the wrong, and sometimes the illegal decision, for financial reasons.

Managers wonder what they can do to create an ethical environment in their companies.

In the end, the surest way to infuse ethics throughout an organization is for top executives to

behave ethically themselves. Few will bother to do the right thing unless they observe that

their bosses value and support such behavior. Even employees who are ethical in their

personal lives may find it difficult to uphold their standards at work if those around them

behave differently. To ensure a more ethical world, managers must be an example for others,

both within and outside their organizations.

EXAM REVIEW 1. ETHICS The law dictates how a person must behave. Ethics governs how people should

behave. Any decision that affects people or animals is an ethics decision. (p. 24)

2. LIFE PRINCIPLES Life Principles are the rules by which you live your life. If you develop these Life Principles now, you will be better prepared when facing

ethics dilemmas in the future. (pp. 25–26)

23 Adam Andrew Newman, “A Cosmetic Freebie with a Cause,” New York Times, April 7, 2013.

44 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3. THE ROLE OF BUSINESS IN SOCIETY An ongoing debate about whether managers should focus only on what is best for shareholders or whether they should

consider the interests of other stakeholders as well. (pp. 26–27)

4. WHY BE ETHICAL?

• Society as a whole benefits from ethical behavior.

• People feel better when they behave ethically.

• Unethical behavior can be very costly. (pp. 27–28)

5. THEORIES OF ETHICS

• Utilitarian thinkers such as John Stuart Mill believe that the right decision maximizes overall happiness and minimizes overall pain.

• Deontological thinkers such as Immanuel Kant believe that the ends do not justify the means. Rather, it is important to do the right thing, no matter the result.

• With his categorical imperative, Kant argued that you should not do something unless you would be willing to have everyone else do it, too.

• John Rawls asked us to consider what type of society we would establish if we did not know whether we would be one of life’s winners or losers. He called this

situation “the veil of ignorance.”

• Under the Front Page Test, you ask yourself what you would do if your actions were going to be reported publicly on or offline. (pp. 28–30)

6. ETHICS TRAPS

• Money

• Rationalization

• Conformity

• Following orders

• Euphemisms

• Lost in a crowd

• Blind spots (pp. 31–34)

7. TO AVOID ETHICS TRAPS:

• Do not trust your first instinct.

• Remember your Life Principles. (pp. 35–36)

8. KANTIAN EVASION A truthful statement that is nonetheless misleading. (p. 34)

9. MANAGING AN UNETHICAL ENVIRONMENT When faced with unethical behavior, you have three choices:

• Loyalty

• Exit (either quiet or noisy)

• Voice (pp. 42–43)

10. CORPORATE SOCIAL RESPONSIBILITY An organization’s obligation to contribute positively to the world around it. (p. 43)

CHAPTER 2 Ethics and Corporate Social Responsibility 45

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

MULTIPLE-CHOICE QUESTIONS 1. Milton Friedman was a strong believer in the model. He

argue that a corporate leader’s sole obligation is to make money for the company’s

owners.

(a) shareholder; did

(b) shareholder; did not

(c) stakeholder; did

(d) stakeholder; did not

2. Which of the following wrote the book Utilitarianism and believed that moral actions should “generate the greatest good for the greatest number”?

(a) Milton Friedman

(b) John Stuart Mill

(c) Immanuel Kant

(d) John Rawls

3. Which of the following believed that the dignity of human beings must be respected, and that the most ethical decisions are made out of a sense of

obligation?

(a) Milton Friedman

(b) John Stuart Mill

(c) Immanuel Kant

(d) John Rawls

4. Kant believed that:

(a) It is ethical to tell a lie if necessary to protect an innocent person from great

harm.

(b) It is ethical to tell a lie if the benefit of the lie outweighs the cost.

(c) It is ethical to make a true, but misleading, statement.

(d) It is wrong to tell an outright lie or to mislead.

5. The following statement is true:

(a) Most people are honest most of the time.

(b) Even people who do not believe in God are more likely to behave honestly after

reading the Ten Commandments.

(c) When confronted with wrong-doing, most people immediately recognize what is

happening.

(d) People make their best ethical decisions when in a hurry.

46 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ESSAY QUESTIONS 1. The Senate recently released a report on wrongdoing at JP Morgan Chase. It found

that bank executives lied to investors and the public. Also, traders, with the

knowledge of top management, changed risk limits to facilitate more trading and then

violated even these higher limits. Executives revalued the bank’s investment

portfolio to reduce apparent losses. JP Morgan’s internal investigation failed to find

this wrongdoing. Into what ethics traps did these JP Morgan employees fall? What

options did the executives and traders have for dealing with this wrongdoing?

2. Located in Bath, Maine, Bath Iron Works builds high tech warships for the Navy. Winning Navy contracts is crucial to the company’s success—it means jobs for the

community and profits for the shareholders. Navy officials held a meeting at Bath’s

offices with its executives and those of a competitor to review the specs for an

upcoming bid. Both companies desperately wanted to win the contract. After the

meeting, a Bath worker realized that one of the Navy officials had left a folder on a

chair labeled: “Business Sensitive.” It contained information about the competitors’

bid that would be a huge advantage to Bath. William Haggett, the Bath CEO, was

notified about the file just as he was walking out the door to give a luncheon speech.

What should he do? What pitfalls did he face? What result if he considered Mill, Kant,

or the Front Page test?

3. A group of medical schools conducted a study on very premature babies—those born between 24 and 27 weeks of gestation (instead of the normal 40 weeks). These

children face a high risk of blindness and death. The goal of the study was to

determine which level of oxygen in a baby’s incubator produced the best results.

Before enrolling families in the study, the investigators did not tell them that being in

the study could increase their child’s risk of blindness or death. The study made some

important discoveries: the level at which too much oxygen increased the risk of

blindness and level at which too little increased the risk of death. What would Mill

and Kant say about this decision not to tell the families?

4. Because Raina processes payroll at her company, she knows how much everyone earns, including the top executives. This information could make for some good

gossip, but she has kept it all completely secret. She just found out, however, that her

boss knew that it is against company policy for her to do payroll for C-level

employees. Yesterday, the CEO went to her boss to confirm that he, the boss, was

personally doing the processing for top management. Her boss lied to the CEO and

said that he was. Then he begged Raina not to tell the truth if the CEO checked with

her. Raina just got a message that the CEO wants to see her. What does she say if he

asks about the payroll?

5. Each year, the sale of Girl Scout cookies is the major fund-raiser for local troops. But because the organization was criticized for promoting such unhealthy food, it

introduced a new cookie, Mango Cremes with Nutrifusion. It promotes this cookie as

a vitamin-laden, natural whole food. “A delicious way to get your vitamins.” But these

vitamins are a minuscule part of the cookie. The rest has more bad saturated fat than

an Oreo. The Girl Scouts do much good for many girls. And to do this good, they need

to raise money. What would Kant and Mill say? What about the Front Page test? What

do you say?

6. When James Kilts became CEO of Gillette Co., the consumer products giant had been a mainstay of the Boston community for a hundred years. But the organization

was going through hard times: its stock was trading at less than half its peak price, and

CHAPTER 2 Ethics and Corporate Social Responsibility 47

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

some of its established brands of razors were suffering under intense competitive

pressure. In four short years, Kilts turned Gillette around—strengthening its core

brands, cutting jobs, and paying off debt. With the company’s stock up 61 percent,

Kilts had added $20 billion in shareholder value.

Then Kilts suddenly sold Gillette to Procter & Gamble (P&G) for $57 billion. So

short was Kilts’s stay in Boston that he never moved his family from their home in Rye,

New York. The deal was sweet for Gillette shareholders—the company’s stock price

went up 13 percent in one day. And tasty also for Kilts—his payoff was $153 million,

including a $23.9 million reward from P&G for having made the deal and for a “change in

control” clause in his employment contract that was worth $12.6 million. In addition,

P&G agreed to pay him $8 million a year to serve as vice chairman after the merger.

When he retired, his pension would be $1.2 million per year. Moreover, two of his top

lieutenants were offered payments totaling $57 million.

Any downside to this deal? Four percent of the Gillette workforce—6,000

employees—were fired. If the payouts to the top three Gillette executives were

divided among these 6,000, each unemployed worker would receive $35,000. The

loss of this many employees (4,000 of whom lived in New England) had a ripple

effect throughout the area’s economy. Although Gillette shareholders certainly

benefited in the short run from the sale, their profit would have been even

greater without this $210 million payout to the executives. Moreover, about half

the increase in Gillette revenues during the time that Kilts was running the show

were attributable to currency fluctuations. A cheaper dollar increased revenue

overseas. If the dollar had moved in the opposite direction, there might not have

been any increase in revenue. Indeed, for the first two years after Kilts joined

Gillette, the stock price declined. It was not until the dollar turned down that the

stock price improved.

Do CEOs who receive sweeteners have too strong an incentive to sell their

companies? Is it unseemly for them to be paid so much when many employees will

lose their jobs?

DISCUSSION QUESTIONS 1. While waiting in line in a supermarket, you

observe a woman trying to pay with food stamps.

Under the law, food stamps cannot be used to pay

for prepared items so the register would not accept

the stamps in payment for a $6 container of

chicken noodle soup from the deli counter. The

woman explained that she was sick and did not

have the energy to cook. She just wanted to go

home and go to bed. In general, you agree that this

law is reasonable—people on limited budgets

should not be buying more expensive prepared

food. But the woman is sick. Would it be ethical for

you to pay for her chicken soup if she agreed to pay

for $6 worth of your grocery items?

2. In Japan, automobile GPS systems come equipped with an option for converting them into

televisions so that drivers can watch their favorite

shows, yes, while driving. “We can’t help but

respond to our customers’ needs,” says a

company spokesperson. 24 Although his company

does not recommend the practice of watching while

driving, he explained that it is the driver’s

responsibility to make this decision. Is it right to sell a

product that could cause great harm to innocent

bystanders? Where does the company’s responsibility

end and the consumer’s begin? What would Mill

and Kant say?

24 Chester Dawson, “Drivers Use Navigation Systems to Tune In,” Wall Street Journal, April 23, 2013.

48 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3. Darby has been working for 14 months at Holden Associates, a large management consulting firm.

She is earning $75,000 a year, which sounds good but does not go very far in New York City. It turns

out that her peers at competing firms are typically

paid 20 percent more and receive larger annual

bonuses. Darby works about 60 hours a week—

more if she is traveling. A number of times, she has

had to reschedule her vacation or cancel personal

plans to meet client deadlines. She hopes to go to

business school in a year and has already begun the

application process.

Holden has a policy that permits any employee

who works as late as 8:00 p.m. to eat dinner at

company expense. The employee can also take a taxi

home. Darby is in the habit of staying until 8:00 p.m.

every night, whether or not her workload requires it.

Then she orders enough food for dinner, with

leftovers for lunch the next day. She has managed to

cut her grocery bill to virtually nothing. Sometimes

she invites her boyfriend to join her for dinner. As a

student, he is always hungry and broke. Darby often

uses the Holden taxi to take them back to his

apartment, although the cab fare is twice as high as to

her own place.

Sometimes Darby stays late to work on her

business school applications. Naturally, she uses

Holden equipment to print out and photocopy the

finished applications. Darby has also been known to

return online purchases through the Holden

mailroom on the company dime. Many employees do

that, and the mailroom workers do not seem to mind.

Is Darby doing anything wrong? What ethics

traps is she facing? What would your Life Principle

be in this situation?

4. Steve supervises a team of account managers. One night at a company outing, Lawrence, a visiting

account manager, made some wildly inappropriate

sexual remarks to Maddie, who is on Steve’s team.

When she told Steve, he was uncertain what to do, so

he asked his boss. She was concerned that if Steve

took the matter further and Lawrence was fired or

even disciplined, her whole area would suffer.

Lawrence was one of the best account managers in the

region, and everyone was overworked as it was. She

told Steve to get Maddie to drop the matter. Just tell

her that these things happen, and Lawrence did not

mean anything by it.

What should Steve do? What ethics traps does

he face? What would be your Life Principle in this

situation?

5. David has just spoken with a member of his sales team who has not met her sales goals for some

months. She has also missed 30 days of work in the

past six months. It turns out that she is in the process

of getting a divorce, and her teenage children are

reacting very badly. Some of the missed days have

been for court, others because the children have

refused to go to school. If David’s team does not

meet its sales goals, no one will get a bonus, and his

job may be at risk. What should he do?

6. Many people enjoy rap music at least in part because of its edgy, troublemaking vibe. The problem is that

some of this music could cause real trouble, Thus,

Ice-T’s song “Cop Killer” generated significant

controversy when it was released. Among other

things, its lyrics celebrated the idea of slitting a

policeman’s throat. Rick Ross rapped about

drugging and raping a woman. Time Warner Inc. did

not withdraw Ice T’s song, but Reebok fired Ross

over his lyrics. One difference: Time Warner was

struggling with a $15 billion debt and a depressed

stock price. Reebok at first refused to take action but

then singing group UltraViolet began circulating an

online petition against the song and staged a protest

at the main Reebok store in New York.

What obligation do media companies have to

their audience? What factors matter when making

a decision about content?

7. You are negotiating a new labor contract with union officials. The contract covers a plant that has

experienced operating losses over the past several

years. You want to negotiate concessions from

labor to reduce the losses. However, labor is

refusing any compromises. You could tell them

that, without concessions, the plant will be closed,

although that is not true.

Is bluffing ethical? Under what circumstances?

What would Kant and Mill say? What result under

the Front Page test? What is your Life Principle?

8. Craig Newmark and Jim Buckmaster founded craigslist, the most popular website in the country

for classified ads. Rather than maximizing its

profits, craigslist instead focused on developing a

community among its users. It was a place to find

an apartment, a pet, a job, a couch, a date, a

babysitter and, it turned out, a prostitute. Most of

the ads on craigslist were free, but blatant ads for

sex were not. Much of the company’s revenue was

from these illegal services. Many of the prostitutes

available on craigslist were not independent

CHAPTER 2 Ethics and Corporate Social Responsibility 49

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

entrepreneurs; they were women and girls bought

and sold against their will. To fight sex

trafficking, craigslist required credit cards and

phone numbers, and it reported any suspicious

ads. Law enforcement officials pressured craigslist

to close the sex section of its website. But some

people argued that blocking these ads was a

violation of free speech and would just drive this

business more underground where law enforcement

officials were less likely to be able to find it.

Others said that banning these ads made the

business model of selling children for sex less

profitable. Does it seem that trafficking women

and children was in keeping with the founders’

personal ethics code? What were their options?

Could they have had any real impact on this

thriving industry? What pitfalls did they face?

9. You are a president of a small, highly rated, liberal college in California. Many of the dining hall

workers are Latino. Some of these workers are

trying to organize a union, which would

dramatically increase the college’s costs at a time

of budget pressure. One of your vice presidents

suggests hiring a law firm to review the college’s

employment records to make sure all employees

are in the United States legally. What would

you do?

10. Many socially responsible funds are now available to investors who want to make ethical

choices. For example, the Appleseed Fund

avoids tobacco products, alcoholic beverages,

gambling, weapons systems, or pornography

while the TIAA-CREF Social Choice Equity

Premier Fund invests in companies that are

“strong stewards of the environment,” devoted

to serving local communities and committed to

high labor standards. Are socially responsible

funds attractive to you? Does it matter if they

are less profitable than other alternatives? How

much less profitable? Do you now, or will you

in the future, use them in saving for your own

retirement?

50 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 3 DISPUTE RESOLUTION Tony Caruso had not returned for dinner, and

his wife, Karen, was nervous. She put on some

sandals and hurried across the dunes, a half mile

to the ocean shore. She soon came upon Tony’s

dog, Blue, tied to an old picket fence. Tony’s

shoes and clothing were piled neatly nearby.

Karen and friends searched frantically through-

out the evening.

A little past midnight, Tony’s body washed

ashore, his lungs filled with water. A local doctor con-

cluded he had accidentally drowned.

Karen and her friends were not the only ones who

were distraught. Tony had been partners with Beth

Smiles in an environmental consulting business, Enviro-

Vision. They were good friends, and Beth was emo-

tionally devastated. When she was able to focus on

business issues, Beth filed an insurance claim with the

Coastal Insurance Group. Beth hated to think about

Tony’s death in financial terms, but she was relieved

that the struggling business would receive $2 million on

the life insurance policy.

Several months after filing the claim, Beth received this reply from Coastal: “Under the

policy issued to Enviro-Vision, we are conditionally liable in the amount of $1 million in the

event of Mr. Caruso’s death. If his death is accidental, we are conditionally liable to pay

double indemnity of $2 million. But pursuant to section H(5), death by suicide is not

covered. “After a thorough investigation, we have concluded that Anthony Caruso’s death

was an act of suicide, as defined in section B(11) of the policy. Your claim is denied in

its entirety.” Beth was furious. She was convinced Tony was incapable of suicide. And

her company could not afford the $2 million loss. She decided to consult her lawyer,

Chris Pruitt.

A little past midnight, Tony’s body washed ashore, his lungs filled

with water.

n u tt a ki t/ S h u tt e rs to ck .c o m ; ©

S ta s V o li k/ S h u tt e rs to ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3-1 THREE FUNDAMENTAL AREAS OF LAW This case is a fictionalized version of several real cases based on double indemnity insurance

policies. In this chapter, we follow Beth’s dispute with Coastal from initial interview through

appeal, using it to examine three fundamental areas of law: the structure of our court

systems, civil lawsuits, and alternative dispute resolution.

When Beth Smiles meets with her lawyer, Chris Pruitt brings a second attorney from his

firm, Janet Booker, who is an experienced litigator; that is, a lawyer who handles court cases. If they file a lawsuit, Janet will be in charge, so Chris wants her there for the first meeting.

Janet probes about Tony’s home life, the status of the business, his personal finances,

everything. Beth becomes upset that Janet doesn’t seem sympathetic, but Chris explains

that Janet is doing her job: she needs all the information, good and bad.

3-1a Litigation versus Alternative Dispute Resolution Janet starts thinking about the two methods of dispute resolution: litigation and alternative

dispute resolution. Litigation refers to lawsuits, the process of filing claims in court, and ultimately going to trial. Alternative dispute resolution is any other formal or informal process used to settle disputes without resorting to a trial. It is increasingly popular with

corporations and individuals alike because it is generally cheaper and faster than litigation,

and we will focus on this topic in the last part of this chapter.

3-2 COURT SYSTEMS The United States has over 50 systems of courts. One nationwide system of federal courts serves the entire country. In addition, each individual state—such as California, Florida, and Texas—

has its court system. The state and federal courts are in different buildings, have different

judges, and hear different kinds of cases. Each has special powers and certain limitations.

3-2a State Courts The typical state court system forms a pyramid, as Exhibit 3.1 shows. Some states have

minor variations on the exhibit. For example, Texas has two top courts: a Supreme Court for

civil cases and a Court of Criminal Appeals for criminal cases.

TRIAL COURTS Almost all cases start in trial courts, which are endlessly portrayed on television and in film.

There is one judge, and there will often (but not always) be a jury. This is the only court to

hear testimony from witnesses and receive evidence. Trial courts determine the facts of a particular dispute and apply to those facts the law given by statutes or earlier court decisions.

In the Enviro-Vision dispute, the trial court will decide all important facts that are in

dispute. How did Tony Caruso die? Did he drown? Assuming he drowned, was his death

accidental or suicide? Once the jury has decided the facts, it will apply the law to those facts.

If Tony Caruso died accidentally, contract law provides that Beth Smiles is entitled to

double indemnity benefits. If the jury decides he killed himself, Beth gets nothing.

Facts are critical. That may sound obvious, but in a course devoted to legal principles, it

is easy to lose track of the key role that factual determinations play in the resolution of any

dispute. In the Enviro-Vision case, we will see that one bit of factual evidence goes

undetected, with costly consequences.

Jurisdiction refers to a court’s power to hear a case. In state or federal court, a plaintiff may start a lawsuit only in a court that has jurisdiction over that kind of case. Some courts

have very limited jurisdiction, while others have the power to hear almost any case.

Litigation The process of filing claims in court and ultimately going to trial.

Alternative dispute resolution Any other formal or informal process used to settle disputes without resorting to a trial.

Trial courts Determine the facts of a particular dispute and apply to those facts the law given by earlier appellate court decisions.

Jurisdiction A court’s power to hear a case.

Litigator A lawyer who handles court cases.

52 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

© C e n g a g e L e a rn in g

SUBJECT MATTER JURISDICTION Subject matter jurisdiction means that a court has the authority to hear a particular type of case.

Trial Courts of Limited Jurisdiction These courts may hear only certain types of cases. Small claims court has jurisdiction only over civil lawsuits involving a maximum of,

say, $5,000 (the amount varies from state to state). A juvenile court hears only cases

involving minors. Probate court is devoted to settling the estates of deceased persons,

though in some states it will hear certain other cases as well.

State Supreme Court

Appeal Courts

Appellate Courts

General Civil Division

Trial Courts of General Jurisdiction Trial Courts of Limited Jurisdiction

General Criminal Division

Probate Division

Small Claims Division

Domestic Relations Division

Municipal Division

Land Division

Juvenile Division

EXHIBIT 3.1 A trial court determines facts, while an appeals court ensures that the lower court correctly applied the law to those facts.

Subject matter jurisdiction A court has the authority to hear a particular type of case.

CHAPTER 3 Dispute Resolution 53

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Trial Courts of General Jurisdiction Trial courts of general jurisdiction, how- ever, can hear a very broad range of cases. The most important court, for our purposes,

is the general civil division. This court may hear virtually any civil lawsuit. In one day it

might hear a $450 million shareholders’ derivative lawsuit, an employment issue in-

volving freedom of religion, and a foreclosure on a mortgage. Most of the cases we

study start in this court. 1 If Enviro-Vision’s case against Coastal goes to trial in a state

court, it will begin in the trial court of general jurisdiction.

PERSONAL JURISDICTION In addition to subject matter jurisdiction, courts must also have personal jurisdiction over the defendant. Personal jurisdiction is the legal authority to require the defendant to stand

trial, pay judgments, and the like. When plaintiffs file lawsuits, defendants sometimes make

a special appearance to challenge a court’s personal jurisdiction. If the court agrees with the defendant’s argument, the lawsuit will be dismissed.

Personal jurisdiction generally exists, if one or more of the following occur:

1. For individuals, the defendant is a resident of the state in which a lawsuit is filed.

For companies, the defendant is doing business in that state.

2. The defendant takes a formal step to defend a lawsuit. Most papers filed with a

court count as formal steps, but special appearances do not.

3. A summons is served on a defendant. A summons is the court’s written notice that a lawsuit has been filed against the defendant. The summons must be delivered to

the defendant when she is physically within the state in which the lawsuit is filed.

For example, Texarkana straddles the Texas/Arkansas border. If a lawsuit is filed in a

Texas court, a defendant who lives in Arkansas can be served if, when walking down the

street in Texarkana, she steps across the state line into Texas. Corporations are required to

hire a registered agent in any state in which they do business. If a registered agent receives a

summons, then the corporation is served.

4. A long-arm statute applies. If all else fails—the defendant does not reside in the state, does not defend the lawsuit, and has not been served with a summons while in the

state—a court still can obtain jurisdiction under long-arm statutes. These statutes

typically claim jurisdiction over someone who commits a tort, signs a contract, or

conducts “regular business activities” in the state.

As a general rule, courts tend to apply long-arm statutes aggressively, hauling defend-

ants into their courtrooms. However, the due process guarantees in the United States

Constitution require fundamental fairness in the application of long-arm statutes. Therefore,

courts can claim personal jurisdiction only if a defendant has had minimum contacts with a state. In other words, it is unfair to require a defendant to stand trial in another state if he

has had no meaningful interaction with that state.

In the following Landmark Case, the Supreme Court explains its views on this

important constitutional issue.

Long-arm statute A statute that gives a court jurisdiction over someone who commits a tort, signs a contract, or conducts “regular business activities” in the state.

Personal jurisdiction The legal authority to require the defendant to stand trial, pay judgments, and the like.

Summons The court’s written notice that a lawsuit has been filed against the defendant.

1 Note that the actual name of the court will vary from state to state. In many states, it is called superior court because it has power superior to the courts of limited jurisdiction. In New York, it is called supreme court (anything to confuse the layperson); in some states, it is called court of common pleas; in Oregon and other states, it is a circuit court. They are all civil trial courts of general jurisdiction. Within this branch, some states are beginning to establish specialized business courts to hear complex

commercial disputes. At least one state has created a cybercourt for high-tech cases. Lawyers will

argue their cases by teleconference and present evidence via streaming video.

54 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

APPELLATE COURTS Appellate courts are entirely different from trial courts. Three or more judges hear the

case. There are no juries, ever. These courts do not hear witnesses or take new

evidence. They hear appeals of cases already tried below. Appeals courts generally accept the facts given to them by trial courts and review the trial record to see if the

court made errors of law.

Higher courts generally defer to lower courts on factual findings. Juries and trial court

judges see all evidence as it is presented, and they are in the best position to evaluate it. An

appeals court will accept a factual finding unless there was no evidence at all to support it. If the jury decides that Tony Caruso committed suicide, the appeals court will normally accept

that fact, even if the appeals judges consider the jury’s conclusion dubious. On the other

hand, if a jury concluded that Tony had been murdered, an appeals court would overturn

that finding if neither side had introduced any evidence of murder during the trial.

An appeals court reviews the trial record to make sure that the lower court correctly applied the

law to the facts. If the trial court made an error of law, the appeals court may require a new trial. Suppose the jury concludes that Tony Caruso committed suicide but votes to award Enviro-Vision

$1 million because it feels sorry for Beth Smiles. That is an error of law: If Tony committed suicide,

Beth is entitled to nothing. An appellate court will reverse the decision. Or suppose that the trial

judge permitted a friend of Tony’s to state that he was certain Tony would never commit suicide.

Landmark Case

Facts: Although Interna- tional Shoe manufactured

footwear only in St.

Louis, Missouri, it sold

its products nationwide.

It did not have offices or

warehouses in the state of

Washington, but it did

send about a dozen sales-

people there. The sales-

people rented space in hotels and businesses, displayed

sample products, and took orders. They were not author-

ized to collect payment from customers.

When the State of Washington sought contributions to

the state’s unemployment fund, International Shoe refused

to pay. Washington sued. The company argued that it was

not engaged in business in the state and, therefore, that

Washington courts had no jurisdiction over it.

The Supreme Court of Washington ruled that Inter-

national Shoe did have sufficient contacts with the state to

justify a lawsuit there. International Shoe appealed to the

United States Supreme Court.

Issue: Did International Shoe have sufficient mini- mum contacts in the state of Washington to permit jurisdiction there? Decision: Yes, the com- pany had minimum con-

tacts with the state.

Reasoning: Agents for International Shoe have

operated continuously in Washington for many years.

Their presence has been more than occasional or

casual. And the agents’ activities have generated a sig-

nificant number of sales for the company. Washington’s

collection action is directly related to commercially

valuable activities that took place within the state’s

borders.

Due Process merely requires reasonable fairness.

International Shoe has benefitted greatly from activities

in Washington, and it faces no injustice if this suit pro-

ceeds. The minimum contacts doctrine is satisfied.

Affirmed.

Error of law Because of this, the appeals court may require a new trial.

INTERNATIONAL SHOE CO. V. STATE OF WASHINGTON

326 U.S. 310 Supreme Court of the United States, 1945

C A S E S U M M A R Y

Appeals courts Generally accept the facts given to them by trial courts and review the trial record to see if the court made errors of law.

CHAPTER 3 Dispute Resolution 55

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Normally, such opinions are not permissible at trial, and it was a legal error for the judge to allow the

jury to hear it.

Court of Appeals The party that loses at the trial court may appeal to the intermediate court of appeals. The party filing the appeal is the appellant. The party opposing the appeal (because it won at trial) is the appellee.

This court allows both sides to submit written arguments on the case, called briefs. Each side then appears for oral argument, usually before a panel of three judges. The

appellant’s lawyer has about 15 minutes to convince the judges that the trial court made

serious errors of law, and that the decision should be reversed; that is, nullified. The appellee’s lawyer has the same time to persuade the court that the trial court acted correctly,

and that the result should be affirmed; that is, permitted to stand.

State Supreme Court This is the highest court in the state, and it accepts some appeals from the court of appeals. In most states, there is no absolute right to appeal to

the Supreme Court. If the high court regards a legal issue as important, it accepts the

case. It then takes briefs and hears oral argument just as the appeals court did. If it

considers the matter unimportant or the law well-established, it refuses to hear the case,

meaning that the court of appeals’ ruling is the final word on the case. 2

In most states, seven judges, often called justices, sit on the Supreme Court. They have the final word on state law.

3-2b Federal Courts As discussed in Chapter 1, federal courts are established by the United States Constitution,

which limits what kinds of cases can be brought in any federal court. See Exhibit 3.2. For

our purposes, two kinds of civil lawsuits are permitted in federal court: federal question

cases and diversity cases.

FEDERAL QUESTION CASES A claim based on the United States Constitution, a federal statute, or a federal treaty is

called a federal question case.3 Federal courts have jurisdiction over these cases. If the Environmental Protection Agency (a part of the federal government) orders Logging

Company not to cut in a particular forest, and Logging Company claims that the agency

has wrongly deprived it of its property, that suit is based on a federal statute and is thus a

federal question. If Little Retailer sues Mega Retailer, claiming that Mega has established a

monopoly, that claim is also based on a statute—the Sherman Antitrust Act—and creates

federal question jurisdiction. Enviro-Vision’s potential suit merely concerns an insurance

contract. The federal district court has no federal question jurisdiction over the case.

DIVERSITY CASES Even if no federal law is at issue, federal courts have diversity jurisdiction when (1) the plaintiff and defendant are citizens of different states and (2) the amount in dispute exceeds $75,000. The theory behind diversity jurisdiction is that courts of one state might be biased

against citizens of another state. To ensure fairness, the parties have the option to use a

federal court as a neutral playing field.

2 In some states with smaller populations, there is no intermediate appeals court. All appeals from trial

courts go directly to the state supreme court. 3 28 U.S.C. §1331 governs federal question jurisdiction, and 28 U.S.C. §1332 covers diversity

jurisdiction.

Diversity jurisdiction (1) When the plaintiff and defendant are citizens of different states and (2) When the amount in dispute exceeds $75,000.

Appellant The party filing the appeal.

Appellee The party opposing the appeal.

Briefs Written arguments on the case.

Reversed Nullified.

Affirmed Permitted to stand.

Federal question A case in which the claim is based on the United States Constitution, a federal statute, or a federal treaty.

56 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Enviro-Vision is located in Oregon and Coastal Insurance is incorporated in Georgia. 4

They are citizens of different states and the amount in dispute far exceeds $75,000. Janet

could file this case in a United States District Court based on diversity jurisdiction.

TRIAL COURTS

United States District Court This is the primary trial court in the federal system. The nation is divided into about 94 districts, and each has a district court. States with

smaller populations have one district. States with larger populations have several; Florida is

divided geographically into three districts.

Appellate Courts

United States Supreme Court

United States Courts of Appeals (12 Circuits)

United States Court of Appeals for the Federal Circuit

U.S. District Courts

U.S. Bankruptcy

Courts

U.S. Tax Courts

Various Federal

Agencies

Administrative Agencies

U.S. Court of International

Trade

U.S. Patent & Trademark

Office

U &

U.S. Claims Courts

Trial CourtsTrial Courts

EXHIBIT 3.2 The Fedral Court System

4 For diversity purposes, a corporation is a citizen of the state in which it is incorporated and the state in

which it has its principal place of business.

© C e n g a g e L e a rn in g

CHAPTER 3 Dispute Resolution 57

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Other Trial Courts There are other, specialized trial courts in the federal system. Bankruptcy Court, Tax Court, and the United States Court of International Trade all handle

name-appropriate cases. The United States Claims Court hears cases brought against the

United States, typically on contract disputes. The Foreign Intelligence Surveillance Court is

a very specialized, secret court, which oversees requests for surveillance warrants against

suspected foreign agents.

Judges The President of the United States nominates all federal court judges, from district court to Supreme Court. The nominees must be confirmed by the Senate. Once confirmed,

federal judges serve for “life in good behavior.” Many federal judges literally stay on the job for

life. When Judge Wesley Brown of Kansas died at the age of 104 in 2012, he held the record as

the oldest active federal judge in history. He served on the bench for five decades.

APPELLATE COURTS

United States Courts of Appeals These are the intermediate courts of appeals. As the map below shows, they are divided into “circuits,” which are geographical areas. There

are 11 numbered circuits, hearing appeals from district courts. For example, an appeal from

the Northern District of Illinois would go to the Court of Appeals for the Seventh Circuit.

A twelfth court, the Court of Appeals for the District of Columbia, hears appeals only

from the district court of Washington, D.C. This is a particularly powerful court because so

many suits about federal statutes begin in the district court for the District of Columbia.

Also in Washington is the Thirteenth Court of Appeals, known as the Federal Circuit. It

hears appeals from specialized trial courts, as shown in Exhibit 3.2.

Within one circuit there are many circuit judges, up to about 50 judges in the largest

circuit, the Ninth. When a case is appealed, three judges hear the appeal, taking briefs and

hearing oral arguments.

United States Supreme Court This is the highest court in the country. There are nine justices on the Court. One justice is the chief justice and the other eight are associate

justices. When they decide a case, each justice casts an equal vote. The chief justice’s

special power comes from his authority to assign opinions to a given justice. The justice

assigned to write an opinion has an opportunity to control the precise language and thus to

influence the voting by other justices.

The Supreme Court has the power to hear appeals in any federal case, and in certain cases

that began in state courts. Generally, it is up to the Court whether or not it will accept a case. A

party that wants the Supreme Court to review a lower court ruling must file a petition for a writ of certiorari, asking the Court to hear the case. Four of the nine justices must vote in favor of hearing a case before a writ will be granted. The Court receives several thousand requests every

year but usually accepts fewer than 100. Most cases accepted involve either an important issue

of constitutional law or an interpretation of a major federal statute.

EXAM Strategy

Question: Mark has sued his neighbor, Janelle, based on the state common law of negligence. He is testifying in court, explaining how Janelle backed a rented truck out

of her driveway and slammed into his Lamborghini, causing $82,000 in damages.

Where would this take place?

(a) State appeals court

(b) United States Court of Appeals

(c) State trial court

Writ of certiorari A petition asking the Supreme Court to hear a case.

58 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

(d) Federal District Court

(e) Either state trial court or Federal District Court

Strategy: The question asks about trial and appellate courts, and also about state versus federal courts. One issue at a time, please. What are the different functions of

trial and appellate courts? Trial courts use witnesses, and often juries, to resolve factual disputes. Appellate courts never hear witnesses and never have juries. Applying that distinction to these facts tells us whether we are in a trial or appeals court.

Next Issue: State trial courts may hear lawsuits on virtually any issue. Federal District Courts may only hear two kinds of cases: federal question (those involving a statute or constitutional provision); or diversity (where the parties are from different states and the amount at issue is $75,000 or higher). Apply what we know to the facts here.

Result: We are in a trial court because Mark is testifying. Could we be in Federal District Court? No. The suit is based on state common law. This is not a diversity case

because the parties live in the same state. We are in a state trial court.

9

10

9

5

4

2

6

3

3

8

1 1

Guam

Northern Mariana Islands

Alaska

Hawaii

New Mexico

Arizona

Utah

Colorado

Wyoming

Nebraska

South Dakota

North Dakota Minnesota

Iowa Northern

Iowa Southern

Montana

Idaho

Oregon

Nevada

Kansas

Texas Northern

Texas Southern

Texas Western

Louisiana Eastern

Louisiana Western

Washington Western

Washington Eastern

California Central

California Southern

California Eastern

C alifornia N

orthern

Oklahoma Eastern

Oklahoma Western

Louisiana Middle

Texas Eastern

Arkansas Western

Arkansas Eastern

Wisconsin Western

Michigan Western

Michigan Eastern

Maine

N.H.

Vt.

Ohio Northern

Ohio Southern

Illinois Northern

Illinois Southern

Missouri Western

Missouri Eastern

Illinois Central

Indiana Northern

Indiana Southern

Michigan Western

Wisconsin Eastern

New York Northern

New York Eastern

Mass. Rhode Island

Pa. Western Pa.

Eastern

District of Columbia

D.C. Circuit Washington D.C.

Federal Circuit Washington D.C.

Virgin Islands

Georgia Southern Georgia

Southern

Georgia Middle

Georgia Northern

South Carolina

Alabama Northern

Ala. Southern

Ala. Middle

Delaware

Mississippi Northern

N. Carolina Eastern

N. Carolina Middle

N. Carolina Western

Tenn. Eastern

Tenn. Middle Tenn. Western

Kentucky Western

Kentucky Eastern

Virginia Eastern

Virginia Western

W. Virginia Southern

W. Virginia Northern

Md.

Florida Northern Florida Middle

Florida Southern

Puerto Rico

New York Western

11

7

Mississippi Southern

Oklahoma Northern

Pennsylvania Middle

New Jersey

New York South

Legend Circuit boundaries State boundaries District boundaries

Conn.

CHAPTER 3 Dispute Resolution 59

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3-3 LITIGATION Janet Booker decides to file the Enviro-Vision suit in the Oregon trial court. She thinks that

a state court judge may take the issue more seriously than a federal district court judge.

3-3a Pleadings The documents that begin a lawsuit are called the pleadings. These consist of the com- plaint, the answer, and sometimes a reply.

COMPLAINT The plaintiff files in court a complaint, which is a short, plain statement of the facts she is alleging and the legal claims she is making. The purpose of the complaint is to inform the

defendant of the general nature of the claims and the need to come into court and protect

his interests.

Janet Booker files the complaint, as shown below. Since Enviro-Vision is a partnership,

she files the suit on behalf of Beth personally.

STATE OF OREGON CIRCUIT COURT

Multnomah County Civil Action No. _________ __________________ Elizabeth Smiles, Plaintiff

JURY TRIAL DEMANDED v. Coastal Insurance Company, Inc., Defendant _____________________

COMPLAINT

Plaintiff Elizabeth Smiles states that:

1. She is a citizen of Multnomah County, Oregon. 2. Defendant Coastal Insurance Company, Inc., is incorporated under the laws of Georgia and

has as its usual place of business 148 Thrift Street, Savannah, Georgia. 3. On or about July 5, 2012, plaintiff Smiles (“Smiles”), Defendant Coastal Insurance Co, Inc.

(“Coastal”) and Anthony Caruso entered into an insurance contract (“the contract”), a copy of which is annexed hereto as Exhibit “A.” This contract was signed by all parties or their authorized agents, in Multnomah County, Oregon.

4. The contract obligates Coastal to pay to Smiles the sum of two million dollars ($2 million) if Anthony Caruso should die accidentally.

5. On or about September 20, 2012, Anthony Caruso accidentally drowned and died while swimming. 6. Coastal has refused to pay any sum pursuant to the contract. 7. Coastal has knowingly, willingly and unreasonably refused to honor its obligations under the

contract.

WHEREFORE, plaintiff Elizabeth Smiles demands judgment against defendant Coastal for all monies due under the contract; demands triple damages for Coastal’s knowing, willing, and unreasonable refusal to honor its obligations; and demands all costs and attorney’s fees, with interest. ELIZABETH SMILES, By her attorney, [Signed] Janet Booker Pruitt, Booker & Bother 983 Joy Avenue Portland, OR October 18, 2012

Complaint A short, plain statement of the facts alleged and the legal claims made.

Pleadings The documents that begin a lawsuit, consisting of the complaint, the answer, and sometimes a reply.

60 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

SERVICE When she files the complaint in court, Janet gets a summons, which is a paper ordering the

defendant to answer the complaint within 20 days. A sheriff or constable then serves the two papers by delivering them to the defendant. Coastal’s headquarters are in Georgia, so the

state of Oregon has required Coastal to specify someone as its agent for receipt of service in

Oregon.

ANSWER Once the complaint and summons are served, Coastal has 20 days in which to file an answer.

Coastal’s answer, shown below, is a brief reply to each of the allegations in the complaint.

The answer tells the court and the plaintiff exactly what issues are in dispute. Since Coastal

admits that the parties entered into the contract that Beth claims they did, there is no need

for her to prove that in court. The court can focus its attention on the disputed issue:

whether Tony Caruso died accidentally.

STATE OF OREGON CIRCUIT COURT

Multnomah County Civil Action No. 09-5626 _________________ Elizabeth Smiles, Plaintiff v. Coastal Insurance Company, Inc., Defendant _____________________

ANSWER

Defendant Coastal Insurance Company, Inc., answers the complaint as follows:

1. Admit. 2. Admit. 3. Admit. 4. Admit. 5. Deny. 6. Admit. 7. Deny.

COASTAL INSURANCE COMPANY, INC., By its attorney, [Signed] Richard B. Stewart Kiley, Robbins, Stewart & Glote 333 Victory Boulevard Portland, OR October 30, 2012

If the defendant fails to answer in time, the plaintiff will ask for a default judgment. In granting a default judgment, the judge accepts every allegation in the complaint as true and

renders a decision that the plaintiff wins without a trial.

Recently, two men sued PepsiCo, claiming that the company stole the idea for Aquafina

water from them. They argued that they should receive a portion of the profits for every

bottle of Aquafina ever sold.

PepsiCo failed to file a timely answer, and the judge entered a default judgment in the

amount of $1.26 billion. On appeal, the default judgment was overturned and PepsiCo was

able to escape paying the massive sum, but other defendants are sometimes not so lucky.

It is important to respond to courts on time.

Default judgment A decision that the plaintiff wins without trial because the defendant failed to answer in time.

CHAPTER 3 Dispute Resolution 61

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

COUNTER-CLAIM Sometimes a defendant does more than merely answer a complaint and files a counter-claim, meaning a second lawsuit by the defendant against the plaintiff. Suppose that after her complaint

was filed in court, Beth had written a letter to the newspaper, calling Coastal a bunch of “thieves

and scoundrels who spend their days mired in fraud and larceny.” Coastal would not have found

that amusing. The company’s answer would have included a counterclaim against Beth for libel,

claiming that she falsely accused the insurer of serious criminal acts. Coastal would have

demanded money damages.

If Coastal counter-claimed, Beth would have to file a reply, which is simply an answer to a counter-claim. Beth’s reply would be similar to Coastal’s answer, admitting or denying the

various allegations.

CLASS ACTIONS Suppose Janet uncovers evidence that Coastal denies 80 percent of all life insurance

claims, calling them suicide. She could ask the court to permit a class action. If the court granted her request, she would represent the entire group of plaintiffs, including those

who are unaware of the lawsuit or even unaware they were harmed. Class actions can give

the plaintiffs much greater leverage, since the defendant’s potential liability is vastly

increased. In the back of her mind, Janet has thoughts of a class action, if she can uncover evidence that Coastal has used a claim of suicide to deny coverage to a large number of

claimants.

Notice how potent a class action can be. From his small town in Maine, Ernie decides to

get rich quickly. On the Internet, he advertises “Energy Breakthrough! Cut your heating

costs 15 percent for only $25.” In response, 100,000 people send him their money, and they

receive a photocopied graph, illustrating that if you wear two sweaters instead of one, you

will feel 15 percent warmer. Ernie has deceitfully earned $2,500,000 in pure profit. What can

the angry homeowners do? Under the laws of fraud and consumer protection, they have a

legitimate claim to their $25, and perhaps even to treble damages ($75). But few will sue,

because the time and effort required would be greater than the money recovered.

Economists analyze such legal issues in terms of efficiency. The laws against Ernie’s fraud are clear and well-intended, but they will not help in this case because it is too expensive for 100,000

people to litigate such a small claim. The effort would be hugely inefficient, both for the home- owners and for society generally. The economic reality may permit Ernie to evade the law’s

grasp.

That is one reason we have class actions. A dozen or so “heating plan” buyers can

all hire the same lawyer. This attorney will file court papers in Maine on behalf of

everyone, nationwide, who has been swindled by Ernie—including the 99,988 people who have yet to be notified that they are part of the case. Now the con artist, instead of

facing a few harmless suits for $25, must respond to a multimillion-dollar claim being

handled by an experienced lawyer. Treble damages become menacing: three times

$25 times 100,000 is no joke, even to a cynic like Ernie. He may also be forced to

pay for the plaintiffs’ attorney, as well as all costs of notifying class members and

disbursing money to them. With one lawyer representing an entire class, the legal

system has become fiercely efficient.

Congress recently passed a statute designed to force large, multi-state class actions out

of state courts, into federal. Proponents of the new law complained that state courts often

gave excessive verdicts, even for frivolous lawsuits. They said the cases hurt businesses

while enriching lawyers. Opponents argued that the new law was designed to shield large

corporations from paying for the harm they caused by sending the cases into a federal

system that is often hostile to such suits.

Counter-claim A second lawsuit by the defendant against the plaintiff.

Class action An individual represents the entire group of plaintiffs, including those who are unaware of the lawsuit or even unaware they were harmed.

Reply An answer to a counter-claim.

62 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

JUDGMENT ON THE PLEADINGS A party can ask the court for a judgment based simply on the pleadings themselves, by

filing a motion to dismiss. A motion is a formal request to the court that the court take some step or issue some order. During a lawsuit, the parties file many motions.

A motion to dismiss is a request that the court terminate a case without permitting it to go further. Suppose that a state law requires claims on life insurance contracts to be

filed within three years, and Beth files her claim four years after Tony’s death. Coastal

would move to dismiss based on this late filing. The court might well agree, and Beth

would never get into court.

DISCOVERY Few cases are dismissed on the pleadings. Most proceed quickly to the next step. Discovery is the critical, pre-trial opportunity for both parties to learn the strengths and weaknesses of

the opponent’s case.

The theory behind civil litigation is that the best outcome is a negotiated settlement and

that parties will move toward agreement if they understand the opponent’s case. That is

likeliest to occur if both sides have an opportunity to examine the evidence the other side will

bring to trial. Further, if a case does go all the way to trial, efficient and fair litigation cannot take

place in a courtroom filled with surprises. On television dramas, witnesses say astonishing

things that amaze the courtroom (and keep viewers hooked through the next commercial). In

real trials, the lawyers know in advance the answers to practically all questions asked because

discovery has allowed them to see the opponent’s documents and question its witnesses. The

following are the most important forms of discovery.

Interrogatories These are written questions that the opposing party must answer, in writing, under oath.

Depositions These provide a chance for one party’s lawyer to question the other party, or a potential witness, under oath. The person being questioned is the deponent. Lawyers for both parties are present. During depositions, and in trial, good lawyers choose words

carefully and ask questions calculated to advance their cause. A fine line separates ethical,

probing questions from those that are tricky, and a similar line divides answers that are

merely unhelpful from perjury.

Production of Documents and Things Each side may ask the other side to produce relevant documents for inspection and copying; to produce physical objects, such as part of a

car alleged to be defective; and for permission to enter on land to make an inspection, for

example, at the scene of an accident.

Physical and Mental Examination A party may ask the court to order an examina- tion of the other party, if his physical or mental condition is relevant, for example, in a case

of medical malpractice.

Janet Booker begins her discovery with interrogatories. Her goal is to learn Coastal’s basic

position and factual evidence and then follow up with more detailed questioning during

depositions. Her interrogatories ask for every fact Coastal relied on in denying the claim. She

asks for the names of all witnesses, the identity of all documents, including electronic records,

the description of all things or objects that they considered. She requests the names of all

corporate officers who played any role in the decision and of any expert witnesses Coastal plans

to call. Interrogatory No. 18 demands extensive information on all other claims in the past three years that Coastal has denied based on alleged suicide. Janet is looking for evidence that would

support a class action.

Beth remarks on how thorough the interrogatories are. “This will tell us what their case

is.” Janet frowns and looks less optimistic: she has done this before.

Discovery The pre-trial opportunity for both parties to learn the strengths and weaknesses of the opponent’s case.

Deponent The person being questioned in a deposition.

Motion A formal request to the court that the court take some step or issue some order.

Motion to dismiss A request that the court terminate a case without permitting it to go further.

CHAPTER 3 Dispute Resolution 63

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Coastal has 30 days to answer Janet’s interrogatories. Before it responds, Coastal mails

to Janet a notice of deposition, stating its intention to depose Beth Smiles. Beth and Janet

will go to the office of Coastal’s lawyer, and Beth will answer questions under oath. But at

the same time Coastal sends this notice, it sends 25 other notices of deposition. The company will depose Karen Caruso as soon as Beth’s deposition is over. Coastal also plans to depose

all seven employees of Enviro-Vision; three neighbors who lived near Tony and Karen’s

beach house; two policemen who participated in the search; the doctor and two nurses

involved in the case; Tony’s physician; Jerry Johnson, Tony’s tennis partner; Craig Bergson,

a college roommate; a couple who had dinner with Tony and Karen a week before his death;

and several other people.

Beth is appalled. Janet explains that some of these people might have relevant information.

But there may be another reason that Coastal is doing this: the company wants to make this

litigation hurt. Janet will have to attend every one of these depositions. Costs will skyrocket.

Janet files a motion for a protective order. This is a request that the court limit Coastal’s discovery by decreasing the number of depositions. Janet also calls Coastal’s lawyer, Rich

Stewart, and suggests that they discuss what depositions are really necessary. Rich insists

that all of the depositions are important. This is a $2 million case, and Coastal is entitled to

protect itself. As both lawyers know, the parties are entitled to discover anything that could reasonably lead to valid evidence.

Before Beth’s deposition date arrives, Rich sends Coast-

al’s answers to Enviro-Vision’s interrogatories. The answers

contain no useful information whatsoever. For example,

Interrogatory No. 10 asked, “If you claim that Anthony

Caruso committed suicide, describe every fact upon which

you rely in reaching that conclusion.” Coastal’s answer sim-

ply says, “His state of mind, his poor business affairs, and the

circumstances of his death all indicate suicide.”

Janet calls Rich and complains that the interrogatory

answers are a bad joke. Rich disagrees, saying that it is the

best information they have so early in the case. After they

debate it for 20 minutes, Rich offers to settle the case for

$100,000. Janet refuses and makes no counteroffer.

Janet files a motion to compel answers to interroga- tories, in other words, a formal request that the court order

Coastal to supply more complete answers. Janet submits a memorandum with the motion, which is a supporting argument. Although it is only a few pages long, the memorandum

takes several hours of online research and writing to prepare—more costs. Janet also informs

Rich Stewart that Beth will not appear for the deposition, since Coastal’s interrogatory

answers are inadequate.

Rich now files his motion to compel, asking the court to order Beth Smiles to appear for her deposition. The court hears all of the motions together. Janet argues that Coastal’s interrogatory

answers are hopelessly uninformative and defeat the whole purpose of discovery. She claims

that Coastal’s large number of depositions creates a huge and unfair expense for a small firm.

Rich claims that the interrogatory answers are the best that Coastal can do thus far and that

Coastal will supplement the answers when more information becomes available. He argues

against Interrogatory No. 18, the one in which Janet asked for the names of other policyholders

whom Coastal considered suicides. He claims that Janet is engaging in a fishing expedition that

would violate the privacy of Coastal’s insurance customers and provide no information relevant

to this case. He demands that Janet make Beth available for a deposition.

These discovery rulings are critical because they will color the entire lawsuit. A trial judge

has to make many discovery decisions before a case reaches trial. At times, the judge must

weigh the need of one party to see documents against the other side’s need for privacy. One

device a judge can use in reaching a discovery ruling is an in camera inspection, meaning that

But there may be another reason that Coastal is

doing this: the company wants to make this litigation hurt.

Motion for a protective order Request that the court limit discovery.

Memorandum A document detailing the arguments in support of a motion.

In camera inspection A judge's private review of evidence to determine whether it should be provided to the opposing party.

64 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

the judge views the requested documents alone, with no lawyers present, and decides whether

the other side is entitled to view them.

E-Discovery The biggest change in litigation in the last decade is the explosive rise of electronic discovery. Companies send hundreds, or thousands, or millions of emails—every

day. Many have attachments, sometimes hundreds of pages long. In addition, businesses

large and small have vast amounts of data stored electronically. All of this information is

potentially subject to discovery.

It is enormously time-consuming and expensive for companies to locate all of

the relevant material, separate it from irrelevant or confidential matter, and furnish it. A

firm may be obligated to furnish millions of emails to the opposing party. In one recent case, a defendant had to pay 31 lawyers full time, for six months, just to wade through the e-ocean

of documents and figure out which had to be supplied and how to produce it. Not

surprisingly, this data eruption has created a new industry: high-tech companies that assist

law firms in finding, sorting, and delivering electronic data.

Who is to say what must be supplied? What if an email string contains individual

emails that are clearly privileged (meaning a party need not divulge them), but others

that are not privileged? May a company refuse to furnish the entire string? Many will

try. However, some courts have ruled that companies seeking to protect email strings

must create a log describing every individual email and allow the court to determine

which are privileged. 5

When the cost of furnishing the data becomes burdensome, who should pay, the party

seeking the information or the one supplying it? In one million-dollar corporate lawsuit, the

defendant turned over 3,000 emails and 211,000 other documents. But the trial judge noted that

many of the email attachments—sometimes 12 to an email—had gone missing, and required the

company to produce them. The defendant protested that finding the attachments would cost an

additional $206,000. The judge ordered the company to do it, and bear the full cost.

Both sides in litigation sometimes use gamesmanship during discovery. Thus, if an

individual sues a large corporation, for example, the company may deliberately make discovery

so expensive that the plaintiff cannot afford the legal fees. And if a plaintiff has a poor case, he

might intentionally try to make the discovery process more expensive for the defendant than

his settlement offer. Even if a defendant expects to win at trial, an offer to settle a case for

$50,000 can look like a bargain if discovery alone will cost $100,000. Some defendants refuse,

but others are more pragmatic.

The following case illustrates another common discovery problem: refusal by one side to

appear for deposition. Did the defendant cynically believe that long delay would win the day,

given that the plaintiff was 78 years old? What can a court do in such a case?

STINTON V. ROBIN’S WOOD, INC.

45 A.D. 3d 203, 842 NYS2d 477 New York App. Div., 2007

C A S E S U M M A R Y

Facts: Ethel Flanzraich, 78 years old, slipped and fell on the steps of property owned by Robin’s Wood. She

broke her left leg and left arm. Flanzraich sued, claiming

that Robin’s Wood caused her fall by negligently paint-

ing the stairs. The defendant’s employee, Anthony

Monforte, had painted the steps. In its answer to the

complaint, Robin’s Wood denied all the significant alle-

gations.

5Universal Service Fund Telephone Billing Practices Litigation, 232 F.R.D. 669 (D. Kan. 2005).

CHAPTER 3 Dispute Resolution 65

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

In the Enviro-Vision case, the judge rules that Coastal must furnish more complete

answers to the interrogatories, especially as to why the company denied the claim. However,

he rules against Interrogatory No. 18, the one concerning other claims Coastal has denied. This

simple ruling kills Janet’s hope of making a class action of the case. He orders Beth to appear for

the deposition. As to future depositions, Coastal may take any 10 but then may take additional

depositions only by demonstrating to the court that the deponents have useful information.

Rich proceeds to take Beth’s deposition. It takes two full days. He asks about Enviro-

Vision’s past and present. He learns that Tony appeared to have won their biggest contract ever

from Rapid City, Oregon, but that he then lost it when he had a fight with Rapid City’s mayor.

He inquires into Tony’s mood, learns that he was depressed, and probes in every direction he

can to find evidence of suicidal motivation. Janet and Rich argue frequently over questions and

whether Beth should have to answer them. At times, Janet is persuaded and permits Beth to

answer; other times, she instructs Beth not to answer. For example, toward the end of the

second day, Rich asks Beth whether she and Tony had been sexually involved. Janet instructs

Beth not to answer. This fight necessitates another trip into court to determine whether Beth

must answer. The judge rules that Beth must discuss Tony’s romantic life only if Coastal has

some evidence that he was involved with someone outside his marriage. The company lacks

any such evidence.

Now limited to 10 depositions, Rich selects his nine other deponents carefully. For

example, he decides to depose only one of the two nurses; he chooses to question Jerry

Johnson, the tennis partner, but not Craig Bergson, the former roommate; and so forth. When

we look at the many legal issues this case raises, his choices seem minor. In fact, unbeknownst

to Rich or anyone else, his choices may determine the outcome of the case. As we will see later,

Craig Bergson has evidence that is possibly crucial to the lawsuit. If Rich decides not to depose

him, neither side will ever learn the evidence and the jury will never hear it. A jury can decide a

case only based on the evidence presented to it. Facts are elusive—and often controlling.

During a preliminary conference with the trial judge,

the parties agreed to hold depositions of both parties on

August 4. Flanzraich appeared for deposition, but Robin’s

Wood did not furnish its employee, Monforte, nor did it

offer any other company representative. The court then

ordered the deposition of the defendant to take place the

following April 2. Again, Robin’s Wood produced neither

Monforte nor anyone else. On July 16, the court ordered the

defendant to produce its representative within 30 days.

Once more, no one showed up for deposition.

On August 18—over one year after the original deposition date—Flanzraich moved to strike the defendant’s answer,

meaning that the plaintiff would win by default. The com-

pany argued that it had made diligent efforts to locate Mon-

forte and force him to appear. However, all the letters sent to

Monforte were addressed care of Robin’s Wood. Finally, the

company stated that it no longer employed Monforte.

The trial judge granted the motion to strike the answer.

That meant that Robin’s Wood was liable for Flanzraich’s

fall. The only remaining issue was damages. The court

determined that Robin’s Wood owed $22,631 for medical

expenses, $150,000 for past pain and suffering, and

$300,000 for future pain and suffering. One day later, Flanz-

raich died of other causes. Robin’s Wood appealed.

Issue: Did the trial court abuse its discretion by striking the defendant’s answer?

Decision: No, the trial court did not abuse its discretion. Affirmed.

Reasoning: Normally, a lawsuit must be decided on the evidence and reasonable conclusions. However, if a de-

fendant fails to respond to discovery requests, and its failure

is willful, extreme, and disrespectful of the court, a trial

judge may strike the defendant’s answer altogether.

Robin’s Wood failed to comply with three orders to

appear for deposition. The company never produced Mon-

forte while he worked there. It failed to notify the plaintiff

when Monforte left, and it made no effort to produce

another employee for deposition. The company did every-

thing it could to ensure that Flanzraich would never speak

with its worker. Had the company at least produced another

representative, Flanzraich could have learned where Mon-

forte had gone because the record indicates Robin’s Wood

knew his whereabouts.

These delays were particularly menacing to Flanz-

raich’s case because she was elderly—a fact well known

to the company. A trial judge may respond to such offen-

sive conduct with appropriate orders.

66 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

In each deposition, Rich carefully probes with his questions, sometimes trying to learn

what he actually does not know, sometimes trying to pin down the witness to a specific version

of facts so that Rich knows how the witness will testify at trial. Neighbors at the beach testify

that Tony seemed tense; one testifies about seeing Tony, unhappy, on the beach with his dog.

Another testifies he had never before seen Blue tied up on the beach. Karen Caruso admits that

Tony had been somewhat tense and unhappy the last couple of months. She reluctantly

discusses their marriage, admitting there were problems.

Other Discovery Rich sends Requests to Produce Documents, seeking medical records about Tony. Once again, the parties fight over which records are relevant, but Rich

gets most of what he wants. Janet does less discovery than Rich because most of the

witnesses she will call are friendly witnesses. She can interview them privately without

giving any information to Coastal. With the help of Beth and Karen, Janet builds her case

just as carefully as Rich, choosing the witnesses who will bolster the view that Tony was in

good spirits and died accidentally.

She deposes all the officers of Coastal who participated in the decision to deny

insurance coverage. She is particularly aggressive in pinning them down as to the limited

information they had when they denied Beth’s claim.

SUMMARY JUDGMENT When discovery is completed, both sides may consider seeking summary judgment.

Summary judgment is a ruling by the court that no trial is necessary because no essential facts are in dispute. The purpose of a trial is to determine the facts of the case; that is, to decide who

did what to whom, why, when, and with what consequences. If there are no relevant facts in

dispute, then there is no need for a trial.

In the following case, the defendant won summary judgment, meaning that the case never

went to trial. And yet, this was only the beginning of trouble for that defendant, Bill Clinton.

JONES V. CLINTON

990 F. Supp. 657, 1998 U.S. Dist. LEXIS 3902 United States District Court for the Eastern District of Arkansas, 1998

C A S E S U M M A R Y

Facts: In 1991, Bill Clinton was governor of Arkansas. Paula Jones worked for a state agency, the Arkansas

Industrial Development Commission (AIDC). When

Clinton became president, Jones sued him, claiming

that he had sexually harassed her. She alleged that in

May 1991, the governor arranged for her to meet him in a

hotel room in Little Rock, Arkansas. When they were alone,

he put his hand on her leg and slid it toward her pelvis. She

escaped from his grasp, exclaimed, “What are you doing?”

and said she was “not that kind of girl.” Upset and confused,

she sat on a sofa near the door. She claimed that Clinton

approached her, “lowered his trousers and underwear,

exposed his penis, and told her to kiss it.” Jones was

horrified, jumped up, and said she had to leave. Clinton

responded by saying, “Well, I don’t want to make you do

anything you don’t want to do,” and pulled his pants up. He

added that if she got in trouble for leaving work, Jones

should “have Dave call me immediately and I’ll take care

of it.” He also said, “You are smart. Let’s keep this between

ourselves.” Jones remained at AIDC until February 1993,

when she moved to California because of her husband’s job

transfer.

President Clinton denied all the allegations. He also

filed for summary judgment, claiming that Jones had not

alleged facts that justified a trial. Jones opposed the

motion for summary judgment.

Issue: Was Clinton entitled to summary judgment, or was Jones entitled to a trial?

Decision: Jones failed to make out a claim of sexual harassment. Summary judgment was granted for the

president.

Summary judgment A ruling by the court that no trial is necessary because no essential facts are in dispute.

CHAPTER 3 Dispute Resolution 67

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

In other words, the court acknowledged that there were factual disputes, but

concluded that even if Jones proved each of her allegations, she would still lose the case, because her allegations fell short of a legitimate case of sexual harassment. Jones

appealed the case. Later the same year, as the appeal was pending and the House of

Representatives was considering whether to impeach President Clinton, the parties

settled the dispute. Clinton, without acknowledging any of the allegations, agreed to

pay Jones $850,000 to drop the suit.

Janet and Rich each consider moving for summary judgment, but both correctly decide

that they would lose. There is one major fact in dispute: did Tony Caruso commit suicide?

Only a jury may decide that issue. As long as there is some evidence supporting each side of a key factual dispute, the court may not grant summary judgment.

EXAM Strategy

Question: You are a judge. Mel has sued Kevin, claiming that while Kevin was drunk, he negligently drove his car down Mel’s street, and destroyed rare trees on a

lot that Mel owns, next to his house. Mel’s complaint stated that three witnesses at a

bar saw Kevin take at least eight drinks less than an hour before the damage was

done. In Kevin’s answer, he denied causing the damage and denied being in the bar

that night.

Kevin’s lawyer has moved for summary judgment. He proves that three weeks

before the alleged accident, Mel sold the lot to Tatiana.

Mel’s lawyer opposes summary judgment. He produces a security camera tape

proving that Kevin was in the bar, drinking beer, 34 minutes before the damage was

done. He produces a signed statement from Sandy, a landscape gardener who lives

across the street from the scene. Sandy states that she heard a crash, hurried to the

windows, and saw Kevin’s car weaving away from the damaged trees. She is a land-

scape gardener and estimates the tree damage at $30,000 to $40,000. How should you

rule on the motion?

Strategy: Do not be fooled by red herrings about Kevin’s drinking or the value of the trees. Stick to the question: should you grant summary judgment? Trials are necessary

to resolve disputes about essential factual issues. Summary judgment is appropriate

when there are no essential facts in dispute. Is there an essential fact not in dispute?

Find it. Apply the rule. Being a judge is easy!

Result: There are facts in dispute, but none of them are essential. It makes no difference whether Kevin was drunk or sober, whether he caused the harm or was at

home in bed. Because Mel does not own the property, he cannot recover for the

damage to it. He cannot win. You should grant Kevin’s summary judgment motion.

Reasoning: To establish this type of sexual harassment case, a plaintiff must show that her refusal to submit to

unwelcome sexual advances resulted in specific harm to

her job.

Jones received every merit increase and cost-of-living

allowance for which she was eligible. Her only job transfer

involved a minor change in working conditions, with no

reduction in pay or benefits. Jones claims that she was

obligated to sit in a less private area, often with no work to

do, and was the only female employee not to receive

flowers on Secretary’s Day. However, even if these alle-

gations are true, all are trivial and none is sufficient to

create a sexual harassment suit. Jones has demonstrated

no specific harm to her job.

68 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

FINAL PREPARATION Well over 90 percent of all lawsuits are settled before trial. But the parties in the Enviro-Vision

dispute are unable to compromise, so each side gears up for trial. The attorneys make lists of all

witnesses they will call. They then prepare each witness very carefully, rehearsing the ques-

tions they will ask. It is considered ethical and proper to rehearse the questions, provided the

answers are honest and come from the witness. It is unethical and illegal for a lawyer to tell a

witness what to say. It also makes for a weaker presentation of evidence—witnesses giving

scripted answers are often easy to spot. The lawyers also have colleagues cross-examine each

witness, so that the witnesses are ready for the questions the other side’s lawyer will ask.

This preparation takes hours and hours, for many days. Beth is frustrated that she cannot do

the work she needs to for Enviro-Vision because she is spending so much time preparing the case.

Other employees have to prepare as well, especially for cross- examination by Rich Stewart, and it

is a terrible drain on the small firm. More than a year after Janet filed her complaint, they are ready

to begin trial.

3-4 TRIAL 3-4a Adversary System Our system of justice assumes that the best way to bring out the truth is for the two

contesting sides to present the strongest case possible to a neutral factfinder. Each side

presents its witnesses and then the opponent has a chance to cross-examine. The adversary

system presumes that by putting a witness on the stand and letting both lawyers question

her, the truth will emerge.

The judge runs the trial. Each lawyer sits at a large table near the front. Beth, looking

tense and unhappy, sits with Janet. Rich sits with a Coastal executive. In the back of the

courtroom are benches for the public. On one bench sits Craig Bergson. He will watch the

entire proceeding with intense interest and a strange feeling of unease. He is convinced he

knows what really happened.

Janet has demanded a jury trial for Beth’s case, and Judge Rowland announces that they

will now impanel the jury.

3-4b Right to Jury Trial Not all cases are tried to a jury. As a general rule, both plaintiff and defendant have a right to

demand a jury trial when the lawsuit is one for money damages. For example, in a typical contract

lawsuit, such as Beth’s insurance claim, both plaintiff and defendant have a jury trial right whether

they are in state or federal court. Even in such a case, though, the parties may waive the jury right, meaning they agree to try the case to a judge. Also, if the plaintiff is seeking an equitable remedy

such as an injunction or other court-ordered enforcement, there is no jury right for either party.

3-4c Voir Dire The process of selecting a jury is called voir dire, which means “to speak the truth.”6 The court’s goal is to select an impartial jury; the lawyers will each try to get a jury as favorable to

their side as possible. A court sends letters to potential jurors who live in its county. Those

who do not report for jury duty face significant consequences.

6 Students of French note that voir means “to see” and assume that voir dire should translate as “to see, to speak.” However, the legal term is centuries old and derives not from modern French but from Old

French, in which voir meant “truth.”

Voir dire The process of selecting a jury.

CHAPTER 3 Dispute Resolution 69

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

When voir dire begins, potential jurors are questioned individually, sometimes by the

judge and sometimes by the two lawyers, as each side tries to ferret out potential bias.

Each lawyer may make any number of challenges for cause, claiming that a juror has demonstrated probable bias. For example, if a prospective juror in the Enviro-Vision case

works for an insurance company, the judge will excuse her on the assumption that she

would be biased in favor of Coastal. If the judge perceives no bias, the lawyer may still

make a limited number of peremptory challenges, entitling him to excuse that juror for virtually any reason, which need not be stated in court. For example, if Rich believes that

a juror seems hostile to him personally, he will use a peremptory challenge to excuse that

juror, even if the judge sensed no animosity. The process continues until 14 jurors are

seated. Twelve will comprise the jury; the other two are alternates who hear the case and

remain available in the event one of the impaneled jurors becomes ill or otherwise cannot

continue.

Although jury selection for a case can sometimes take many days, in the Enviro-Vision

case, the first day of the hearing ends with the jury selected. In the hallway outside the

court, Rich offers Janet $200,000 to settle. Janet reports the offer to Beth and they agree to

reject it. Craig Bergson drives home, emotionally confused. Only three weeks before his

death, Tony had accidentally met his old roommate and they had had several drinks. Craig

believes that what Tony told him answers the riddle of this case.

PEREDA V. PARAJON

957 So.2d 1194 Florida Court of Appeals, 2007

C A S E S U M M A R Y

Facts: Maria Parajon sued Diana Pereda for injuring her in a car accident. During voir dire, Parajon’s lawyer asked the panel of prospective jurors these questions: “Is there

anybody sitting on this panel now that has ever been

under the care of a physician for personal injuries,

whether you had a lawsuit or not? In other words, you

may not have had any sort of lawsuit, but you slipped and

fell—you had any accidents?”

Several of the prospective jurors raised their hands,

allowing the lawyers to question more deeply into possible

bias. However, Lisa Berg, a prospective juror who happened

to be a lawyer, did not respond. Berg and others were seated

as jurors, and ultimately awarded Parajon $450,000 for med-

ical damages and pain and suffering.

After the trial, questioned in court by the judge,

Berg admitted that three years earlier she had been injured in

a car accident, hired a lawyer to sue, and settled out of court for

$4,000. Asked about the settlement, Berg replied, “I think

everyone always wants more money.”

Parajon moved for a new trial but the judge denied

the motion. Parajon appealed.

Issue: Is Parajon entitled to a new trial based on Berg’s failure to disclose her own personal injury law- suit?

Decision: Yes, Parajon is entitled to a new trial. Reversed and remanded for a new trial.

Reasoning: When a juror does not accurately answer questions during voir dire, a new trial is called for if the

following three criteria are met:

First, the information is relevant and material to

the case. Second, the juror concealed it. Third,

the lawyers made a diligent effort to seek the infor-

mation.

Berg’s own car accident was relevant and material

because it might have influenced her opinion in the

case. As a lawyer herself, Berg knew that the question

applied to her, and she deliberately chose not to

answer it. The fact that other prospective jurors

answered the question indicated that Parajon’s lawyers

made a diligent and reasonable attempt to get the

information.

Peremptory challenges The right to excuse a juror for virtually any reason.

Challenges for cause A claim that a juror has demonstrated probable bias.

70 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3-4d Opening Statements The next day, each attorney makes an opening statement to the jury, summarizing the proof

he or she expects to offer, with the plaintiff going first. Janet focuses on Tony’s successful

life, his business and strong marriage, and the tragedy of his accidental death. 7

Rich works hard to establish a friendly rapport with the jury. If members of the jury like

him, they will tend to pay more attention to his presentation of evidence. He expresses regret

about the death. Nonetheless, suicide is a clear exclusion from the policy. If insurance

companies are forced to pay claims never bargained for, everyone’s insurance rates will go up.

3-4e Burden of Proof In civil cases, the plaintiff has the burden of proof. That means that the plaintiff must

convince the jury that its version of the case is correct; the defendant is not obligated to

disprove the allegations.

The plaintiff’s burden in a civil lawsuit is to prove its case by a preponderance of the evidence. It must convince the jury that its version of the facts is at least slightly more likely than the defendant’s version. Some courts describe this as a “51-49” persuasion; that is, that

plaintiff s proof must “just tip” credibility in its favor. By contrast, in a criminal case, the

prosecution must demonstrate beyond a reasonable doubt that the defendant is guilty. The burden of proof in a criminal case is much tougher because the likely consequences are, too.

See Exhibit 3.3.

3-4f Plaintiff ’s Case Because the plaintiff has the burden of proof, Janet puts in her case first. She wants to prove

two things. First, that Tony died. That is easy because the death certificate clearly

demonstrates it and Coastal does not seriously contest it. Second, in order to win double

Civil Lawsuit Criminal Prosecution

Defendant Plaintiff

Defendant

Prosecution

EXHIBIT 3.3 Burden of Proof. In a civil lawsuit, a plaintiff wins with a mere preponderance of the evidence. But the prosecution must persuade a jury beyond a reasonable doubt in order to win a criminal conviction.

Preponderance of the evidence The plaintiff’s burden in a civil lawsuit.

Beyond a reasonable doubt The government’s burden in a criminal prosecution.

© C e n g a g e L e a rn in g

7 Janet Booker has dropped her claim for triple damages against Coastal. To have any hope of such a

verdict, she would have to show that Coastal had no legitimate reason at all for denying the claim.

Discovery has convinced her that Coastal will demonstrate some rational reasons for what it did.

CHAPTER 3 Dispute Resolution 71

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

indemnity damages, she must show that the death was accidental. She will do this with the

testimony of the witnesses she calls, one after the other. Her first witness is Beth. When a

lawyer asks questions of her own witness, it is direct examination. Janet brings out all the evidence she wants the jury to hear: that the business was basically sound, though tem-

porarily troubled, that Tony was a hard worker, why the company took out life insurance

policies, and so forth.

Then Rich has a chance to cross-examine Beth, which means to ask questions of an opposing witness. He will try to create doubt in the jury’s mind. He asks Beth only

questions for which he is certain of the answers, based on discovery. Rich gets Beth to

admit that the firm was not doing well the year of Tony’s death; that Tony had lost the

best client the firm ever had; that Beth had reduced salaries; and that Tony had been

depressed about business.

3-4g Rules of Evidence The lawyers are not free simply to ask any question they want. The law of evidence

determines what questions a lawyer may ask and how the questions are to be phrased,

what answers a witness may give, and what documents may be introduced. The goal is to

get the best evidence possible before the jurors so they can decide what really happened. In

general, witnesses may only testify about things they saw or heard.

These rules are complex, and a thorough look at them is beyond the scope of this

chapter. However, they can be just as important in resolving a dispute as the underlying

substantive law. Suppose that a plaintiff’s case depends upon the jury hearing about a

certain conversation, but the rules of evidence prevent the lawyer from asking about it. That

conversation might just as well never have occurred.

Janet calls an expert witness, a marine geologist, who testifies about the tides and

currents in the area where Tony’s body was found. The expert testifies that even experi-

enced swimmers can be overwhelmed by a sudden shift in currents. Rich objects strenu-

ously that this is irrelevant, because there is no testimony that there was such a current at the time of Tony’s death. The judge permits the testimony.

Karen Caruso testifies that Tony was in “reasonably good” spirits the day of his death,

and that he often took Blue for walks along the beach. Karen testifies that Blue was part

Newfoundland. Rich objects that testimony about Blue’s pedigree is irrelevant, but Janet

insists it will show why Blue was tied up. The judge allows the testimony. Karen says that

whenever Blue saw them swim, he would instinctively go into the water and pull them to

shore. Does that explain why Blue was tied up? Only the jury can answer.

Cross-examination is grim for Karen. Rich slowly but methodically questions her about

Tony’s state of mind and brings out the problems with the company, his depression, and

tension within the marriage. Janet’s other witnesses testify essentially as they did during

their depositions.

3-4h Motion for Directed Verdict At the close of the plaintiff’s case, Rich moves for a directed verdict; that is, a ruling that the

plaintiff has entirely failed to prove some aspect of her case. Rich is seeking to win without

even putting in his own case. He argues that it was Beth’s burden to prove that Tony died

accidentally and that she has entirely failed to do that.

A directed verdict is permissible only if the evidence so clearly favors the defendant that reasonable minds could not disagree on it. If reasonable minds could disagree, the motion must be denied. Here, Judge Rowland rules that the plaintiff has put in enough evidence of

accidental death that a reasonable person could find in Beth’s favor. The motion is denied.

There is no downside for Rich to ask for a directed verdict. The trial continues as if he

had never made such a motion.

Directed verdict A ruling that the plaintiff has entirely failed to prove some aspect of her case.

Cross-examine To ask questions of an opposing witness.

Direct examination When a lawyer questions her own witness.

72 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3-4i Defendant’s Case Rich now puts in his case, exactly as Janet did, except that he happens to have fewer

witnesses. He calls the examining doctor, who admits that Tony could have committed

suicide by swimming out too far. On cross-examination, Janet gets the doctor to acknowl-

edge that he has no idea whether Tony intentionally drowned. Rich also questions several

neighbors as to how depressed Tony had seemed and how unusual it was that Blue was tied

up. Some of the witnesses Rich deposed, such as the tennis partner Jerry Johnson, have

nothing that will help Coastal’s case, so he does not call them.

Craig Bergson, sitting in the back of the courtroom, thinks how different the trial would

have been had he been called as a witness. When he and Tony had the fateful drink, Tony

had been distraught: business was terrible, he was involved in an extramarital affair that he

could not end, and he saw no way out of his problems. He had no one to talk to and had

been hugely relieved to speak with Craig. Several times Tony had said, “I just can’t go on

like this. I don’t want to, anymore.” Craig thought Tony seemed suicidal and urged him to

see a therapist Craig knew and trusted. Tony had said that it was good advice, but Craig is

unsure whether Tony sought any help.

This evidence would have affected the case. Had Rich known of the conversation, he

would have deposed Craig and the therapist. Coastal’s case would have been far stronger,

perhaps overwhelming. But Craig’s evidence will never be heard. Facts are critical. Rich’s

decision to depose other witnesses and omit Craig may influence the verdict more than any

rule of law.

3-4j Closing Arguments Both lawyers sum up their case to the jury, explaining how they hope the jury will interpret

what they have heard. Janet summarizes the plaintiff’s version of the facts, claiming that

Blue was tied up so that Tony could swim without worrying about him. Rich claims that

business and personal pressures had overwhelmed Tony. He tied up his dog, neatly folded

his clothes, and took his own life.

3-4k Jury Instructions Judge Rowland instructs the jury as to its duty. He tells them that they are to evaluate the

case based only on the evidence they heard at trial, relying on their own experience and

common sense.

He explains the law and the burden of proof, telling the jury that it is Beth’s obligation to

prove that Tony died. If Beth has proven that Tony died, she is entitled to $1 million; if she

has proven that his death was accidental, she is entitled to $2 million. However, if Coastal has

proven suicide, Beth receives nothing. Finally, he states that if they are unable to decide

between accidental death and suicide, there is a legal presumption that it was accidental. Rich

asks Judge Rowland to rephrase the “legal presumption” part, but the judge declines.

3-4l Verdict The jury deliberates informally, with all jurors entitled to voice their opinion. Some

deliberations take two hours; some take two weeks. Many states require a unanimous

verdict; others require only, for example, a 10–2 vote in civil cases.

This case presents a close call. No one saw Tony die. Yet even though they cannot

know with certainty, the jury’s decision will probably be the final word on whether he took

his own life. After a day and a half of deliberating, the jury notifies the judge that it has

reached a verdict. Rich quickly makes a new offer: $350,000. (The two sides have the right

to settle a case until the moment when the last appeal is decided.) Beth hesitates but turns

it down.

CHAPTER 3 Dispute Resolution 73

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

The judge summons the lawyers to court, and Beth goes as well. The judge asks the

foreman if the jury has reached a decision. He states that it has: The jury finds that Tony

Caruso drowned accidentally, and awards Beth Smiles $2 million.

3-4m Motions after the Verdict Rich immediately moves for a judgment non obstante veredicto (JNOV), meaning a judgment notwithstanding the jury’s verdict. He is asking the judge to overturn the jury’s verdict.

Rich argues that the jury’s decision went against all of the evidence. He also claims that the

judge’s instructions were wrong and misled the jury.

Judge Rowland denies the JNOV. Rich immediately moves for a new trial, making the

same claim, and the judge denies the motion. Beth is elated that the case is finally over—

until Janet says she expects an appeal. Craig Bergson, leaving the courtroom, wonders if he

did the right thing. He felt sympathy for Beth and none for Coastal. Yet now he is neither

happy nor proud.

3-5 APPEALS Two days later, Rich files an appeal to the court of appeals. The same day, he phones Janet

and increases his settlement offer to $425,000. Beth is tempted but wants Janet’s advice.

Janet says the risks of an appeal are that the court will order a new trial, and they would start

all over. But to accept this offer is to forfeit over $1.5 million. Beth is unsure what to do. The

firm desperately needs cash now, and appeals may take years. Janet suggests they wait until

oral argument, another eight months.

Rich files a brief arguing that there were two basic errors at the trial: first, that the jury’s

verdict is clearly contrary to the evidence; and second, that the judge gave the wrong

instructions to the jury. Janet files a reply brief, opposing Rich on both issues. In her brief,

Janet cites many cases that she claims are precedent: earlier decisions by the state appellate courts on similar or identical issues.

Eight months later, the lawyers representing Coastal and Enviro-Vision appear in the

court of appeals to argue their case. Rich, the appellant, goes first. The judges frequently

interrupt his argument with questions. They show little sympathy for his claim that the

verdict was against the facts. They seem more sympathetic with his second point, that the

instructions were wrong.

When Janet argues, all of their questions concern the judge’s instructions. It appears

they believe the instructions were in error. The judges take the case under advisement,

meaning they will decide some time in the future—maybe in two weeks, maybe in five

months.

3-5a Appeals Court Options The court of appeals can affirm the trial court, allowing the decision to stand. The court may modify the decision, for example, by affirming that the plaintiff wins but decreasing the size of the award. (That is unlikely here; Beth is entitled to $2 million or nothing.) The

court might reverse and remand, nullifying the lower court’s decision and returning the case to the lower court for a new trial. Or it could simply reverse, turning the loser (Coastal) into the winner, with no new trial.

What will it do here? On the factual issue, it will probably rule in Beth’s favor. There

was evidence from which a jury could conclude that Tony died accidentally. It is true that there was also considerable evidence to support Coastal’s position, but that is probably not

enough to overturn the verdict. If reasonable people could disagree on what the evidence

proves, an appellate court generally refuses to change the jury’s factual findings. The court

Reverse and remand To nullify the lower decision and return the case for reconsideration or retrial.

Judgment non obstante veredicto

A judgment notwithstanding the jury’s verdict.

Precedent Earlier decisions by the state appellate courts on similar or identical issues.

Affirm To allow the decision to stand.

Modify To affirm the outcome but with changes.

74 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

of appeals is likely to rule that a reasonable jury could have found accidental death, even if the appellate judges personally suspect that Tony may have killed himself.

The judge’s instructions raise a more difficult problem. Some states would require a

more complex statement about “presumptions.” 8

What does a court of appeals do if it decides the trial court’s instructions were wrong? If

it believes the error rendered the trial and verdict unfair, it will remand the case; that is,

send it back to the lower court for a new trial. However, the court may conclude that the

mistake was harmless error. A trial judge cannot do a perfect job, and not every error is fatal. The court may decide the verdict was fair in spite of the mistake.

Janet and Beth talk. Beth is very anxious and wants to settle. She does not want to wait

four or five months, only to learn that they must start all over. Janet urges that they wait a

few weeks to hear from Rich: They don’t want to seem too eager.

A week later, Rich telephones and offers $500,000. Janet turns it down, but says she will

ask Beth if she wants to make a counter-offer. She and Beth talk. They agree that they will

settle for $1 million. Janet then calls Rich and offers to settle for $1.7 million. Rich and Janet

debate the merits of the case. Rich later calls back and offers $750,000, saying he doubts

that he can go any higher. Janet counters with $1.4 million, saying she doubts she can go any

lower. They argue, both predicting that they will win on appeal.

Rich calls, offers $900,000 and says, “That’s it. No more.” Janet argues for $1.2 million,

expecting to nudge Rich up to $1 million. He doesn’t nudge, instead saying, “Take it or

leave it.” Janet and Beth talk it over. Janet telephones Rich and accepts $900,000 to settle

the case.

If they had waited for the court of appeals decision, would Beth have won? It is

impossible to know. It is certain, though, that whoever lost would have appealed. Months

would have passed waiting to learn if the state supreme court would accept the case. If that

court had agreed to hear the appeal, Beth would have endured another year of waiting, brief

writing, oral argument, and tense hoping. The high court has all of the options discussed: to

affirm, modify, reverse and remand, or simply reverse.

3-6 ALTERNATIVE DISPUTE RESOLUTION As we have seen in the previous section, trials can be trying. Lawsuits can cause prolonged

periods of stress, significant legal bills, and general unpleasantness. Many people and

companies prefer to settle cases out of court. Alternative dispute resolution (ADR) provides

several semi-formal methods of resolving conflicts. We will look at different types of ADR

and analyze their strengths and weaknesses.

3-6a Negotiation In most cases, the parties negotiate, whether personally or through lawyers. Fortunately, the

great majority of disputes are resolved this way. Negotiation often begins as soon as a

dispute arises and may last a few days or several years.

8 Judge Rowland probably should have said, “The law presumes that death is accidental, not suicide.

So if there were no evidence either way, the plaintiff would win because we presume accident. But if

there is competing evidence, the presumption becomes irrelevant. If you think that Coastal Insurance

has introduced some evidence of suicide, then forget the legal presumption. You must then decide

what happened based on what you have seen and heard in court, and on any inferences you choose to

draw.” Note that the judge’s instructions were different, though similar.

Harmless error A mistake by the trial judge that was too minor to affect the outcome.

CHAPTER 3 Dispute Resolution 75

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3-6b Mediation Mediation is the fastest growing method of dispute resolution in the United States.

Here, a neutral person, called a mediator, attempts to guide the two disputing parties toward a voluntary settlement. (In some cases, there may be two or more mediators, but

we will use the singular.) Generally, the two disputants voluntarily enter mediation,

although some judges order the parties to try this form of ADR before allowing a case to

go to trial.

A mediator does not render a decision in the dispute, but uses a variety of skills to move

the parties toward agreement. Often a mediator will shuttle between the antagonists,

hearing their arguments, sorting out the serious issues from the less important, prompting

the parties and lawyers alike to consider new perspectives, and looking for areas of agree-

ment. Mediators must earn the trust of both parties, listen closely, try to diffuse anger and

fear, and build the will to settle. Good mediators do not need a law degree, but they must

have a sense of humor and low blood pressure.

Mediation has several major advantages. Because the parties maintain control of the

process, the two antagonists can speak freely. They need not fear conceding too much,

because no settlement takes effect until both parties sign. All discussions are confidential,

further encouraging candid talk. This is particularly helpful in cases involving proprietary

information that might be revealed during a trial.

Of all forms of dispute resolution, mediation probably offers the strongest “win-

win” potential. Since the goal is voluntary settlement, neither party needs to fear that it

will end up the loser. This is in sharp contrast to litigation, where one party is very

likely to lose. Removing the fear of defeat often encourages thinking and talking that

are more open and realistic than negotiations held in the midst of a lawsuit. Studies

show that over 75 percent of mediated cases do reach a voluntary settlement. Such an

agreement is particularly valuable to parties that wish to preserve a long-term relation-

ship. Consider two companies that have done business successfully for 10 years but now

are in the midst of a million-dollar trade dispute. A lawsuit could last three or more

years and destroy any chance of future trade. However, if the parties mediate the

disagreement, they might reach an amicable settlement within a month or two and

could quickly resume their mutually profitable business.

This form of ADR works for disputes both big and small. Two college roommates

who cannot get along may find that a three-hour mediation session restores tranquility

in the apartment. On a larger scale, consider the work of former U.S. Senator George

Mitchell, who mediated the Anglo-Irish peace agreement, setting Northern Ireland on

the path to peace for the first time in three centuries. Like most good mediators,

Mitchell was remarkably patient. In an early session, Mitchell permitted the head of

one militant party to speak without interruption—for seven straight hours. The diatribe

yielded no quick results, but Mitchell believed that after Northern Ireland’s tortured

history, any nonviolent discussions represented progress.

3-6c Arbitration In this form of ADR, the parties agree to bring in a neutral third party, but with a major

difference: The arbitrator has the power to impose an award. The arbitrator allows each side

equal time to present its case and, after deliberation, issues a binding decision, generally

without giving reasons. Unlike mediation, arbitration ensures that there will be a final result,

although the parties lose control of the outcome.

Judge Judy and similar TV court shows are examples of arbitration. Before the shows

are taped, people involved in a real dispute sign a contract in which they give up the right to

go to court over the incident and agree to be bound by the judge’s decision.

Mediator A neutral person who attempts to guide two disputing parties toward a voluntary settlement.

76 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Parties in arbitration give up many additional rights that litigants retain, including

discovery and class action. In arbitration, as already discussed as applied to trials,

discovery allows the two sides in a lawsuit to obtain documentary and other evidence

from the opponent before the dispute is decided. Arbitration permits both sides to keep

secret many files that would have to be divulged in a court case, potentially depriving

the opposing side of valuable evidence. A party may have a stronger case than it

realizes, and the absence of discovery may permanently deny it that knowledge. As

discussed earlier in this chapter, a class action is a suit in which one injured party

represents a large group of people who have suffered similar harm. Arbitration elim-

inates this possibility, since injured employees face the employer one at a time. Finally,

the fact that an arbitrator may not provide a written, public decision bars other plaintiffs,

and society generally, from learning what happened.

Traditionally, parties sign arbitration agreements after some incident takes place. A car accident would happen first, and the drivers would agree to arbitration second. But today,

many parties agree in advance to arbitrate any disputes that may arise in the future. For example, a new employee may sign an agreement requiring arbitration of any future

disputes with his employer; a customer opening an account with a stockbroker or bank—

or health plan—may sign a similar form, often without realizing it. The good news is fewer

lawsuits; the bad news is you might be the person kept out of court.

Assume that you live in Miami. Using the Internet, you order a $1,000 ThinkLite

laptop computer, which arrives in a carton loaded with six fat instructional manuals and

many small leaflets. You read some of the documents and ignore others. For four weeks,

you struggle to make your computer work, to no avail. Finally, you call ThinkLite and

demand a refund, but the company refuses. You file suit in your local court, at which

time the company points out that buried among the hundreds of pages it mailed you

was a mandatory arbitration form. This document prohibits you from filing suit against the company and states that if you have any complaint with the company, you must fly

to Chicago, pay a $2,000 arbitrator’s fee, plead your case before an arbitrator selected by

the Laptop Trade Association of America, and, should you lose, pay ThinkLite’s

attorneys’ fees, which could be several thousand dollars. Is that mandatory arbitration

provision valid? It is too early to say with finality, but thus far, the courts that have

faced such clauses have enforced them. 9

Chapter Conclusion No one will ever know for sure whether Tony Caruso took his own life. Craig Bergson’s evidence might have tipped the scales in favor of Coastal. But even that is uncertain, since

the jury could have found him unpersuasive. After two years, the case ends with a settle-

ment and uncertainty—both typical lawsuit results. The missing witness is less common but

not extraordinary. The vaguely unsatisfying feeling about it all is only too common and

indicates why most parties settle out of court.

9 See, for example, Hill v. Gateway 2000, 105 F.3d 1147, 1997 U.S. App. LEXIS 1877 (7th Cir. 1997), upholding a similar clause.

CHAPTER 3 Dispute Resolution 77

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

EXAM REVIEW

1. COURT SYSTEMS There are many systems of courts, one federal and one in each state. A federal court will hear a case only if it involves a federal question or diversity

jurisdiction. (pp. 52–57)

2. TRIAL AND APPELLATE COURTS Trial courts determine facts and apply the law to the facts; appeals courts generally accept the facts found by the trial court and

review the trial record for errors of law. (pp. 55–59)

Question: Jade sued Kim, claiming that Kim promised to hire her as an in-store model for $1,000 per week for eight weeks. Kim denied making the

promise, and the jury was persuaded: Kim won. Jade has appealed, and now

she offers Steve as a witness. Steve will testify to the appeals court that he

saw Kim hire Jade as a model, exactly as Jade claimed. Will Jade win on

appeal?

Strategy: Before you answer, make sure you know the difference between trial and appellate courts. What is the difference? Apply that distinction here. (See the

“Result” at the end of this section.)

3. PLEADINGS A complaint and an answer are the two most important pleadings; that is, documents that start a lawsuit. (p. 60)

4. DISCOVERY Discovery is the critical pre-trial opportunity for both parties to learn the strengths and weaknesses of the opponent’s case. Important forms

of discovery include interrogatories, depositions, production of documents

and objects, physical and mental examinations, and requests for admission.

(pp. 63–66)

5. MOTIONS A motion is a formal request to the court. (p. 63)

6. SUMMARY JUDGMENT Summary judgment is a ruling by the court that no trial is necessary because there are no essential facts in dispute. (pp. 67–68)

7. JURY TRIALS Generally, both plaintiff and defendant may demand a jury in any lawsuit for money damages. (p. 69)

8. VOIR DIRE Voir dire is the process of selecting jurors in order to obtain an impartial panel. (p. 69)

E X A M

S tr

a te

g y

78 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Question: You are a lawyer, representing the plaintiff in a case of alleged employment discrimination. The court is selecting a jury. Based on questions you

have asked, you believe that juror number 3 is biased against your client. You

explain this to the judge, but she disagrees. Is there anything you can do?

Strategy: The question focuses on your rights during voir dire. If you believe that a juror will not be fair, you may make two different types of challenge. What are they?

(See the “Result” at the end of this section.)

9. BURDEN OF PROOF The plaintiff’s burden of proof in a civil lawsuit is preponderance of the evidence, meaning that its version of the facts must be at

least slightly more persuasive than the defendant’s. In a criminal prosecution,

the government must offer proof beyond a reasonable doubt in order to win a

conviction. (p. 71)

10. RULES OF EVIDENCE The rules of evidence determine what questions may be asked during trial, what testimony may be given, and what documents may be

introduced. (p. 72)

11. VERDICTS The verdict is the jury’s decision in a case. The losing party may ask the trial judge to overturn the verdict, seeking a JNOV or a new trial. Judges seldom

grant either. (pp. 73–74)

12. APPEALS An appeals court has many options. The court may affirm, upholding the lower court’s decision; modify, changing the verdict but leaving the same party

victorious; reverse, transforming the loser into the winner; and/or remand, sending

the case back to the lower court. (pp. 74–75)

13. ADR Alternative dispute resolution is any formal or informal process to settle disputes without a trial. Mediation, arbitration, and other forms of ADR are growing

in popularity. (pp. 75–77)

2. Result: Trial courts use witnesses to help resolve factual disputes. Appellate courts

review the record to see if there have been errors of law. Appellate courts never hear

witnesses, and they will not hear Steve. Jade will lose her appeal.

8. Result: You have already made a challenge for cause, claiming bias, but the judge

has rejected your challenge. If you have not used up all of your peremptory challenges, you

may use one to excuse this juror, without giving any reason.

E X A M

S tr

a te

g y

CHAPTER 3 Dispute Resolution 79

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

MULTIPLE-CHOICE QUESTIONS 1. The burden of proof in a civil trial is to prove a case . The burden of

proof rests with the .

(a) beyond a reasonable doubt; plaintiff

(b) by a preponderance of the evidence; plaintiff

(c) beyond a reasonable doubt; defendant

(d) by a preponderance of the evidence; defendant

2. Alice is suing Betty. After the discovery process, Alice believes that no relevant facts are in dispute, and that there is no need for a trial. She should move for:

(a) a judgment on the pleadings

(b) a directed verdict

(c) a summary judgment

(d) a JNOV

3. Glen lives in Illinois. He applies for a job with a Missouri company, and he is told, amazingly, that the job is open only to white applicants. He will now sue the Missouri

company under the Civil Rights Act, a federal statute. Can Glen sue in federal court?

(a) Yes, absolutely.

(b) Yes, but only if he seeks damages of at least $75,000. Otherwise, he must sue in a

state court.

(c) Yes, but only if the Missouri company agrees. Otherwise, he must sue in a state

court.

(d) No, absolutely not. He must sue in a state court.

4. A default judgment can be entered if which of the following is true?

(a) A plaintiff presents her evidence at trial and clearly fails to meet her burden

of proof.

(b) A defendant loses a lawsuit and does not pay a judgment within 180 days.

(c) A defendant fails to file an answer to a plaintiff’s complaint on time.

(d) A citizen fails to obey an order to appear for jury duty.

5. Barry and Carl are next-door neighbors. Barry’s dog digs under Carl’s fence and does $500 worth of damage to Carl’s garden. Barry refuses to pay for the damage, claiming

that Carl’s cats “have been digging up my yard for years.”

The two argue repeatedly, and the relationship turns frosty. Of the following choices,

which has no outside decision maker and is most likely to allow the neighbors to

peacefully coexist after working out the dispute?

(a) Trial

(b) Arbitration

(c) Mediation

80 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ESSAY QUESTIONS 1. You plan to open a store in Chicago, specializing in rugs imported from Turkey.

You will work with a native Turk who will purchase and ship the rugs to your store.

You are wise enough to insist on a contract establishing the rights and obligations of

both parties and would prefer an ADR clause. But you do not want a clause that

will alienate your overseas partner. What kind of ADR clause should you include,

and why?

2. Which court(s) have jurisdiction over each of these lawsuits—state or federal? Explain your reasoning for each answer.

• Pat wants to sue his next-door neighbor, Dorothy, claiming that Dorothy promised to sell him the house next door.

• Paula, who lives in New York City, wants to sue Dizzy Movie Theatres, whose principal place of business is Dallas. She claims that while she was in Texas on

holiday, she was injured by their negligent maintenance of a stairway. She claims

damages of $30,000.

• Phil lives in Tennessee. He wants to sue Dick, who lives in Ohio. Phil claims that Dick agreed to sell him 3,000 acres of farmland in Ohio, worth over $2 million.

• Pete, incarcerated in a federal prison in Kansas, wants to sue the United States government. He claims that his treatment by prison authorities violates three

federal statutes.

3. British discovery practice differs from that in the United States. Most discovery in Britain concerns documents. The lawyers for the two sides, called solicitors, must deliver to the opposing side a list of all relevant documents in their possession. Each

side may then request to look at and copy those it wishes. Depositions are rare. What

advantages and disadvantages are there to the British practice?

4. Trial practice also is dramatically different in Britain. The parties’ solicitors do not go into court. Courtroom work is done by different lawyers, called barristers. The barristers have very limited rights to interview witnesses before trial. They know the

substance of what each witness intends to say but do not rehearse questions and

answers, as in the United States. Which approach do you consider more effective?

More ethical? What is the purpose of a trial? Of pre-trial preparation?

5. Claus Scherer worked for Rockwell International and was paid over $300,000 per year. Rockwell fired Scherer for alleged sexual harassment of several workers, including his

secretary, Terry Pendy. Scherer sued in United States District Court, alleging that

Rockwell’s real motive in firing him was his high salary.

Rockwell moved for summary judgment, offering deposition transcripts of various

employees. Pendy’s deposition detailed instances of harassment, including comments

about her body, instances of unwelcome touching, and discussions of extramarital

affairs. Another deposition, from a Rockwell employee who investigated the

allegations, included complaints by other employees as to Scherer’s harassment. In his

own deposition, which he offered to oppose summary judgment, Scherer testified that

he could not recall the incidents alleged by Pendy and others. He denied generally

that he had sexually harassed anyone. The district court granted summary judgment

for Rockwell. Was its ruling correct?

CHAPTER 3 Dispute Resolution 81

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

DISCUSSION QUESTIONS 1. In the Tony Caruso case described throughout this

chapter, the defendant offers to settle the case at

several stages. Knowing what you do now about

litigation, would you have accepted any of the

offers? If so, which one(s)? If not, why not?

2. The burden of proof in civil cases is fairly low. A plaintiff wins a lawsuit if he is 51 percent

convincing, and then he collects 100 percent of his

damages. Is this result reasonable? Should a

plaintiff in a civil case be required to prove his case

beyond a reasonable doubt? Or, if a plaintiff is

only 51 percent convincing, should he get only

51 percent of his damages?

3. Large numbers of employees have signed mandatory arbitration agreements in employment

contracts. Courts usually uphold these clauses.

Imagine that you signed a contract with an

arbitration agreement, that the company later

mistreated you, and that you could not sue in

court. Would you be upset? Or would you be

relieved to go through the faster and cheaper

process of arbitration?

4. Imagine a state law that allows for residents to sue “spammers”—those who send uninvited

commercial messages through email—for $30. One

particularly prolific spammer sends messages to

hundreds of thousands of people.

John Smith, a lawyer, signs up 100,000 people to

participate in a class-action lawsuit. According to

the agreements with his many clients, Smith will

keep one-third of any winnings. In the end, Smith

wins a $3 million verdict and pockets $1 million.

Each individual plaintiff receives a check for $20.

Is this lawsuit a reasonable use of the court’s

resources? Why or why not?

5. Higher courts are reluctant to review a lower court’s factual findings. Should this be so? Would appeals be fairer if appellate courts reviewed

everything?

82 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 4 COMMON LAW, STATUTORY LAW, AND ADMINISTRATIVE LAW Jason observes a toddler wander onto the railroad

tracks and hears a train approaching. He has plenty of time to pull the child from the tracks

with no risk to himself, but chooses to do nothing. The youngster is killed. The child’s family

sues Jason for his callous behavior, and a court determines that Jason owes—nothing.

“Why can’t they just fix the law?” students and professionals often ask, in response to

Jason’s impunity and countless other legal oddities. Their exasperation is understandable.

This chapter cannot guarantee intellectual tranquility, but it should diminish the sense of

bizarreness that law can instill. We will look at three sources of law: common law, statutory

law, and administrative law. Most of the law you learn in the course comes from one of

these sources. The substantive law will make more sense when you have a solid feel for

how it was created.

n u tt a ki t/ S h u tt e rs to ck .c o m ;©

S ta s V o lik /S h u tt e rs to ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4-1 COMMON LAW Jason and the toddler present a classic legal puzzle: What, if anything, must a bystander do

when he sees someone in danger? We will examine this issue to see how the common law

works.

The common law is judge-made law. It is the sum total of all the cases decided by appellate courts. The common law of Pennsylvania consists of all cases decided by appellate

courts in that state. The Illinois common law is made up of all of the cases decided by

Illinois appellate courts. Two hundred years ago, almost all of the law was common law.

Today, common law still predominates in tort, contract, and agency law, and it is very

important in property, employment, and some other areas.

4-1a Stare Decisis A law course is not a law course without random Latin phrases. Stare decisis means “let the decision stand.” It is the essence of the common law. Once a court has decided a particular

issue, it will generally apply the same rule in similar cases in the future. Suppose the highest

court of Arizona must decide whether a contract signed by a 16-year-old can be enforced

against him. The court will look to see if there is precedent; that is, whether the high court of Arizona has already decided a similar case. The Arizona court looks and finds several

earlier cases, all holding that such contracts may not be enforced against a minor. The court

will probably apply that precedent and refuse to enforce the contract in this case. Courts do

not always follow precedent, but they generally do: stare decisis. A desire for predictability created the doctrine of stare decisis. The value of predictability

is apparent: People must know what the law is. If contract law changed daily, an entrepre-

neur who leased factory space and then started buying machinery would be uncertain if the

factory would actually be available when she was ready to move in. Will the landlord slip out

of the lease? Will the machinery be ready on time? The law must be knowable. Yet there

must also be flexibility in the law, some means to respond to new problems and a changing

social climate. Sometimes, we are better off if we are not encumbered by ironclad rules

established before electricity was discovered. These two ideas are in conflict: The more

flexibility we permit, the less predictability we enjoy. We will watch the conflict play out in

the bystander cases.

4-1b Bystander Cases This country inherited from England a simple rule about a bystander’s obligations: You have no duty to assist someone in peril unless you created the danger. In Union Pacific Railway Co. v. Cappier,1 through no fault of the railroad, a train struck a man. Railroad employees saw the incident happen but did nothing to assist him. By the time help arrived, the victim had died.

The court held that the railroad had no duty to help the injured man:

With the humane side of the question courts are not concerned. It is the omission or negligent

discharge of legal duties only which come within the sphere of judicial cognizance. For with-

holding relief from the suffering, for failure to respond to the calls of worthy charity, or for

faltering in the bestowment of brotherly love on the unfortunate, penalties are found not in the

laws of men but in [the laws of God].

As harsh as this judgment might seem, it was an accurate statement of the law at that time

in both England and the United States: Bystanders need do nothing. Contemporary writers

found the rule inhumane and cruel, and even judges criticized it. But—stare decisis—they

Common law Judge-made law.

1 66 Kan. 649, 72 P. 281 (1903).

Stare decisis

“Let the decision stand,” that is, the ruling from a previous case.

Precedent An earlier case that decided the issue.

84 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

followed it. With a rule this old and well established, no court was willing to scuttle it. What

courts did do was seek openings for small changes.

Eighteen years after the Kansas case of Cappier, a court in nearby Iowa found the basis for one exception. Ed Carey was a farm laborer, working for Frank Davis. While in the

fields, Carey fainted from sunstroke and remained unconscious. Davis simply hauled him to

a nearby wagon and left him in the sun for an additional four hours, causing serious

permanent injury. The court’s response:

It is unquestionably the well-settled rule that the master is under no legal duty to care for a sick or

injured servant for whose illness or injury he is not at fault. Though not unjust in principle, this

rule, if carried unflinchingly and without exception to its logical extreme, is sometimes productive

of shocking results. To avoid this criticism [we hold that where] a servant suffers serious injury, or

is suddenly stricken down in a manner indicating the immediate and emergent need of aid to

save him from death or serious harm, the master, if present is in duty bound to take such

reasonable measures as may be practicable to relieve him, even though such master be not

chargeable with fault in bringing about the emergency. 2

And this is how the common law often changes: bit by tiny bit. In Iowa, a bystander

could now be liable if he was the employer and if the worker was suddenly stricken and if it was an emergency and if the employer was present. That is a small change but an important one.

For the next 50 years, changes in bystander law came very slowly. Consider Osterlind v. Hill, a case from 1928.3 Osterlind rented a canoe from Hill’s boatyard, paddled into the lake, and promptly fell into the water. For 30 minutes, he clung to the side of the canoe and shouted for help. Hill heard the cries but did nothing; Osterlind drowned. Was Hill liable?

No, said the court: A bystander has no liability. Not until half a century later did the same

court reverse its position and begin to require assistance in extreme cases. Fifty years is a

long time for the unfortunate Osterlind to hold on. 4

In the 1970s, changes came more quickly.

TARASOFF V. REGENTS OF THE UNIVERSITY OF CALIFORNIA

17 Cal.3d 425, 551 P.2d 334, 131 Cal. Rptr. 14 Supreme Court of California, 1976

C A S E S U M M A R Y

Facts: On October 27, 1969, Prosenjit Poddar killed Tati- ana Tarasoff. Tatiana’s parents claimed that two months

earlier Poddar had confided his intention to kill Tatiana to

Dr. Lawrence Moore, a psychologist employed by the Uni-

versity of California at Berkeley. They sued the university,

claiming that Dr. Moore should have warned Tatiana and/or

should have arranged for Poddar’s confinement.

Issue: Did Dr. Moore have a duty to Tatiana Tarasoff, and did he breach that duty?

Decision: Yes, Dr. Moore had a duty to Tatiana Tarasoff.

Reasoning: Under the common law, one person gener- ally owes no duty to control the conduct of another or to

warn anyone who is in danger. However, courts make an

2Carey v. Davis, 190 Iowa 720, 180 N.W. 889 (1921). 3 263 Mass. 73, 160 N.E. 301 (1928).

4Pridgen v. Boston Housing Authority, 364 Mass. 696, 308 N.E.2d 467 (Mass. 1974).

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 85

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

The Tarasoff exception applies when there is some special relationship, such as therapist– patient. What if there is no such relationship? Remember the Soldano v. O’Daniels case from Chapter 1, in which the bartender refused to call the police.

As in the earlier cases we have seen, this lawsuit presented an emergency. But the

exception created in Carey v. Davis applied only if the bystander was an employer, and that in Tarasoff only for a doctor. In Soldano, the bystander was neither. Should the law require him to act, that is, should it carve a new exception? Here is what the California court decided:

Many citizens simply “don’t want to get involved.” No rule should be adopted [requiring] a

citizen to open up his or her house to a stranger so that the latter may use the telephone to call for

emergency assistance. … [S]uch an action may be fraught with danger. It does not follow,

however, that use of a telephone in a public portion of a business should be refused for a

legitimate emergency call.

We conclude that the bartender owed a duty to [Soldano] to permit the patron from Happy

Jack’s to place a call to the police or to place the call himself. It bears emphasizing that the duty in

this case does not require that one must go to the aid of another. That is not the issue here. The

employee was not the good samaritan intent on aiding another. The patron was.

And so, courts have made several subtle changes to the common law rule. Let’s apply

them to the opening scenario. If the toddler’s family sues Jason, will they be successful?

Probably not.

Jason did not have a duty or a special relationship of trust with the toddler. Jason did not

stand in the way of someone else trying to call the police. He may be morally culpable for

refusing to save a life, but he will not be legally liable unless an entirely new change to the

common law occurs.

The bystander rule, that hardy oak, is alive and well. Various initials have been carved

into its bark—the exceptions we have seen and a variety of others—but the trunk is strong

and the leaves green. Perhaps someday the proliferating exceptions will topple it, but the

process of the common law is slow, and that day is nowhere in sight.

EXAM Strategy

Question: When Rachel is walking her dog, Bozo, she watches a skydiver float to earth. He lands in an enormous tree, suspended 45 feet above ground. “Help!” the

man shouts. Rachel hurries to the tree and sees the skydiver bleeding profusely.

She takes out her cell phone to call 911 for help, but just then Bozo runs away. Rachel

darts after the dog, afraid that he will jump in a nearby pond and emerge smelling

of mud. She forgets about the skydiver and takes Bozo home. Three hours later,

the skydiver expires.

exception when the defendant has a special relationship

to a dangerous person or potential victim. A therapist is

someone who has just such a special relationship with a

patient.

It is very difficult to predict whether a patient

presents a serious danger of violence, and no one can

be expected to do a perfect job. A therapist must exercise

only the reasonable degree of skill, knowledge, and

care ordinarily possessed by others in the field. In this case,

however, there is no dispute about whether Dr. Moore

could have foreseen violence or predicted that Poddar

would kill Tatiana. Once a therapist determines, or reason-

ably should determine, that a patient poses a serious danger

of violence to someone, he must make reasonable efforts to

protect the potential victim. The Tarasoffs have stated a

legitimate claim against Dr. Moore.

86 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

The victim’s family sues Rachel. She defends by saying she feared that Bozo would

have an allergic reaction to mud, and that in any case she could not have climbed 45

feet up a tree to save the man. The family argues that the dog is not allergic to mud,

that even if he is, a pet’s inconvenience pales compared to human life, and that Rachel

could have phoned for emergency help without climbing an inch. Please rule.

Strategy: The family’s arguments might seem compelling, but are they relevant? Rachel is a bystander, someone who perceives another in danger. What is the rule

concerning a bystander’s obligation to act? Apply the rule to the facts of this case.

Result: A bystander has no duty to assist someone in peril unless she created the danger. Rachel did not create the skydiver’s predicament. She had no obligation to do

anything. Rachel wins.

4-2 STATUTORY LAW More law is created by statute than by the courts. Statutes affect each of us every day,

in our business, professional, and personal lives. When the system works correctly, this

is the one part of the law over which “we the people” have control. We elect the

legislators who pass state statutes; we vote for the senators and representatives who

create federal statutes.

Every other November, voters in all 50 states cast ballots for members of Congress. The

winners of congressional elections convene in Washington, D.C., and create statutes. In this

section, we look at how Congress does its work creating statutes. 5 Using the Civil Rights Act

as a backdrop, we will follow a bill as it makes its way through Congress and beyond.

4-2a Bills Congress is organized into two houses, the House of Representatives and the Senate. Either

house may originate a proposed statute, that is called a bill. To become law, the bill must be voted on and approved by both houses. Once both houses pass it, they will send it to the

President. If the President signs the bill, it becomes law and is then a statute. If the

President opposes the bill, he will veto it, in which case it is not law.6

If you visit either house of Congress, you will probably find half a dozen legislators on

the floor, with one person talking and no one listening. This is because most of the work is

done in committees. Both houses are organized into dozens of committees, each with

special functions. The House currently has about 25 committees (further divided into about

150 subcommittees), and the Senate has approximately 20 committees (with about 86

subcommittees). For example, the Armed Services Committee of each house oversees the

huge defense budget and the workings of the armed forces. Labor committees handle

legislation concerning organized labor and working conditions. Banking committees develop

expertise on financial institutions. Judiciary committees review nominees to the federal

courts. There are dozens of other committees, some very powerful, because they control

vast amounts of money, and some relatively weak. Few of us ever think about the House

Agricultural Subcommittee on Specialty Crops. But if we owned a family peanut farm, we

would pay close attention to the subcommittee’s agenda, because those members of Con-

gress would pay close attention to us.

Bill A proposed statute, submitted to Congress or a state legislature.

Veto The power of the President to reject legislation passed by Congress.

5 State legislatures operate similarly in creating state laws.

6 Congress may, however, attempt to override the veto. See the discussion following.

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 87

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

When a bill is proposed in either house, it is referred to the committee that specializes

in that subject. Why are bills proposed in the first place? For any of several reasons:

• New Issue, New Worry. If society begins to focus on a new issue, Congress may respond with legislation. We consider below, for example, the congressional response

in the 1960s to employment discrimination.

• Unpopular Judicial Ruling. If Congress disagrees with a judicial interpretation of a statute, the legislators may pass a new statute to modify or “undo” the court

decision. For example, if the Supreme Court misinterprets a statute about musical

copyrights, Congress may pass a new law correcting the Court’s error. However,

the legislators have no such power to modify a court decision based on the

Constitution. When the Supreme Court ruled that lawyers had a right under the First Amendment to advertise their services, Congress lacked the power to change the decision.

• Criminal Law. Statutory law, unlike common law, is prospective. Legislators are hoping to control the future. And that is why almost all criminal law is statutory.

A court cannot retroactively announce that it has been a crime for a retailer to accept kickbacks from a wholesaler. Everyone must know the rules in advance because

the consequences—prison, a felony record, etc.—are so harsh.

4-2b Discrimination: Congress and the Courts The civil rights movement of the 1950s and 1960s convinced most citizens that African

Americans suffered significant and unacceptable discrimination in jobs, housing, voting,

schools, and other basic areas of life. Demonstrations and boycotts, marches and counter-

marches, church bombings and killings persuaded the nation that the problem was vast

and urgent.

In 1963, President Kennedy proposed legislation to guarantee equal rights in these

areas. The bill went to the House Judiciary Committee, which heard testimony for

weeks. Witnesses testified that blacks were often unable to vote because of their race,

that landlords and home sellers adamantly refused to sell or rent to African Americans,

that education was grossly unequal, and that blacks were routinely denied good jobs in

many industries. Eventually, the Judiciary Committee approved the bill and sent it to

the full House.

The bill was dozens of pages long and divided into “titles,” with each title covering

a major issue. Title VII concerned employment. We will consider the progress of Title

VII in Congress and in the courts. Here is one section of Title VII, as reported to the

House floor: 7

Sec. 703(a). It shall be an unlawful employment practice for an employer—to fail or refuse to hire

or to discharge any individual, or otherwise to discriminate against any individual with respect to

his compensation, terms, conditions, or privileges of employment, because of such individual’s

race, color, religion, or national origin; or

to limit, segregate, or classify his employees in any way which would deprive or tend to deprive

any individual of employment opportunities or otherwise adversely affect his status as an employee,

because of such individual’s race, color, religion, or national origin.

7 The section number in the House bill was actually 704(a); we use 703 here because that is the

number of the section when the bill became law and the number to which the Supreme Court refers in

later litigation.

88 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4-2c Debate The proposed bill was intensely controversial and sparked argument throughout

Congress. Here are some excerpts from one day’s debate on the House floor, on

February 8, 1964: 8

MR. WAGGONNER. I speak to you in all sincerity and ask for the right to discriminate if I so

choose because I think it is my right. I think it is my right to choose my social companions. I think

it is my right if I am a businessman to run it as I please, to do with my own as I will. I think that is

a right the Constitution gives to every man. I want the continued right to discriminate and I want

the other man to have the right to continue to discriminate against me, because I am discrimi-

nated against every day. I do not feel inferior about it.

I ask you to forget about politics, forget about everything except the integrity of the individual,

leaving to the people of this country the right to live their lives in the manner they choose to live.

Do not destroy this democracy for a Socialist government. A vote for this bill is no less.

MR. CONTE. If the serious cleavage which pitted brother against brother and citizen against

citizen during the tragedy of the Civil War is ever to be justified, it can be justified in this House

and then in the other body with the passage of this legislation which can and must reaffirm the

rights to all individuals which are inherent in our Constitution.

The distinguished poet Mark Van Doren has said that “equality is absolute or no, nothing

between can stand,” and nothing should now stand between us and the passage of strong and

effective civil rights legislation. It is to this that we are united in a strong bipartisan coalition

today, and when the laws of the land proclaim that the 88th Congress acted effectively, judi-

ciously, and wisely, we can take pride in our accomplishments as free men.

Other debate was less rhetorical and aimed more at getting information. The following

exchange anticipates a 30-year controversy on quotas:

MR. JOHANSEN. I have asked for this time to raise a question and I would ask particularly for the

attention of the gentleman from New York [Mr. Goodell] because of a remark he made—and

I am not quarreling with it. I understood him to say there is no plan for balanced employment or

for quotas in this legislation I am raising a question as to whether in the effort to eliminate

discrimination—and incidentally that is an undefined term in the bill—we may get to a situation

in which employers and conceivably union leaders, will insist on legislation providing for a quota

system as a matter of self-protection.

Now let us suppose this hypothetical situation exists with 100 jobs to be filled. Let us say

150 persons apply and suppose 75 of them are Negro and 75 of them are white. Supposing the

employer hires 75 white men. [Does anyone] have a right to claim they have been discriminated

against on the basis of color?

MR. GOODELL. It is the intention of the legislation that if applicants are equal in all other

respects there will be no restriction. One may choose from among equals. So long as there is no

distinction on the basis of race, creed, or color it will not violate the act.

The debate on racial issues carried on. Later in the day, Congressman Smith of Virginia

offered an amendment that could scarcely have been smaller—or more important:

Amendment offered by Mr. Smith of Virginia: On page 68, line 23, after the word “religion,”

insert the word “sex.”

In other words, Smith was asking that discrimination on the basis of sex also be

outlawed, along with the existing grounds of race, color, national origin, and religion.

Congressman Smith’s proposal produced the following comments:

8 The order of speakers is rearranged, and the remarks are edited.

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 89

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

MR. CELLER. You know, the French have a phrase for it when they speak of women and

men. They say “vive la différence.” I think the French are right. Imagine the upheaval that

would result from adoption of blanket language requiring total equality. Would male citizens

be justified in insisting that women share with them the burdens of compulsory military

service? What would become of traditional family relationships? What about alimony? What

would become of the crimes of rape and statutory rape? I think the amendment seems

illogical, ill timed, ill placed, and improper.

MRS. ST. GEORGE. Mr. Chairman, I was somewhat amazed when I came on the floor this

afternoon to hear the very distinguished chairman of the Committee on the Judiciary [Mr. Celler]

make the remark that he considered the amendment at this point illogical. I can think of nothing

more logical than this amendment at this point.

There are still many States where women cannot serve on juries. There are still many States

where women do not have equal educational opportunities. In most States and, in fact, I figure it

would be safe to say, in all States—women do not get equal pay for equal work. That is a very

well known fact. And to say that this is illogical. What is illogical about it? All you are doing is

simply correcting something that goes back, frankly to the Dark Ages.

The debate continued. Some supported the “sex” amendment because they were

determined to end sexual bias. But politics are complex. Some opponents of civil rights supported the amendment because they believed that it would make the legislation less

popular and cause Congress to defeat the entire Civil Rights bill.

That strategy did not work. The amendment passed, and sex was added as a protected

trait. And, after more debate and several votes, the entire bill passed the House. It went to

the Senate, where it followed a similar route from the Judiciary Committee to the full

Senate. Much of the Senate debate was similar to what we have seen. But some senators

raised a new issue, concerning §703(2), which prohibited segregating or classifying employ- ees based on any of the protected categories (race, color, national origin, religion, or sex).

Senator Tower was concerned that §703(2) meant that an employee in a protected

category could never be given any sort of job test. So the Senate amended §703 to include

a new subsection:

Sec. 703(h). Notwithstanding any other provision of this title, it shall not be an unlawful employ-

ment practice for an employer … to give and to act upon the results of any professionally

developed ability test provided that such test is not designed, intended or used to discriminate

because of race, color, religion, sex or national origin.

With that amendment, and many others, the bill passed the Senate.

CONFERENCE COMMITTEE Civil rights legislation had now passed both houses, but the bills were no longer the same

due to the many amendments. This is true with most legislation. The next step is for the

two houses to send representatives to a House-Senate Conference Committee. This

committee examines all of the differences between the two bills and tries to reach a

compromise. With the Civil Rights bill, Senator Tower’s amendment was left in; other

Senate amendments were taken out. When the Conference Committee had settled every

difference between the two versions, the new, modified bill was sent back to each house

for a new vote.

The House of Representatives and the Senate again angrily debated the compromise

language reported from the Conference Committee. Finally, after years of violent public demon-

strations and months of debate, each house passed the same bill. President Johnson promptly

signed it. The Civil Rights Act of 1964 was law. See Exhibit 4.1.

90 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

But the passing of a statute is not always the end of the story. Sometimes courts must

interpret congressional language and intent.

4-2d Statutory Interpretation Title VII of the Civil Rights Act obviously prohibited an employer from saying to a job

applicant, “We don’t hire minorities.” In some parts of the country, that had been common

practice; after the Civil Rights Act passed, it became rare. Employers who routinely hired

whites only, or promoted only whites, found themselves losing lawsuits. A new group of

cases arose, those in which some job standard was set that appeared to be racially neutral,

yet had a discriminatory effect. In North Carolina, the Duke Power Co. required that

applicants for higher paying, promotional positions meet two requirements: They must

have a high school diploma and they must pass a standardized written test. There was no

evidence that either requirement related to successful job performance. Blacks met the

President

House of Representatives

Conference Committee

Senate

Banking, Finance &

Urban Affairs

Education and Labor

Judiciary Committee

Armed Services

Agriculture Ways and

Means

Judiciary Committee

Armed Services

Foreign Relations

Appropriation

Aeronautical & Space Sciences

1

2

3

4

5 5

6 7

8

© C e n g a g e L e a rn in g

EXHIBIT 4.1 The two houses of Congress are organized into dozens of committees, a few of which are shown here. The path of the 1964 Civil Rights Act (somewhat simplified) was as follows: [1] The House Judiciary Committee approved the bill and sent it to the full House; [2] the full House passed the bill and sent it to the Senate, where it was assigned to the Senate Judiciary Committee; [3] the Senate Judiciary Committee passed an amended version of the bill and sent it to the full Senate; [4] the full Senate passed the bill with additional amendments. Since the Senate version was now different from the bill the House passed, the bill went to a Conference Committee. The Conference Committee [5] reached a compromise and sent the new version of the bill back to both houses. Each house passed the compromise bill (6 and 7) and sent it to the President, who signed it into law (8).

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 91

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

requirements in lower percentages than whites, and consequently whites obtained a dis-

proportionate share of the good jobs.

Title VII did not precisely address this kind of case. It clearly outlawed overt discrimi-

nation. Was Duke Power’s policy overt discrimination, or was it protected by Senator

Tower’s amendment, §703(h)? The case went all the way to the Supreme Court, where

the Court had to interpret the new law.

Courts are often called upon to interpret a statute, that is, to explain precisely what the

language means and how it applies in a given case. There are three primary steps in a court’s

statutory interpretation:

• Plain Meaning Rule. When a statute’s words have ordinary, everyday significance, the court will simply apply those words. Section 703(a)(1) of the Civil Rights Act

prohibits firing someone because of her religion. Could an employer who had fired a

Catholic because of her religion argue that Catholicism is not really a religion, but

more of a social group? No. The word “religion” has a plain meaning, and courts

apply its commonsense definition.

• Legislative History and Intent. If the language is unclear, the court must look deeper. Section 703(a)(2) prohibits classifying employees in ways that are discriminatory. Does

that section prevent an employer from requiring high school diplomas, as Duke Power

did? The explicit language of the statute does not answer the question. The court will

look at the law’s history to determine the intent of the legislature. The court will

examine committee hearings, reports, and the floor debates that we have seen.

• Public Policy. If the legislative history is unclear, courts will rely on general public policies, such as reducing crime, creating equal opportunity, and so forth. They may

include in this examination some of their own prior decisions. Courts assume that the

legislature is aware of prior judicial decisions, and if the legislature did not change

those decisions, the statute will be interpreted to incorporate them.

Here is how the Supreme Court interpreted the 1964 Civil Rights Act.

Landmark Case

Facts: See the discussion of the Duke Power Com-

pany’s job requirements

in the “Statutory Interpre-

tation” section above.

Issue: Did Title VII of the 1964 Civil Rights Act require that employment tests be job-related? Decision: Yes, employ- ment tests must be job-related.

Reasoning: Congress’s goal in enacting Title VII is plain from its language: to achieve equality of opportunity and

remove barriers that have favored whites. An employer may

not use any practice, proce-

dure, or test that perpetu-

ates discrimination. This is

true not only for overtly

discriminatory behavior but

alsoforconduct thatappears

fair yet has a discriminatory

effect. The key is business

necessity. An employment

test or restriction that

excludes blacks is prohibited unless it is required to do the

particular job. In this case, neither the high school completion

requirement nor the general intelligence test is related to job

performance, and therefore neither is permissible.

GRIGGS V. DUKE POWER CO. 401 U.S. 424, 91 S. Ct. 849, 1971 U.S. LEXIS 134

United States Supreme Court, 1971

C A S E S U M M A R Y

92 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

And so the highest Court ruled that if a job requirement had a discriminatory impact,

the employer could use that requirement only if it was related to job performance. Many

more cases arose. For almost two decades courts held that, once workers showed that a job

requirement had a discriminatory effect, the employer had the burden to prove that the

requirement was necessary for the business. The requirement had to be essential to achieve

an important goal. If there was any way to achieve that goal without discriminatory impact,

the employer had to use it.

4-2e Changing Times But things changed. In 1989, a more conservative Supreme Court decided Wards Cove Packing Co. v. Atonio.9 The plaintiffs were nonwhite workers in salmon canneries in Alaska. The canneries had two types of jobs: skilled and unskilled. Nonwhites (Filipinos and Alaska

Natives) invariably worked as low-paid, unskilled workers, canning the fish. The higher

paid, skilled positions were filled almost entirely with white workers, who were hired during

the off-season in Washington and Oregon.

There was no overt discrimination. But plaintiffs claimed that various practices led to

the racial imbalances. The practices included failing to promote from within the company,

hiring through separate channels (cannery jobs were done through a union hall, skilled

positions were filled out of state), nepotism, and an English language requirement. Once

again the case reached the Supreme Court, where Justice White wrote the Court’s opinion.

If the plaintiffs succeeded in showing that the job requirements led to racial imbalance,

said the Court, the employer now only had to demonstrate that the requirement or practice

“serves, in a significant way, the legitimate employment goals of the employer [T]here is no

requirement that the challenged practice be ‘essential’ or ‘indispensable’ to the employer’s

business.” In other words, the Court removed the “business necessity” requirement of

Griggs and replaced it with “legitimate employment goals.”

4-2f Voters’ Role The response to Wards Cove was quick. Liberals decried it; conservatives hailed it. Everyone agreed that it was a major change that would make it substantially harder for

plaintiffs to bring successful discrimination cases. Democrats introduced bills to reverse

the interpretation of Wards Cove. President George H. W. Bush strongly opposed any new bill. He said it would lead to “quotas,” that is, that employers would feel obligated

to hire a certain percentage of workers from all racial categories to protect themselves

from suits. This was the issue that Congressman Johansen had raised in the original

House debate in 1964.

Both houses passed bills restoring the “business necessity” holding of Griggs. Again there were differences, and a Conference Committee resolved them. After acrimonious debate,

both houses passed the compromise bill in October 1990. Was it therefore law? No. President

Bush immediately vetoed the bill. He said it would compel employers to adopt quotas.

4-2g Congressional Override When the President vetoes a bill, Congress has one last chance to make it law: an override.

If both houses repass the bill, each by a two-thirds margin, it becomes law over the

President’s veto. Congress attempted to pass the 1990 Civil Rights bill over the Bush veto,

but it fell short in the Senate by one vote.

9 490 U.S. 642, 109 S. Ct. 2115, 1989 U.S. LEXIS 2794 (1989).

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 93

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Civil rights advocates tried again, in January 1991, introducing a new bill to reverse the

Wards Cove rule. Again both houses debated and bargained. The new bill stated that, once an employee proves that a particular employment practice causes a discriminatory impact,

the employer must “demonstrate that the challenged practice is job related for the position

in question and consistent with business necessity.”

Now the two sides fought over the exact meanings of two terms: “job related” and

“business necessity.” Each side offered definitions, but they could not reach agreement. It

appeared that the entire bill would founder over those terms. So Congress did what it often

does when faced with a problem of definition: It dropped the issue. Liberals and conserva-

tives agreed not to define the troublesome terms. They would leave that task to courts to

perform through statutory interpretation.

With the definitions left out, the new bill passed both houses. In November 1991,

President Bush signed the bill into law. The President stated that the new bill had

been improved and no longer threatened to create racial quotas. His opponents

charged he had reversed course for political reasons, anticipating the 1992 presidential

election.

And so, the Congress restored the “business necessity” interpretation to its own 1964

Civil Rights Act. No one would say, however, that it had been a simple process.

EXAM Strategy

Question: Kelly Hackworth took a leave of absence from her job at Progressive Insurance to care for her ailing mother. When she offered to return, Progressive

refused to give her the same job or one like it. She sued based on the Family

Medical Leave Act, a federal statute that requires firms to give workers

returning from family leave their original job or an equivalent one. However, the

statute excludes from its coverage workers whose company employs “fewer than

50 people within 75 miles” of the worker’s jobsite. Between Ms. Hackworth’s

jobsite in Norman, Oklahoma, and the company’s Oklahoma City workplace

(less than 75 miles away), Progressive employed 47 people. At its Lawton,

Oklahoma facility, Progressive employed three more people—but Lawton was

75.6 miles (wouldn’t you know it) away from Norman. Progressive argued

that the job was not covered by the statute. Hackworth claimed that this

distance should be considered “within 75 miles,” thereby rendering her eligible

for FMLA leave. Even if it were not, she urged, it would be absurd to disqualify her

from important rights based on a disparity of six-tenths of a mile. Please rule.

Strategy: The question asks you to interpret a statute. How do courts do that? There are three steps: the plain meaning rule; legislative history; and public policy. Apply

those steps to these facts.

Result: In this real case, the court ruled that the plain meaning of “within 75 miles” was 75 miles or less. Lawton was not 75 miles or less from Norman. The statute did not apply and Ms. Hackworth lost.

10

10Hackworth v. Progressive Casualty Ins. Co., 468 F.3d 722 (10th Cir. 2006).

94 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4-3 ADMINISTRATIVE LAW Before beginning this section, please return your seat to its upright position. Stow the tray

firmly in the seatback in front of you. Turn off any laptops, cell phones, or other electronic

devices. Sound familiar? Administrative agencies affect each

of us every day in hundreds of ways. They have become the

fourth branch of government. Supporters believe that they

provide unique expertise in complex areas; detractors regard

them as unelected government run amok.

Many administrative agencies are familiar. The Fed-

eral Aviation Administration, which requires all airlines to

ensure that your seats are upright before takeoff and land-

ing, is an administrative agency. The Internal Revenue

Service expects to hear from us every April 15. The En-

vironmental Protection Agency regulates the water quality of

the river in your town. The Federal Trade Commission over-

sees the commercials that shout at you from your television set.

Other agencies are less familiar. You may never have

heard of the Bureau of Land Management, but if you go

into the oil and gas industry, you will learn that this power-

ful agency has more control over your land than you do. If you develop real estate in Palos

Hills, Illinois, you will tremble every time the Appearance Commission of the City of Palos

Hills speaks, since you cannot construct a new building without its approval. If your soft-

ware corporation wants to hire an Argentine expert on databases, you will get to know the

complex workings of Immigration and Customs Enforcement: No one lawfully enters this

country without its nod of approval.

4-3a Background By the 1880s, trains crisscrossed America. But this technological miracle became an eco-

nomic headache. Congress worried that the railroads’ economic muscle enabled a few

powerful corporations to reap unfair profits. The railroad industry needed closer regulation.

Who would do it? Courts decide individual cases; they do not regulate industries. Congress

itself passes statutes, but it has no personnel to oversee the day-to-day working of a huge

industry. For example, Congress lacks the expertise to establish rates for freight passing

from Kansas City to Chicago, and it has no personnel to enforce rates once they are set.

A new entity was needed. Congress passed the Interstate Commerce Act, creating the

Interstate Commerce Commission (ICC), the first administrative agency. The ICC began

regulating freight and passenger transportation over the growing rail system and continued

to do so for over 100 years. Congress gave the ICC power to regulate rates and investigate

harmful practices, to hold hearings, issue orders, and punish railroads that did not comply.

The ICC was able to hire and develop a staff that was expert in the issues that Congress

wanted controlled. The agency had enough flexibility to deal with the problems in a variety

of ways: by regulating, investigating, and punishing. And that is what has made adminis-

trative agencies an attractive solution for Congress: One entity, focusing on one industry,

can combine expertise and flexibility. However, the ICC also developed great power, which

voters could not reach, and thereby started the great and lasting conflict over the role

of agencies.

During the Great Depression of the 1930s, the Roosevelt administration and Congress

created dozens of new agencies. Many were based on social demands, such as the need of

the elderly population for a secure income. Political and social conditions dominated again

Before beginning this section, please return your seat to its upright position. Stow the tray firmly in the seatback in

front of you.

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 95

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

in the 1960s, as Congress created agencies, such as the Equal Employment Opportunity

Commission, to combat discrimination.

Then during the 1980s, the Reagan administration made an effort to decrease the number

and strength of the agencies. For several years some agencies declined in influence, though

others did not. Today, there is still controversy about how much power agencies should have.

4-3b Classification of Agencies Agencies exist at the federal, state, and local level. We will focus on federal agencies

because they have national impact and great power. Most of the principles discussed apply

to state and local agencies as well. Virtually any business or profession you choose to work in

will be regulated by at least one administrative agency, and it may be regulated by several.

EXECUTIVE-INDEPENDENT Some federal agencies are part of the executive branch, while others are independent

agencies. This is a major distinction. The President has much greater control of executive

agencies for the simple reason that he can fire the agency head at any time. An executive

agency will seldom diverge far from the President’s preferred policies. Some familiar

executive agencies are the Internal Revenue Service (part of the Treasury Department);

the Federal Bureau of Investigation (Department of Justice); the Food and Drug Admin-

istration (Department of Health and Human Services); and the Nuclear Regulatory Com-

mission (Department of Energy).

The President has no such removal power over independent agencies. The Federal

Communications Commission (FCC) is an independent agency. For many corporations

involved in broadcasting, the FCC has more day-to-day influence on their business than

Congress, the courts, and the President combined. Other powerful independent agencies

are the Federal Trade Commission, the Securities and Exchange Commission, the National

Labor Relations Board, and the Environmental Protection Agency.

ENABLING LEGISLATION Congress creates a federal agency by passing enabling legislation. The Interstate Commerce Act was the enabling legislation that established the ICC. Typically, the enabling legislation

describes the problems that Congress believes need regulation, establishes an agency to do

it, and defines the agency’s powers.

Critics argue that Congress is delegating to another body powers that only the legislature

or courts are supposed to exercise. This puts administrative agencies above the voters. But

legal attacks on administrative agencies have consistently failed for several decades. Courts

acknowledge that agencies have become an integral part of a complex economy, and so long

as there are some limits on an agency’s discretion, courts will generally uphold its powers.

4-4 POWER OF AGENCIES Administrative agencies use three kinds of power to do the work assigned to them: They

make rules, they investigate, and they adjudicate.

4-4a Rulemaking One of the most important functions of an administrative agency is to make rules. In making

rules, the agency attempts, prospectively, to establish fair and uniform behavior for all

businesses in the affected area. To create a new rule is to promulgate it. Agencies promul- gate two types of rules: legislative and interpretive.

Enabling legislation Laws passed by Congress that establish federal agencies and define their powers.

96 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

TYPES OF RULES: LEGISLATIVE AND INTERPRETIVE Legislative rules are the most important agency rules, and they are much like statutes. Here,

an agency creates law by requiring businesses or private citizens to act in a certain way.

Suppose you operate a website for young shoppers, aged 10 to 18. Like most online

merchants, you consider yourself free to collect as much data as possible about consumers.

Wrong. The Federal Trade Commission, a federal agency, has promulgated detailed rules

governing any site directed to young children. Before obtaining private data from these

immature consumers, you must let them know exactly who you are, how to contact site

operators, precisely what you are seeking, and how it will be used. You must also obtain

verifiable parental consent before collecting, using, or disclosing any personal information.

Failure to follow the rules can result in a substantial civil penalty. This modest legislative

rule, in short, will be more important to your business than most statutes passed by

Congress.

Interpretive rules do not change the law. They are the agency’s interpretation of what

the law already requires. But they can still affect all of us. For example, in 1977, Congress

amended the Clean Air Act in an attempt to reduce pollution from factories. The act

required the Environmental Protection Agency (EPA) to impose emission standards on

“stationary sources” of pollution. But what did “stationary source” mean? It was the EPA’s

job to define that term. Obscure work, to be sure, yet the results could be seen and even

smelled, because the EPA’s definition would determine the quality of air entering our lungs

every time we breathe. Environmentalists wanted the term defined to include every

smokestack in a factory so that the EPA could regulate each one. The EPA, however,

developed the “bubble concept,” ruling that “stationary source” meant an entire factory,

but not the individual smokestacks. As a result, polluters could shift emission among

smokestacks in a single factory to avoid EPA regulation. Environmentalists howled that

this interpretation gutted the purpose of the statute, but to no avail. The agency had

spoken, merely by interpreting a statute. 11

HOW RULES ARE MADE Corporations fight many a court battle over whether an agency has the right to issue a

particular rule and whether it was promulgated properly. The critical issue is this: How

much participation is the public entitled to before an agency issues a rule? There are two

basic methods of rulemaking. 12

Informal Rulemaking On many issues, agencies may use a simple “notice and com- ment” method of rulemaking. The agency must publish a proposed rule in advance and

permit the public a comment period. During this period, the public may submit any

objections and arguments, with supporting data. The agency will make its decision and

publish the final rule.

For example, the Department of Transportation may use the informal rulemaking

procedure to require safety features for all new automobiles. The agency must listen to

objections from interested parties, notably car manufacturers, and it must give a written

response to the objections. The agency is required to have rational reasons for the final

choices it makes. However, it is not obligated to satisfy all parties or do their bidding.

Formal Rulemaking In the enabling legislation, Congress may require that an agency hold a hearing before promulgating rules. Congress does this to make the agency more

accountable to the public. After the agency publishes its proposed rule, it must hold a public

11 An agency’s interpretation can be challenged in court, and this one was.

12 Certain rules may be made with no public participation at all. For example, an agency’s internal

business affairs and procedures can be regulated without public comment, as can its general policy

statements. None of these directly affect the public, and the public has no right to participate.

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 97

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

hearing. Opponents of the rule, typically affected businesses, may cross-examine the agency

experts about the need for the rule and may testify against it. When the agency makes its

final decision about the rule, it must prepare a formal, written response to everything that

occurred at the hearing.

When used responsibly, these hearings give the public access to the agency and can

help formulate sound policy. When used irresponsibly, hearings can be manipulated to

stymie needed regulation. The most famous example concerns peanut butter. The Food

and Drug Administration (FDA) began investigating peanut butter content in 1958. It

found, for example, that Jif peanut butter, made by Procter & Gamble (P&G), had only

75 percent peanuts and 20 percent of a Crisco-type base. P&G fought the investigation, and

any changes, for years. Finally, in 1965, the FDA proposed a minimum of 90 percent

peanuts in peanut butter; P&G wanted 87 percent. The FDA wanted no more than 3

percent hydrogenated vegetable oil; P&G wanted no limit.

The hearings dragged on for months. One day, the P&G lawyer objected to the

hearing going forward because he needed to vote that day. Another time, when an FDA

official testified that consumer letters indicated the public wanted to know what was really

in peanut butter, the P&G attorney demanded that the official bring in and identify the

letters—all 20,000 of them. Finally, in 1968, a decade after beginning its investigation,

the FDA promulgated final rules requiring 90 percent peanuts but eliminating the

3 percent cap on vegetable oil. 13

4-4b Investigation Agencies do a wide variety of work, but they all need broad factual knowledge of the field

they govern. Some companies cooperate with an agency, furnishing information and even

voluntarily accepting agency recommendations. For example, the U.S. Consumer Product

Safety Commission investigates hundreds of consumer products every year and frequently

urges companies to recall goods that the agency considers defective. Many firms comply.

Other companies, however, jealously guard information, often because corporate offi-

cers believe that disclosure would lead to adverse rules. To force disclosure, agencies use

subpoenas and searches.

SUBPOENAS A subpoena is an order to appear at a particular time and place to provide evidence. A subpoena duces tecum requires the person to appear and bring specified documents. Busi- nesses and other organizations intensely dislike subpoenas and resent government agents

plowing through records and questioning employees. What are the limits on an agency’s

investigation? The information sought:

• Must be relevant to a lawful agency investigation. The FCC is clearly empowered to investigate the safety of broadcasting towers, and any documents about tower construction

are obviously relevant. Documents about employee racial statistics might indicate

discrimination, but the FCC lacks jurisdiction on that issue and thus may not demand such

documents.

• Must not be unreasonably burdensome. A court will compare the agency’s need for the information with the intrusion on the corporation.

• Must not be privileged. The Fifth Amendment privilege against self-incrimination means that a corporate officer accused of criminal securities violations may not be compelled to

testify about his behavior.

Subpoena An order to appear at a particular place and time. A subpoena duces tecum requires the person to produce certain documents or things.

13 For an excellent account of this high-fat hearing, see Mark J. Green, The Other Government

(New York: W. W. Norton & Co., 1978), pp. 136–150.

98 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Search and Seizure At times an agency will want to conduct a surprise search of an enterprise and seize any evidence of wrongdoing. May an agency do that? Yes, although there are limitations. When a particular industry is comprehensively regulated, courts will assume that companies know they are subject to periodic, unannounced inspections. In

those industries, an administrative agency may conduct a search without a warrant and seize

evidence of violations. For example, the mining industry is minutely regulated, with strict

rules covering equipment, mining depths, and air quality. Mining executives understand

that they are closely watched. Accordingly, the Bureau of Mines may make unannounced,

warrantless searches to ensure safety. 14

The following case established many of the principles just described.

4-4c Adjudication To adjudicate a case is to hold a hearing about an issue and then decide it. Agencies adjudicate countless cases. The FCC adjudicates which applicant for a new television

license is best qualified. The Occupational Safety and Health Administration (OSHA) holds

adversarial hearings to determine whether a manufacturing plant is dangerous.

Landmark Case

Facts: Biswell’spawnshop had a license to sell “sport-

ing weapons.” Treasury

agentsdemandedtoinspect

his locked storeroom with-

out a warrant, claiming that

the Gun Control Act of

1968 gave them that right.

Under this law, Treasury

agents had permission to

inspect firearm dealers’ business records, firearms, and ammuni-

tion during business hours.

Biswell voluntarily opened the storeroom, where an

agent found two sawed-off rifles. Because these guns did

not remotely meet the definition of “sporting weapons,”

Biswell was convicted on firearms charges.

The appellate court found that, because the search

violated the Fourth Amendment, the rifles could not be

admitted as evidence. It reversed the conviction, and the

government appealed to the Supreme Court.

Issue: Did the agent’s warrantless search violate the Constitution? Decision: No, the agent had a right to search the firearm dealer’s premises without a warrant.

Reasoning: The Gun Control Act of 1968 was a

valid statute aimed at regu-

lating firearms and prevent-

ing violent crime. As part of

this effort, it gave the

Treasury agents the right

to perform frequent and

unannounced inspections

of firearm dealers’ pre-

mises. What good is a firearm inspection that is announced

ahead of time? A warrant requirement would certainly frus-

trate the statute’s purpose of controlling illegal guns.

Warrants protect an individual’s expectation of privacy.

Biswell had no justifiable expectation of privacy in his store-

room, since he, like all firearms dealers, knew that his business

records, firearms, and ammunition were subject to inspection.

Biswell accepted these rules when he obtained his license.

Also he received annual reminders.

Since inspections furthered the Gun Control Act’s

important purpose and Biswell could not reasonably

expect his storeroom to be private, the seizure of the

sawed-off rifles was permissible. They should have been

admitted into evidence.

Adjudicate To hold a formal hearing about an issue and then decide it.

14Donovan v. Dewey, 452 U.S. 594, 101 S. Ct. 2534, 1980 U.S. LEXIS 58 (1981).

UNITED STATES V. BISWELL 406 U.S. 311

United States Supreme Court, 1972

C A S E S U M M A R Y

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 99

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Most adjudications begin with a hearing before an administrative law judge (ALJ). There is no jury. An ALJ is an employee of the agency but is expected to be impartial in

her rulings. All parties are represented by counsel. The rules of evidence are informal, and

an ALJ may receive any testimony or documents that will help resolve the dispute.

After all evidence is taken, the ALJ makes a decision. The losing party has a right to

appeal to an appellate board within the agency. The appellate board may ignore the ALJ’s

decision. If it does not, an unhappy party may appeal to federal court.

4-5 LIMITS ON AGENCY POWER There are four primary methods of reining in these powerful creatures: statutory, political,

judicial, and informational.

4-5a Statutory Control As discussed, the enabling legislation of an agency provides some limits. It may require that

the agency use formal rulemaking or investigate only certain issues. The Administrative

Procedure Act imposes additional controls by requiring basic fairness in areas not regulated

by the enabling legislation.

4-5b Political Control The President’s influence is greatest with executive agencies. Congress, though, “controls

the purse.” No agency, executive or independent, can spend money it does not have. An

agency that angers Congress risks having a particular program defunded or its entire budget

cut. Further, Congress may decide to defund an agency as a cost-cutting measure. In its

effort to balance the budget, Congress abolished the Interstate Commerce Commission,

transferring its functions to the Transportation Department.

Congress has additional control because it must approve presidential nominees to head

agencies. Before approving a nominee, Congress will attempt to determine her intentions.

And, finally, Congress may amend an agency’s enabling legislation, limiting its power.

4-5c Judicial Review An individual or corporation directly harmed by an administrative rule, investigation, or

adjudication may generally have that action reviewed in federal court. 15

The party seeking

review, for example, a corporation, must have suffered direct harm; the courts will not listen

to theoretical complaints about an agency action. 16

And that party must first have taken all

possible appeals within the agency itself. 17

Administrative law judge (ALJ) An agency employee who acts as an impartial decision maker.

15 In two narrow groups of cases, a court may not review an agency action. In a few cases, courts hold

that a decision is “committed to agency discretion,” a formal way of saying that courts will keep hands

off. This result occurs only with politically sensitive issues, such as international air routes. In some

cases, the enabling legislation makes it absolutely clear that Congress wanted no court to review

certain decisions. Courts will honor that. 16 The law describes this requirement by saying that a party must have standing to bring a case. A

college student who has a theoretical belief that the EPA should not interfere with the timber industry

has no standing to challenge an EPA rule that prohibits logging in a national forest. A lumber company

that was ready to log that area has suffered a direct economic injury: It has standing to sue. 17 This is the doctrine of exhaustion of remedies. A lumber company may not go into court the day after the

EPA publishes a proposed ban on logging. It must first exhaust its administrative remedies by participating

in the administrative hearing and then pursuing appeals within the agency before venturing into court.

100 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

STANDARD ON REVIEW Suppose OSHA promulgates a new rule limiting the noise level within steel mills.

Certain mill operators are furious because they will have to retool their mills in order

to comply. After exhausting their administrative appeals, they file suit seeking to force

OSHA to withdraw the new rule. How does a court decide the case? Or, in legal terms,

what standard does a court use in reviewing the case? Does it simply substitute its own

opinion for that of the agency? No, it does not. The standard a court uses must take

into account:

Facts Courts generally defer to an agency’s fact finding. If OSHA finds that human hearing starts to suffer when decibels reach a particular level, a court will probably accept

that as final. The agency is presumed to have expertise on such subjects. As long as there is

substantial evidence to support the fact decision, it will be respected.

Law Courts often—but not always—defer to an agency’s interpretation of the law. This is due in part to the enormous range of subjects that administrative agencies

monitor. Consider the following example. “Chicken catchers” work in large poultry

operations, entering coops, manually capturing broilers, loading them into cages, and

driving them to a processing plant, where they … well, never mind. On one farm, the

catchers wanted to organize a union, but the company objected, pointing out that

agricultural workers had no right to do so. Were chicken catchers “agricultural workers”? The National Labor Relations Board, an administrative agency, declared that chicken

catchers were in fact ordinary workers, entitled to organize. The Supreme Court ruled that courts were obligated to give deference to the agency’s decision about chicken

catchers. If the agency’s interpretation was reasonable, it was binding, even if the court itself might not have made the same analysis. The workers were permitted to form a

union—though the chickens were not.

In the following case, however, the Supreme Court disagreed with the FCC’s standards

about profanity on TV. The high court ruled that these standards were too vague to be

enforceable. The case contains vulgar language, so please do not read it.

FEDERAL COMMUNICATIONS COMMISSION V. FOX TELEVISION STATIONS, INC.

132 S. Ct. 2307 United States Supreme Court, 2012

C A S E S U M M A R Y

Facts: “People have been telling me I’m on the way out every year, right? So f*** ’em,” said Cher, on a televised

Billboard Music Awards ceremony. A year later, on the same

program, Nicole Richie asked, “Have you ever tried to get

cow s*** out of a Prada purse? It’s not so f****** simple.”

U.S. law bans the broadcast of “any obscene, inde-

cent, or profane language.” The Federal Communications

Commission (FCC), which regulates the broadcast indus-

try, had issued guidelines indicating that the utterance of

an isolated vulgarity was acceptable so long as it was not

repeated at length. After Nicole Richie explained the

difficulties of cleaning a Prada purse, the FCC declared

a more stringent indecency policy. This stricter standard

made a single fleeting expletive punishable if the word

was, “patently offensive.” But the FCC failed to give a

clear definition of the term, and it enforced the new rule

unevenly. For example, it allowed bad language during

news interviews and films, but condemned the same

words in other contexts.

When the FCC found that Fox had violated the

agency’s standards by broadcasting Cher and Nicole

Richie’s three words, Fox argued that the new policy

was too vague and arbitrary. The appeals court agreed

with Fox. The Supreme Court granted certiorari.

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 101

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4-5d Informational Control and the Public We started this section describing the pervasiveness of administrative agencies. We should

end it by noting one way in which all of us have some direct control over these ubiquitous

authorities: information.

A popular government, without popular information, or the means of acquiring it, is but a

Prologue to a Farce or a Tragedy—or perhaps both. Knowledge will forever govern ignorance,

and a people who mean to be their own Governors must arm themselves with the power which

knowledge gives.

James Madison, President, 1809–1817

Two federal statutes arm us with the power of knowledge.

FREEDOM OF INFORMATION ACT Congress passed the landmark Freedom of Information Act (known as “FOIA”) in 1966. It

is designed to give all of us, citizens, businesses, and organizations alike, access to the

information that federal agencies are using. The idea is to avoid government by secrecy.

Any citizen or executive may make a “FOIA request” to any federal government

agency. It is simply a written request that the agency furnish whatever information

it has on the subject specified. Two types of data are available under FOIA. Anyone is

entitled to information about how the agency operates, how it spends its money, and

what statistics and other information it has collected on a given subject. People routinely obtain

records about agency policies, environmental hazards, consumer product safety, taxes and

spending, purchasing decisions, and agency forays into foreign affairs. A corporation that believes

that OSHA is making more inspections of its textile mills than it makes of the competition could

demand all relevant information, including OSHA’s documents on the mill itself, comparative

statistics on different inspections, OSHA’s policies on choosing inspection sites, and so forth.

Second, all citizens are entitled to any records the government has about them. You are entitled to information that the Internal Revenue Service, or the Federal Bureau of

Investigation, has collected about you.

FOIA does not apply to Congress, the federal courts, or the executive staff at the White

House. Note also that, since FOIA applies to federal government agencies, you may not use

it to obtain information from state or local governments or private businesses.

Exemptions An agency officially has 10 days to respond to the request. In reality, most agencies are unable to meet the deadline but are obligated to make good faith efforts. FOIA

exempts altogether nine categories from disclosure. The most important exemptions permit

Issue: Was the FCC’s indecency policy unacceptably vague and arbitrary?

Decision: Yes, the FCC had failed to give broadcasters fair notice of what kind of conduct could be punished.

And it did not apply the rules equally to everyone.

Reasoning: The FCC has the right to set and change its policies. However, laws must provide a person of ordinary

intelligence with reasonable notice of what behavior is

prohibited. How could Fox have known that a fleeting

F-word on live TV was forbidden when at other times

such words were not? It could not and it did not.

Clear rules also ensure that government agencies do

not act in an arbitrary or discriminatory fashion. To be fair,

they must treat the same behavior in the same way. Never

before had the FCC penalized this conduct. In fact, even

after its stricter indecency standard was set, the FCC

allowed the utterance of the F-word in other contexts.

The FCC cannot penalize Fox if it then ignores the same

behavior in others.

102 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

an agency to keep confidential information that relates to national security, criminal inves-

tigations, internal agency matters such as personnel or policy discussions, trade secrets or

financial institutions, or an individual’s private life.

PRIVACY ACT This 1974 statute prohibits federal agencies from giving information about an individual

to other agencies or organizations without written consent. There are exceptions, but

overall this act has reduced the government’s exchange of information about us “behind

our back.”

EXAM Strategy

Question: Builder wants to develop 1,000 acres in rural Montana, land that is home to the Kite Owl. The EPA rules that the Kite Owl is an endangered species,

and prohibits development of the property. The developer appeals to the court.

The EPA based its decision on five statistical studies, and the opinions of three out

of seven experts. The court looks at the same evidence and acknowledges

that the EPA decision is carefully reasoned and fair. However, the judges believe

that the other four experts were right: The owl is not endangered. Should the court permit development?

Strategy: What is the legal standard for deciding whether a court should affirm or reverse an agency decision? As long as there is substantial evidence to support the factual conclusions, and a reasonable basis for the legal conclusion, the court should not impose its judgment. Agencies are presumed to have special expertise in their areas.

As the Fox Television case tells us, an agency ruling should generally be affirmed unless it is arbitrary and capricious. Apply that standard here.

Result: The EPA made a careful, reasoned decision. The court may disagree, but it should not impose its views. The court must affirm the agency’s ruling and prohibit

development.

Chapter Conclusion “Why can’t they just fix the law?” They can, and sometimes they do—but it is a difficult and complex task. “They” includes a great many people and forces, from common law courts to

members of Congress to campaign donors to administrative agencies. The courts have made

the bystander rule slightly more humane, but it has been a long and bumpy road. Congress

managed to restore the legal interpretation of its own 1964 Civil Rights Act, but it took

months of debate and compromising. The FDA squeezed more peanuts into a jar of Jif, but

it took nearly a decade to get the lid on.

A study of law is certain to create some frustrations. This chapter cannot prevent them all.

However, an understanding of how law is made is the first step toward controlling that law.

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 103

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

EXAM REVIEW 1. COMMON LAW The common law evolves in awkward fits and starts because courts

attempt to achieve two contradictory purposes: predictability and flexibility. (p. 84)

2. STARE DECISIS Stare decisis means “let the decision stand” and indicates that once a court has decided a particular issue, it will generally apply the same rule in

future cases. (p. 84)

3. BYSTANDER RULE The common law bystander rule holds that, generally, no one has a duty to assist someone in peril unless the bystander himself created the

danger. Courts have carved some exceptions during the last 100 years, but the basic

rule still stands. (pp. 84–85)

4. LEGISLATION Bills originate in congressional committees and go from there to the full House of Representatives or Senate. If both houses pass the bill, the

legislation normally must go to a Conference Committee to resolve differences

between the two versions. The compromise version then goes from the Conference

Committee back to both houses, and if passed by both, to the President. If the

President signs the bill, it becomes a statute; if he vetoes it, Congress can pass it over

his veto with a two-thirds majority in each house. (pp. 87–94)

5. STATUTORY INTERPRETATION Courts interpret a statute by using the plain meaning rule; then, if necessary, legislative history and intent; and finally, if

necessary, public policy. (pp. 91–93)

Question: Whitfield, who was black, worked for Ohio Edison. Edison fired him, but then later offered to rehire him. Another employee argued that Edison’s

original termination of Whitfield had been race discrimination. Edison rescinded

its offer to rehire Whitfield. Whitfield sued Edison, claiming that the company

was retaliating for the other employee’s opposition to discrimination. Edison

pointed out that Title VII of the 1964 Civil Rights Act did not explicitly apply in

such cases. Among other things, Title VII prohibits an employer from retaliating

against an employee who has opposed illegal discrimination. But it does not say anything about retaliation based on another employee’s opposition to discrimination. Edison argued that the statute did not protect Whitfield.

Strategy: What three steps does a court use to interpret a statute? First, we apply the plain meaning rule. Does that rule help us here? The statute neither allows

nor prohibits Edison’s conduct. The law does not mention this situation, and the

plain meaning rule is of no help. Second step: Legislative history and intent. What

did Congress intend with Title VII generally? With the provision that bars

retaliation against a protesting employee? Resolving those issues should give you

the answer to this question.

6. ADMINISTRATIVE AGENCIES Congress creates federal administrative agencies with enabling legislation. The Administrative Procedure Act controls how

agencies do their work. (pp. 95–96)

E X A M

S tr

a te

g y

104 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

7. RULEMAKING Agencies may promulgate legislative rules, which generally have the effect of statutes, or interpretive rules, which merely interpret existing statutes.

(pp. 97–98)

8. INVESTIGATION Agencies have broad investigatory powers and may use subpoenas and, in some cases, warrantless searches to obtain information. (pp. 98–99)

Question: When Hiller Systems, Inc., was performing a safety inspection on board the M/V Cape Diamond, an ocean-going vessel, an accident killed two men. The Occupational Safety and Health Administration (OSHA), a federal agency,

attempted to investigate, but Hiller refused to permit any of its employees to

speak to OSHA investigators. What could OSHA do to pursue the investigation?

What limits would there have been on OSHA’s actions?

Strategy: Agencies make rules, investigate, and adjudicate. Which is involved here? Investigation. During an investigation, what power has an agency to force

a company to produce data? What are the limits on that power?

9. ADJUDICATION Agencies adjudicate cases, meaning that they hold hearings and decide issues. Adjudication generally begins with a hearing before an administrative

law judge and may involve an appeal to the full agency or ultimately to federal court.

(pp. 99–100)

10. AGENCY LIMITATIONS The four most important limitations on the power of federal agencies are statutory control in the enabling legislation and the APA; political

control by Congress and the President; judicial review; and the informational control

created by the FOIA and the Privacy Act. (pp. 100–103)

5. Result: Congress passed Title VII as a bold, aggressive move to end race discrimination

in employment. Further, by specifically prohibiting retaliation against an employee,

Congress indicated it was aware that companies might punish those who spoke in favor

of the very goals of Title VII. Protecting an employee from anti-discrimination statements

made by a coworker is a very slight step beyond that, and appears consistent with the goals

of Title VII and the anti-retaliation provision. Whitfield should win, and in the real case,

he did. 18

8. Result: OSHA can issue a subpoena duces tecum, demanding that those on board the ship, and their supervisors, appear for questioning, and bring with them all relevant

documents. OSHA may ask for anything that is (1) relevant to the investigation, (2) not

unduly burdensome, and (3) not privileged. Conversations between one of the ship

inspectors and his supervisor are clearly relevant; a discussion between the supervisor

and the company’s lawyer is privileged.

E X A M

S tr

a te

g y

18EEOC v. Ohio Edison, 7 F.3d 541 (6th Cir. 1993).

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 105

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

MULTIPLE-CHOICE QUESTIONS 1. A bill is vetoed by .

(a) the Speaker of the House

(b) a majority of the voting members of the Senate

(c) the President

(d) the Supreme Court

2. If a bill is vetoed, it may still become law if it is approved by .

(a) two-thirds of the Supreme Court

(b) two-thirds of registered voters

(c) two-thirds of the Congress

(d) the President

(e) an independent government agency

3. Which of the following Presidents was most influential in the passing of the Civil Rights Act?

(a) Franklin D. Roosevelt

(b) Ronald Reagan

(c) Abraham Lincoln

(d) John F. Kennedy

(e) George W. Bush

4. Under FOIA, any citizen may demand information about.

(a) how an agency operates

(b) how an agency spends its money

(c) files that an agency has collected on the citizen herself

(d) all of the above

5. If information requested under FOIA is not exempt, an agency has to comply with the request.

(a) 10 days

(b) 30 days

(c) 3 months

(d) 6 months

106 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ESSAY QUESTIONS 1. Until 1989 every state had a statute outlawing the burning of American flags. But in

Texas v. Johnson,19 the Supreme Court declared such statutes unconstitutional, saying that flag burning is symbolic speech protected by the First Amendment.

Does Congress have the power to overrule the Court’s decision?

2. In 1988, terrorists bombed Pan Am Flight 103 over Lockerbie, Scotland, killing all passengers on board. Congress sought to remedy security shortcomings by passing the

Aviation Security Improvement Act of 1990, which, among other things, ordered the

Federal Aviation Authority (FAA) to prescribe minimum training requirements and

staffing levels for airport security. The FAA promulgated rules according to the

informal rulemaking process. However, the FAA refused to disclose certain rules

concerning training at specific airports. A public interest group called Public Citizen,

Inc., along with family members of those who had died at Lockerbie, wanted to know

the details of airport security. What steps should they take to obtain the information?

Are they entitled to obtain it?

3. The Aviation Security Improvement Act states that the FAA can refuse to divulge information about airport security. The FAA interprets this statement to mean that it

can withhold data in spite of the FOIA. Public Citizen and the Lockerbie family

members interpret FOIA as being the controlling statute, requiring disclosure. Is the

FAA interpretation binding?

4. An off-duty, out-of-uniform police officer and his son purchased some food from a 7-Eleven convenience store and were still in the parking lot when a carload of

teenagers became rowdy. The officer went to speak to them, and the teenagers

assaulted him. The officer shouted to his son to get the 7-Eleven clerk to call for help.

The son entered the store, told the clerk that a police officer needed help, and

instructed the clerk to call the police. He returned 30 seconds later and repeated the

request, urging the clerk to say it was a Code 13. The son claimed that the clerk

laughed at him and refused to do it. The policeman sued the store. Argument for the Store: We sympathize with the policeman and his family, but the store has no liability. A bystander is not obligated to come to the aid of anyone in distress unless the

bystander created the peril, and obviously the store did not do so. The policeman

should sue those who attacked him. Argument for the Police Officer: We agree that in general a bystander has no obligation to come to the aid of one in distress. However,

when a business that is open to the public receives an urgent request to call the

police, the business should either make the call or permit someone else to do it.

5. Federal antitrust statutes are complex, but the basic goal is straightforward: To prevent a major industry from being so dominated by a small group of corporations

that they destroy competition and injure consumers. Does Major League Baseball

violate the antitrust laws? Many observers say that it does. A small group of owners

not only dominate the industry, but actually own it, controlling the entry of new owners into the game. This issue went to the United States Supreme Court in 1922.

Justice Holmes ruled, perhaps surprisingly, that baseball is exempt from the antitrust

laws, holding that baseball is not “trade or commerce.” Suppose that members of

Congress dislike this ruling and the current condition of baseball. What can they do?

19 491 U.S. 397, 109 S. Ct. 2533, 1989 U.S. LEXIS 3115 (1989).

CHAPTER 4 Common Law, Statutory Law, and Administrative Law 107

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

DISCUSSION QUESTIONS 1. Courts generally follow precedent, but in the

Tarasoff and Soldano cases discussed earlier, they did not. Consider this chapter’s opening scenario .

Should Jason bear any legal responsibility for the toddler’s untimely end; or should a court follow

precedent and hold Jason blameless?

2. Revisit the Fox Television Stations case. Do you agree with the opinion? What would a sensible broadcast

obscenity policy contain? When (if ever) should a

network face fines for airing bad language?

3. Revisit United States v. Biswell. Do you agree with the Court’s decision? Is it reasonable that

government agencies can conduct searches more

freely if a business is in an industry that is

comprehensively regulated? Should a pawnshop

face more searches than other kinds of enterprises,

or should the rules be the same for all companies?

4. FOIA applies to government agencies, but it exempts Congress. Should top lawmakers

be obligated to comply with FOIA requests,

or would that create more problems than it

would solve?

5. Suppose you were on a state supreme court and faced with a restaurant-choking case. Should you

require restaurant employees to know and employ

the Heimlich maneuver to assist a choking victim?

If they do a bad job, they could cause additional

injury. Should you permit them to do nothing at

all? Is there a compromise position? What social

policies are most important?

108 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 5 CONSTITUTIONAL LAW Theconsultantstartedhispresentationtotheenergy

company’s board of directors. “So I don’t have to tell

youthatiftheSmith-JonesBilleverpassesCongress,

it will be an utter disaster for your company. The

House has already passed it. The President wants it.

The only thing that kept it from becoming law this

summer is that the Senate was too chicken to bring

it up for a vote in an election year.

“Here’s the bottom line: To be comfortable,

you need three candidates who see things your way to beat current senators who support

the bill.”

The next slide showed a large map of the United States

with three states highlighted in red. “These are your best

bets. Attempting wins here would cost $ 60 million total—

not so much for a billion-dollar-a-year operation like yours.

“The money would go to saturation advertising from

Labor Day to Election Day. I want to buy TV ads during

local news programs all day, and during most primetime

shows. I want the viewers to see your ads at least a dozen

times before they go to the polls.

“In state #1, the challenger—your candidate—is a squeaky-clean state representative, but

no one knows much about her outside her own district. She carries herself well, has a nice

family. People will like her if they see her. Your money makes sure people will see her.

“In state #2, your guy hasn’t really done much. But his grandfather was a hero at

Normandy, and his dad was a coal miner. Great-grandparents were immigrants who came

through New York with nothing in their pockets—I can see the ad with the Statue of

Liberty already. A lot of voters will appreciate his family’s story. This strategy will work

if we have the funds to tell the story often enough.

“In state #3, we go negative. Really negative. Our opponent has been in the Senate a

long time, and he’s taken maybe 100,000 photos. We have three of them showing him with

world leaders who have become unpopular of late. We’re going to use them to tell a story

about the senator putting foreign interests above American jobs and national security. People

In state #3, we go negative. Really negative.

n u tt a ki t/ S tu tt e rs to ck .c o m ; ©

S ta s V o li k/ S h u tt e rs to ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

are angry—they think America is losing its place in the world. Our polling

shows that this kind of campaign will be highly effective.

“You need to get into this election. All of your stakeholders benefit if the

Smith-Jones Bill dies—your workers stay on the job, your shareholders make

more money, and your customers pay lower prices. Corporations are nothing

more or less than the people who work for them, and they have the right to

express their political opinions. These ads would simply give your workers

the chance to exercise their right to free speech.”

The CFO interrupted, “Look, we’re all against the Smith-Jones Bill. But

is this plan legal?”

5-1 GOVERNMENT POWER 5-1a One in a Million The Constitution of the United States is the greatest legal document ever written. No other

written constitution has lasted so long, governed so many, or withstood such challenge. This

amazing work was drafted in 1787, when two weeks were needed to make the horseback ride

from Boston to Philadelphia, a pair of young cities in a weak and disorganized nation. Yet

today, when that trip requires less than two hours by jet, that same Constitution successfully

governs the most powerful country on earth. This longevity is a tribute to the wisdom and

idealism of the Founding Fathers. The Constitution is not perfect, but overall, it has worked

astonishingly well and has become the model for many constitutions around the world.

The Constitution sits above everything else in our legal system. No law can conflict

with it. The chapter opener raises a constitutional issue: Does Congress have the right to

prohibit corporations from spending money to affect elections, or are these actions protected

as free speech under the First Amendment? We will explore this question later in the

chapter when we discuss the Citizens United case. The Constitution is short and relatively easy to read. This brevity is potent. The

Founding Fathers, or Framers, wanted it to last for centuries, and they understood that

would happen only if the document permitted interpretation and “fleshing out” by later

generations. The Constitution’s versatility is striking. In this chapter, the first part provides

an overview of the Constitution, discussing how it came to be and how it is organized. The

second part describes the power given to the three branches of government. The third part

explains the individual rights the Constitution guarantees to citizens.

5-2 OVERVIEW Thirteen American colonies declared independence from Great Britain in 1776 and gained

it in 1783. The new status was exhilarating. Ours was the first nation in modern history

founded on the idea that the people could govern themselves, democratically. The idea was

daring, brilliant, and fraught with difficulties. The states were governing themselves under

the Articles of Confederation, but these articles gave the central government no real power.

The government could not tax any state or its citizens and had no way to raise money. The

national government also lacked the power to regulate commerce between the states or

between foreign nations and any state. This state of governance was disastrous. States began

to impose taxes on goods entering from other states. The young “nation” was a collection of

poor relations, threatening to squabble themselves to death.

110 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

In 1787, the states sent a group of 55 delegates to Philadelphia. Rather than amend the

old articles, the Framers set out to draft a new document and to create a government that

had never existed before. It was hard going. What structure should the government have?

How much power? Representatives like Alexander Hamilton, a federalist, urged a strong central government. The new government must be able to tax and spend, regulate com-

merce, control the borders, and do all things that national governments routinely do. But

Patrick Henry and other antifederalists feared a powerful central government. They had fought a bitter war precisely to get rid of autocratic rulers; they had seen the evil that a

distant government could inflict. The antifederalists insisted that the states retain maximum

authority, keeping political control closer to home.

The debate continues to this day, and periodically it plays a key role in elections. The

“tea party” movement, for example, is a modern group of antifederalists.

Another critical question was how much power the people should have. Many of the delegates had little love for the common people and feared that extending this idea of

democracy too far would lead to mob rule. Antifederalists again disagreed. The British had

been thrown out, they insisted, to guarantee individual liberty and a chance to participate in

the government. Power corrupted. It must be dispersed among the people to avoid its abuse.

How to settle these basic differences? By compromise, of course. The Constitution is a series of compromises about power. We will see many provisions granting power to one branch of the government while at the same time restraining the authority given.

5-2a Separation of Powers The Framers did not want to place too much power in any single place. One method of

limiting power was to create a national government divided into three branches, each

independent and equal. Each branch would act as a check on the power of the other two.

Article I of the Constitution created a Congress, which was to have legislative, or lawmak-

ing, power. Article II created the office of President, defining the scope of executive, or

enforcement, power. Article III established judicial, or interpretive, power by creating the

Supreme Court and permitting additional federal courts.

Consider how the three separate powers balance one another: Congress was given the power

to pass statutes, a major grant of power. But the President was permitted to veto, or block,

proposed statutes, a nearly equal grant. Congress, in turn, had the right to override the veto,

ensuring that the President would not become a dictator. The President was allowed to appoint

federal judges and members of his cabinet, but only with a consenting vote from the Senate.

5-2b Individual Rights The original Constitution was silent about the rights of citizens. This void alarmed many who

feared that the new federal government would have unlimited power over their lives. So in

1791, the first 10 amendments, known as the Bill of Rights, were added to the Constitution, guaranteeing many liberties directly to individual citizens.

In the next two sections, we look in more detail at the two sides of the great series of

compromises: power granted and rights protected.

5-3 POWER GRANTED 5-3a Congressional Power To recap two key ideas from Chapter 1:

1. Voters in all 50 states elect representatives who go to Washington, D.C., to serve in

Congress.

Bill of Rights The first 10 amendments to the Constitution outlining the rights of citizens.

CHAPTER 5 Constitutional Law 111

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

2. The Congress is comprised of the House of Representatives and the Senate.

The House has 435 voting members, and states with large populations send

more representatives. The Senate has 100 members—two from each state.

Congress wields tremendous power. Its members create statutes that influence our jobs,

money, health care, military, communications, and virtually everything else. But can Con-

gress create any kind of law that it wishes? No. Article I, section 8 is a critically important part of the Constitution. It lists the 18 types

of statutes that Congress is allowed to pass, such as imposing taxes, declaring war, and

coining money. Thus, only the national government may create currency. The state of

Illinois cannot print $20 bills with Barack Obama’s profile.

States are allowed to create all other kinds of laws for themselves because the Tenth Amendment says, “All powers not delegated to the United States by the Constitution … are

reserved to the States.”

The Commerce Clause is the specific item in Article I, section 8, most important to your future as a businessperson. It calls upon Congress “to regulate commerce among the

several States,” and its impact is described in the next section.

INTERSTATE COMMERCE With the Commerce Clause, the Framers sought to accomplish several things in response to

the commercial chaos that existed under the Articles of Confederation. They wanted the

federal government to speak with one voice when regulating commercial relations with

foreign governments. 1

The Framers also wanted to give Congress the power to bring

coordination and fairness to trade among the states, and to stop the states from imposing

the taxes and regulations that were wrecking the nation’s domestic trade.

Virtually all of the numerous statutes that affect businesses are passed under the

Commerce Clause. But what does it mean to regulate interstate commerce? Are all business

transactions “interstate commerce,” or are there exceptions? In the end, the courts must

interpret what the Constitution means.

SUBSTANTIAL EFFECT RULE An important test of the Commerce Clause came in the Depression years of the 1930s, in

Wickard v. Filburn.2 The price of wheat and other grains had fluctuated wildly, severely harming farmers and the national food market. Congress sought to stabilize prices by

limiting the bushels per acre that a farmer could grow. Filburn grew more wheat than

federal law allowed and was fined. In defense, he claimed that Congress had no right to

regulate him because none of his wheat went into interstate commerce. He sold some locally and used the rest on his own farm as food for livestock and as seed. The Commerce Clause,

Filburn claimed, gave Congress no authority to limit what he could do.

The Supreme Court disagreed and held that Congress may regulate any activity that has a substantial economic effect on interstate commerce. Filburn’s wheat affected interstate commerce because the more he grew for use on his own farm, the less he would need to buy

in the open market of interstate commerce. In the end, “interstate commerce” does not

require that things travel from one state to another.

In United States v. Lopez,3 however, the Supreme Court ruled that Congress had exceeded its power under the Commerce Clause. Congress had passed a criminal statute called the

“Gun-Free School Zones Act,” which forbade any individual from possessing a firearm in

1Michelin Tire Corp. v. Wages, Tax Commissioner, 423 U.S. 276, 96 S. Ct. 535, 1976 U.S. LEXIS 120 (1976). 2 317 U.S. 111, 63 S. Ct. 82, 1942 U.S. LEXIS 1046 (1942).

3 514 U.S. 549, 115 S. Ct. 1624, 1995 U.S. LEXIS 3039 (1995).

Commerce Clause The part of Article I, Section 8, that gives Congress the power to regulate commerce with foreign nations and among states.

112 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

a school zone. The goal of the statute was obvious: to keep schools safe. Lopez was convicted

of violating the act and appealed his conviction all the way to the high Court, claiming that

Congress had no power to pass such a law. The government argued that the Commerce

Clause gave it the power to pass the law, but the Supreme Court was unpersuaded.

The possession of a gun in a local school zone is in no sense an economic activity that might,

through repetition elsewhere, substantially affect any sort of interstate commerce. [Lopez] was a

local student at a local school; there is no indication that he had recently moved in interstate

commerce, and there is no requirement that his possession of the firearm have any concrete tie to

interstate commerce. To uphold the Government’s contentions here, we would have to pile

inference upon inference in a manner that would bid fair to convert congressional authority under

the Commerce Clause to a general police power of the sort retained by the States. [The statute

was unconstitutional and void.]

Congress’s power is great—but still limited.

Current Application: The Patient Protection and Affordable Healthcare Act In 2010, Congress passed the Patient Protection and Affordable Healthcare Act and President Barack Obama signed it into law. The wide-ranging legislation was aimed at

reducing the number of uninsured Americans and also the cost of health care. Almost

immediately after it passed, many states sued and argued that the law violated the Con-

stitution by exceeding Congress’s power to regulate interstate commerce.

The challenge centered on a provision (which the press refers to as the “individual

mandate”) in the Act that required many people to purchase health insurance or face fines.

The states argued that requiring people to buy something was fundamentally different from

regulating people who voluntarily decide to participate in commerce. Amidst contentious political debate, the lower courts were divided on whether this

healthcare statute was constitutional. In 2012, the Supreme Court had the final word in

National Federation of Independent Business v. Sebelius.4 The Justices agreed in part with the states: Requiring individuals to obtain health insurance was not within Congress’s power

under the Commerce Clause. Nevertheless, the Court held that the individual mandate was

a constitutional exercise of another one of Congress’s powers, its taxing power. The Court reasoned that the fines imposed on individuals without health insurance could reasonably

be characterized as a tax and were therefore constitutional.

STATE LEGISLATIVE POWER The “dormant” or “negative” aspect of the Commerce Clause governs state efforts to

regulate interstate commerce. The dormant aspect holds that a state statute that discrimi- nates against interstate commerce is almost always unconstitutional. Here is an example, but please do not read it if you plan to drive later today. Michigan and New York permitted

in-state wineries to sell directly to consumers. They both denied this privilege to out-of-

state producers, who were forced to sell to wholesalers, who offered the wine to retailers,

who sold to consumers. This provision created an impossible barrier for many small vine-

yards, which did not produce enough wine to attract wholesalers. Even if they did, the

multiple resales drove their prices prohibitively high.

Local residents and out-of-state wineries sued, claiming that the state regulations violated

the dormant Commerce Clause. The Supreme Court ruled that these statutes obviously

discriminated against out-of-state vineyards; the schemes were illegal unless Michigan and

New York could demonstrate an important goal that could not be met any other way. The

states’ alleged motive was to prevent minors from purchasing wine over the Internet. How-

ever, Michigan and New York offered no evidence that such purchases were really a problem.

The Court said that minors seldom drink wine, and when they do, they seek instant

4 648 F.3d 1235 (2012).

CHAPTER 5 Constitutional Law 113

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

gratification, not a package in the mail. States that allowed direct shipment to consumers

reported no increase in purchases by minors. This discrimination against interstate commerce,

like most, was unconstitutional. 5

Devil’s Advocate Underage drinking is a serious problem. The Court should allow states wide leeway in their efforts to limit

alcohol consumption by minors. Even if the state regulations are imperfect, they may help reduce underage drinking.

SUPREMACY CLAUSE What happens when both the federal and state governments pass regulations that are

permissible, but conflicting? For example, Congress passed the federal Occupational Safety

and Health Act (OSHA) establishing many job safety standards, including those for training

workers who handle hazardous waste. Congress had the power to do so under the Com-

merce Clause. Later, Illinois passed its own hazardous waste statutes, seeking to protect

both the general public and workers. The state statute did not violate the Commerce Clause

because it imposed no restriction on interstate commerce.

Each statute specified worker training and employer licensing. But the requirements

differed. Which statute did Illinois corporations have to obey? Article VI of the Constitution

contains the answer. The Supremacy Clause states that the Constitution, and federal statutes and treaties, shall be the supreme law of the land.

• If there is a conflict between federal and state statutes, the federal law preempts the field, meaning it controls the issue. The state law is void.

• Even in cases where there is no conflict, if Congress demonstrates that it intends to exercise exclusive control over an issue, federal law preempts.

Thus state law controls only when there is no conflicting federal law and Congress has not intended to dominate the issue. In the Illinois case, the Supreme Court concluded that

Congress intended to regulate the issue exclusively. Federal law therefore preempted the

field, and local employers were obligated to obey only the federal regulations.

EXAM Strategy

Question: Dairy farming was more expensive in Massachusetts than in other states. To help its farmers, Massachusetts taxed all milk sales, regardless of where the milk

was produced. The revenues went into a fund that was then distributed to in-state

dairy farmers. Discuss.

Strategy: By giving a subsidy to local farmers, the state is treating them differently from out-of-state dairies. This discrepancy raises Commerce Clause issues. The

dormant aspect applies. What does it state? Apply that standard to these facts.

Result: The dormant aspect holds that a state statute that discriminates against interstate commerce is almost always invalid. Massachusetts was subsidizing its farmers at the

expense of those from other states. The tax violates the Commerce Clause and is void.

5Granholm v. Heald, 544 U.S. 460, 1255 S. Ct. 1885 (2005).

Supremacy Clause Makes the Constitution, and federal statutes and treaties, the supreme law of the land.

114 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

5-3b Executive Power Article II of the Constitution defines executive power. The President’s most basic job function

is to enforce the nation’s laws. Three of his key powers concern appointment, legislation, and

foreign policy.

APPOINTMENT Administrative agencies play a powerful role in business regulation, and the President

nominates the heads of most of them. These choices dramatically influence what issues

the agencies choose to pursue and how aggressively they do it. For example, a President

who seeks to expand the scope of regulations on air quality may appoint a forceful

environmentalist to run the Environmental Protection Agency (EPA), whereas a President

who dislikes federal regulations will choose a more passive agency head. 6

LEGISLATION The President and his advisers propose bills to Congress. During the last 50 years, a vast

number of newly proposed bills have come from the executive branch. Some argue that too many proposals come from the President and that Congress has become overly passive. When a President proposes controversial legislation on a major issue, such as Social Security

reform, the bill can dominate the news—and Congress—for months or even years. The

President, of course, also has the power to veto bills. 7

FOREIGN POLICY The President conducts the nation’s foreign affairs, coordinating international efforts,

negotiating treaties, and so forth. The President is also the commander in chief of the

armed forces, meaning that he heads the military. But Article II does not give him the right

to declare war—only the Senate may do that. A continuing tension between the President

and Congress has resulted from the President’s use of troops overseas without a formal declaration of war.

5-3c Judicial Power Article III of the Constitution creates the Supreme Court and permits Congress to establish

lower courts within the federal court system. 8

Federal courts have two key functions:

adjudication and judicial review.

ADJUDICATING CASES The federal court system hears criminal and civil cases. Generally, prosecutions of federal

crimes begin in United States District Court. That same court has limited jurisdiction to

hear civil lawsuits, a subject discussed in Chapter 3, on dispute resolution.

JUDICIAL REVIEW One of the greatest “constitutional” powers appears nowhere in the Constitution. In 1803,

the Supreme Court decided Marbury v. Madison.9 Congress had passed a relatively minor statute that gave certain powers to the Supreme Court, and Marbury wanted the Court to

use those powers. The Court refused. In an opinion written by Chief Justice John Marshall,

the Court held that the statute violated the Constitution because Article III of the Constitution

6 For a discussion of administrative agency power, see Chapter 4, on administrative law.

7 For a discussion of the President’s veto power and Congress’s power to override a veto, see

Chapter 4, on statutory law. 8 For a discussion of the federal court system, see Chapter 3, on dispute resolution.

9 5 U.S. 137, 1 Cranch 137 (1803).

CHAPTER 5 Constitutional Law 115

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

did not grant the Court those powers. The details of the case were insignificant, but the ruling

was profound: Because the statute violated the Constitution, said the Court, it was void. Judicial review refers to the power of federal courts to declare a statute or governmental action unconstitutional and void.

This formidable grab of power has produced two centuries of controversy. The Court

was declaring that it alone had the right to evaluate acts of the other two branches of

government—the Congress and the executive—and to decide which were valid and which

were void. The Constitution nowhere grants this power. Undaunted, Marshall declared that

“[I]t is emphatically the province and duty of the judicial department to say what the law

is.” In later cases, the Supreme Court expanded on the idea, holding that it could also

nullify state statutes, rulings by state courts, and actions by federal and state officials. In this

chapter, we have already encountered an example of judicial review in the Lopez case, where the justices declared that Congress lacked the power to pass local gun regulations.

Is judicial review good for the nation? Those who oppose it argue that federal court

judges are all appointed, not elected, and that we should not permit judges to nullify a

statute passed by elected officials because that diminishes the people’s role in their government.

Those who favor judicial review insist that there must be one cohesive interpretation of the

Constitution and the judicial branch is the logical one to provide it. The following example of

judicial review shows how immediate and emotional the issue can be. It is a criminal prosecution

for a brutal crime. Cases like this force us to examine two questions about judicial review. What is

the proper punishment for such a horrible crime? Just as important, who should make that decision— appointed judges, or elected legislators?

KENNEDY V. LOUISIANA

554 U.S. 407 United States Supreme Court, 2008

C A S E S U M M A R Y

Facts: Patrick Kennedy raped his eight-year-old stepdaugh- ter, referred to as L.H. A forensic expert testified that L.H.’s

physical injuries were the most severe he had ever witnessed

from a sexual assault. The jury also heard evidence that the

defendant had raped another eight-year-old. Kennedy was

convicted of aggravated rape, because the victim was under

12 years of age.

The jury voted to sentence Kennedy to death, which was

permitted by the Louisiana statute. The state supreme court

affirmed the death sentence, and Kennedy appealed to the

United States Supreme Court. He argued that the Louisiana

statute was unconstitutional. The Eighth Amendment prohi-

bits cruel and unusual punishment, which includes penalties

that are out of proportion to the crime. Kennedy claimed that

capital punishment was out of proportion to rape, and violated

the Eighth Amendment.

Issue: Did the Louisiana statute violate the Constitution by permitting the death penalty in a case of child rape?

Decision: Yes, the Louisiana statute violated the Eighth Amendment. Reversed.

Reasoning: Constitutional liberties create limits. States may define crimes and set punishments, but the penalties must

not be excessive in light of evolving standards of decency

in modern society. The death penalty requires special

attention.

Only six states (Louisiana, Georgia, Montana, Oklahoma,

South Carolina, and Texas) allowed for a death sentence in

cases of child rape. The other 44 states either did not have

capital crimes or allow for the death penalty only when a

defendant takes a life.

The majority of the Justices determined that the crime

in this case, while horrific, was nonetheless not equivalent

to murder in its “severity and irrevocability.” It concluded

that Louisiana's statute amounted to cruel and unusual

punishment.

Dissent by Justice Alito: The court is wrong about the evolving standards of decency. In recent years, five states

have passed laws that impose capital punishment in capital

rape cases. They have acted in response to a significant

increase in reports of the sexual abuse of children. These

laws did not violate the Eighth Amendment.

116 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Judicial Activism/Judicial Restraint The power of judicial review is potentially dictatorial. The Supreme Court nullifies statutes passed by Congress (Marbury v. Madison, United States v. Lopez) and executive actions. May it strike down any law it dislikes? In theory, no—the Court should nullify only laws that violate the Constitution. But in practice,

yes—the Constitution means whatever the majority of the current justices says that it

means, since it is the Court that tells us which laws are violative.

Judicial activism refers to a court’s willingness, or even eagerness, to become involved in major issues and to decide cases on constitutional grounds. Activists are

sometimes willing to “stretch” laws beyond their most obvious meaning. Judicial restraint is the opposite, an attitude that courts should leave lawmaking to legislators and nullify a law only when it unquestionably violates the Constitution. Some justices

believe that the Founding Fathers never intended the judicial branch to take a promi-

nent role in sculpting the nation’s laws and its social vision.

From the 1950s through the 1970s, the Supreme Court took an activist role, deciding

many major social issues on constitutional grounds. The landmark 1954 decision in

Brown v. Board of Education ordered an end to racial segregation in public schools, not only changing the nation’s educational systems, but altering forever its expectations

about race. 10

The Court also struck down many state laws that denied minorities the

right to vote. Beginning with Miranda v. Arizona, the Court began a sweeping reappraisal of the police power of the state and the rights of criminal suspects during searches,

interrogations, trials, and appeals. 11

And in Roe v. Wade, the Supreme Court established certain rights to abortion, most of which remain after nearly 40 years of continuous

litigation. 12

Beginning in the late 1970s, and lasting to the present, the Court has pulled back

from its social activism. Exhibit 5.1 illustrates the balance among Congress, the Pre-

sident, and the Court.

The Constitution established a federal government of checks and balances. Con-

gress may propose statutes; the President may veto them; and Congress may override

the veto. The President nominates cabinet officers, administrative heads, and Supreme

Court justices, but the Senate must confirm his nominees. Finally, the Supreme Court

(and lower federal courts) exercise judicial review over statutes and executive actions.

Unlike the other checks and balances, judicial review is not provided for in the Con-

stitution, but is a creation of the Court itself in Marbury v. Madison.

5-4 PROTECTED RIGHTS The amendments to the Constitution protect the people of this nation from the power of

state and federal government. The First Amendment guarantees rights of free speech, free

press, and religion; the Fourth Amendment protects against illegal searches; the Fifth

Amendment ensures due process; the Sixth Amendment demands fair treatment for defen-

dants in criminal prosecutions; and the Fourteenth Amendment guarantees equal protection

of the law. We consider the First, Fifth, and Fourteenth Amendments in this chapter and

the Fourth, Fifth, and Sixth Amendments in Chapter 7, on crime.

The “people” who are protected include citizens and, for most purposes, corporations.

Corporations are considered persons and receive most of the same protections. The great

majority of these rights also extends to citizens of other countries who are in the United States.

10 347 U.S. 483, 74 S. Ct. 686, 1954 U.S. LEXIS 2094 (1954).

11 384 U.S. 436, 86 S. Ct. 1602, 1966 U.S. LEXIS 2817 (1966).

12 410 U.S. 113, 93 S. Ct. 705, 1973 U.S. LEXIS 159 (1973).

Judicial activism A court’s willingness to decide issues on constitutional grounds.

Judicial restraint A court’s attitude that it should leave lawmaking to legislators.

CHAPTER 5 Constitutional Law 117

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Constitutional rights generally protect only against governmental acts. The Constitution generally does not protect us from the conduct of private parties, such as corporations or other

citizens.

5-4a Incorporation A series of Supreme Court cases has extended virtually all of the important constitutional

protections to all levels of national, state, and local government. This process is called incorporation because rights explicitly guaranteed at one level are incorporated into rights that apply at other levels.

5-4b First Amendment: Free Speech The First Amendment states that “Congress shall make no law … abridging the free-

dom of speech ….” In general, we expect our government to let people speak and hear

whatever they choose. The Founding Fathers believed democracy would work only if

the members of the electorate were free to talk, argue, listen, and exchange viewpoints

in any way they wanted. The people could only cast informed ballots if they were

informed. “Speech” also includes symbolic conduct, as the following case flamingly

illustrates.

Congress President Supreme Court

Statutes

Cabinet

Administrative Agency Heads

Executive Actions

Confirm or Reject

Nominates

Judicial Review

NominatesOverridePropose

Veto

Confirm or Reject

Confirm or Reject

Nominates

Judicial Review

© C e n g a g e L e a rn in g

EXHIBIT 5.1 The Path of Legislation: The Balance among the President, the Congress, and the Court

118 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

POLITICAL SPEECH Because the Framers were primarily concerned with enabling democracy to function,

political speech has been given an especially high degree of protection. Such speech

may not be barred even when it is offensive or outrageous. A speaker, for example, could

accuse a U.S. senator of being insane and could use crude, violent language to describe

him. The speech is still protected. Political speech is protected unless it is intended and likely to create imminent lawless action.13 For example, suppose the speaker said, “The senator is inside that restaurant. Let’s get some matches and burn the place down.”

Speech of this sort is not protected. The speaker could be arrested for attempted arson

or attempted murder.

One of the most important recent developments in constitutional law concerns

the ability of organizations to engage in political speech. In the case that follows, a sharply divided Supreme Court weighed in on the issue raised in this chapter’s opening

scenario.

TEXAS V. JOHNSON

491 U.S. 397 United States Supreme Court, 1989

C A S E S U M M A R Y

Facts: Outside the Republican National Convention in Dallas, Gregory Johnson participated in a protest against

policies of the Reagan administration. Participants gave

speeches and handed out leaflets. Johnson burned an

American flag. He was arrested and convicted under a

Texas statute that prohibited desecrating the flag, but the

Texas Court of Criminal Appeals reversed on the grounds

that the conviction violated the First Amendment. Texas

appealed to the United States Supreme Court.

Issue: Does the First Amendment protect flag burning?

Decision: Affirmed. The First Amendment protects flag burning.

Reasoning: The First Amendment literally applies only to “speech,” but the Supreme Court had already ruled

that the Amendment also protects written words and other

conduct that conveys a specific message. For example,

earlier decisions protected a student’s right to wear a black

armband in protest against American military actions.

Judged by this standard, flag burning is symbolic speech.

Texas argued that its interest in honoring the flag

justified its prosecution of Johnson, since he knew that

his action would be deeply offensive to many citizens.

However, if there is a bedrock principle underlying the

First Amendment, it is that the government may not

prohibit the expression of an idea simply because society

finds it offensive.

The best way to preserve the flag's special role in our

lives is not to punish those who feel differently but to

persuade them that they are wrong. We do not honor our

flag by punishing those who burn it, because in doing so

we diminish the freedom that this cherished emblem

represents.

13Brandenburg v. Ohio, 395 U.S. 444, 89 S. Ct. 1827, 1969 U.S. LEXIS 1367 (1969).

CHAPTER 5 Constitutional Law 119

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

TIME, PLACE, AND MANNER Even when speech is protected, the government may regulate the time, place, and manner of such speech. A town may require a group to apply for a permit before using a public park for

a political demonstration. The town may insist that the demonstration take place during

daylight hours and that there be adequate police supervision and sanitation provided. However, the

town may not prohibit such demonstrations outright.

Many public universities have designated “free speech zones” located in high-traffic

areas of campus that are not immediately adjacent to a large number of classrooms. The

zones allow for debates to proceed and reach many students, but they minimize the chances

that noisy demonstrations will interfere with lectures.

MORALITY AND OBSCENITY The regulation of morality and obscenity presents additional problems. Obscenity has never

received constitutional protection. The Supreme Court has consistently held that it does not

play a valued role in our society and has refused to give protection to obscene works. That is

well and good, but it merely forces the question: What is obscene?

In Miller v. California,14 the Court created a three-part test to determine if a creative work is obscene. The basic guidelines for the factfinder are:

• Whether the average person, applying contemporary community standards, would find that the work, taken as a whole, appeals to the prurient interest;

• Whether the work depicts or describes, in a patently offensive way, sexual conduct specifically defined by the applicable state law; and

• Whether the work, taken as a whole, lacks serious literary, artistic, political, or scientific value.

CITIZENS UNITED V. FEDERAL ELECTION COMMISSION

558 U.S. 310 Supreme Court of the United States, 2010

C A S E S U M M A R Y

Facts: Citizens United, a nonprofit organization, produced a documentary on presidential candidate Hillary Clinton.

The group wanted to run television ads promoting Hillary: the Movie. The Bipartisan Campaign Reform Act of 2002 banned “electioneering communication” by corporations

and unions for the 30 days before a presidential primary.

Citizens United challenged the Act.

Issue: Did the Bipartisan Campaign Reform Act violate the First Amendment?

Decision: Yes, the law violated the First Amendment.

Reasoning: Prohibiting organizations from “electioneer- ing communications” amounts to censorship. Speech is

vital to a democracy, and it must not be suppressed.

Corporations are protected by the First Amendment,

and therefore, they have the right to express their political

views. Yet, under this statute, any negative portrayal of a

politician on television, radio, or YouTube, that takes

place near an election could be a felony.

Corruption should be curbed, but not at the expense

of free speech. Americans must be allowed to decide for

themselves which ideas are worthy of discussion. The

government cannot make the decision for them.

14 413 U.S. 15, 93 S. Ct. 2607, 1973 U.S. LEXIS 149 (1973).

120 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

If the trial court finds that the answer to all three of those questions is “yes,” it may

judge the material obscene; the state may then prohibit the work. If the state fails to prove

any one of the three criteria, though, the work is not obscene. 15

A United States District

Court ruled that “As Nasty As They Wanna Be,” recorded by 2 Live Crew, was obscene.

The appeals court, however, reversed, finding that the state had failed to prove lack of

artistic merit. 16

COMMERCIAL SPEECH Commercial speech refers to speech that has a dominant theme to propose a commercial

transaction. For example, most advertisements on television and in the newspapers are

commercial speech. This sort of speech is protected by the First Amendment, but the government is permitted to regulate it more closely than other forms of speech.

Commercial speech that is false or misleading may be outlawed altogether. The govern- ment may regulate other commercial speech, provided that the rules are reasonable and directed to a legitimate goal. The following case demonstrates the very different treatment given to this type of speech.

SALIB V. CITY OF MESA

133 P.3d 756 212 Ariz. 446 Arizona Court of Appeals, 2006

C A S E S U M M A R Y

Facts: Edward Salib owned a Winchell's Donut House in Mesa, Arizona. To attract customers, he displayed large

signs advertising his products in his store window. The

city ordered him to remove the signs because they vio-

lated its Sign Code, which prohibited covering more than

30% of a store’s windows with signs. Salib sued, claiming

that the Sign Code violated his First Amendment free

speech rights. The trial court gave summary judgment

for Mesa, and the store owner appealed.

Issue: Did Mesa’s Sign Code violate the First Amendment?

Decision: No, the Code placed a reasonable limit on commercial speech. Affirmed.

Reasoning: The First Amendment guarantees free speech rights to people and to organizations. The govern-

ment, though, can restrict commercial speech in some

circumstances. Regulators, for example, can ban false

and misleading messages. They may also place limits

on other advertisements if they pass the following three-

part test:

First, the government has a substantial interest.

Second, a restriction directly advances this interest.

Third, the restriction is narrowly tailored to meet its

goal.

In the case, the City of Mesa claimed a substantial

interest in making its business district aesthetically pleas-

ing. It argued that the Sign Code did in fact make the city

more attractive. Mesa also claimed that its 30% standard

was a narrow and reasonable compromise between its

interest in city beautification and the rights of business

owners.

The court agreed with Mesa’s arguments and

declined to second-guess the standard.

15Penthouse Intern Ltd. v. McAuliffe, 610 F.2d 1353 (5th Cir. 1980). 16 960 F.2d 134 (1992).

Commercial speech Communication, such as advertisements, that has the dominant theme of proposing a business transaction.

CHAPTER 5 Constitutional Law 121

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

EXAM Strategy

Question: Maria owns a lot next to a freeway that passes through Tidyville. She has rented a billboard to Huge Mart, a nearby retailer, and a second billboard to Green, a

political party. However, Tidyville prohibits off-premises signs (those not on the

advertiser’s property) that are visible from the freeway. Tidyville’s rule is designed to

make the city more attractive, to increase property values, and to eliminate distrac-

tions that may cause freeway accidents. Huge Mart and Green sue, claiming that

Tidyville’s law violates their First Amendment rights. Who wins?

(a) Huge Mart is likely to win; Green is likely to lose.

(b) Green is likely to win; Huge Mart is likely to lose.

(c) Huge Mart and Green are both likely to win.

(d) Huge Mart and Green are both likely to lose.

Strategy: What is the difference between the two cases? Huge Mart wants the billboard for commercial speech; Green wants it for a political message. What are the

legal standards for commercial and political free speech? Apply those standards.

Result: The government may regulate commercial speech, provided that the rules are reasonable and directed to a legitimate goal. Political speech is given much stronger

protection, and can be prohibited only if it is intended and likely to create imminent

lawless action. The regulation outlawing advertising will be upheld, but Tidyville will not be allowed to block political messages.

5-4c Fifth Amendment: Due Process and the Takings Clause You are a senior at a major state university. You feel great

about a difficult exam you took in Professor Watson’s class.

The Dean’s Office sends for you, and you enter curiously,

wondering if your exam was so good that the dean is award-

ing you a prize. Not quite. The exam proctor has accused

you of cheating. Based on the accusation, Watson has

flunked you. You protest that you are innocent and demand to know what the accusation is.

The dean says that you will learn the details at a hearing, if you wish to have one. She reminds

you that if you lose the hearing, you will be expelled from the university. Four years of work

and your entire career are suddenly on the line.

The hearing is run by Professor Holmes, who will make the final decision. Holmes is a

junior faculty member in Watson’s department. (Next year, Watson will decide Holmes’s

tenure application.) At the hearing, the proctor accuses you of copying from a student sitting

in front of you. Both Watson and Holmes have already compared the two papers and

concluded that they are strongly similar. Holmes tells you that you must convince him

the charge is wrong. You examine the papers, acknowledge that there are similarities, but

plead as best you can that you never copied. Holmes doesn’t buy it. The university expels

you, placing on your transcript a notation of cheating.

Have you received fair treatment? To answer that, we must look to the Fifth Amend-

ment, which provides several vital protections. We will consider two related provisions, the

Due Process Clause and the Takings Clause. Together, they state: “No person shall be …

Four years of work and your entire career are suddenly on the line.

122 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

deprived of life, liberty, or property without due process of law; nor shall private property be

taken for public use, without just compensation.” These clauses prevent the government

from arbitrarily taking the most valuable possessions of a citizen or corporation. The

government has the right to take a person’s liberty or property. But there are three important

limitations:

• Procedural Due Process. Before depriving anyone of liberty or property, the government must go through certain steps, or procedures, to ensure that the result is fair.

• The Takings Clause. When the government takes property for public use, such as to build a new highway, it has to pay a fair price.

• Substantive Due Process. Some rights are so fundamental that the government may not take them from us at all. The substance of any law or government action may be

challenged on fundamental fairness grounds.

PROCEDURAL DUE PROCESS The government deprives citizens or corporations of their property in a variety of ways. The

Internal Revenue Service may fine a corporation for late payment of taxes. The Customs

Service may seize goods at the border. As to liberty, the government may take it by

confining someone in a mental institution or by taking a child out of the home because of

parental neglect. The purpose of procedural due process is to ensure that before the government takes liberty or property, the affected person has a fair chance to oppose the

action. There are two steps in analyzing a procedural due process case:

• Is the government attempting to take liberty or property?

• If so, how much process is due? (If the government is not attempting to take liberty or property, there is no due process issue.)

Is the Government Attempting to Take Liberty or Property? Liberty inter- ests are generally easy to spot: Confining someone in a mental institution and taking a child

from her home are both deprivations of liberty. A property interest may be obvious. Suppose

that, during a civil lawsuit, the court attaches a defendant’s house, meaning it bars the defendant from selling the property at least until the case is decided. This way, if the plaintiff

wins, the defendant will have assets to pay the judgment. The court has clearly deprived the

defendant of an important interest in his house, and the defendant is entitled to due process.

However, a property interest may be subtler than that. A woman holding a job with a

government agency has a “property interest” in that job, because her employer has agreed

not to fire her without cause, and she can rely on it for income. If the government does fire her,

it is taking away that property interest, and she is entitled to due process. A student attending

any public school has a property interest in her education. If a public university suspends a

student as described above, it is taking her property, and she, too, should receive due process.

How Much Process Is Due? Assuming that a liberty or property interest is affected, a court must decide how much process is due. Does the person get a formal trial, or an

informal hearing, or merely a chance to reply in writing to the charges against her? If she

gets a hearing, must it be held before the government deprives her of her property, or is it

enough that she can be heard shortly thereafter? What sort of hearing the government must offer depends upon how important the property or liberty interest is and on whether the government has a competing need for efficiency. The more important the interest, the more formal the procedures must be.

Neutral Factfinder Regardless of how formal the hearing, one requirement is constant: The factfinder must be neutral. Whether it is a superior court judge deciding a multimillion-

dollar contract suit or an employment supervisor deciding the fate of a government employee,

Takings Clause A clause in the Fifth Amendment that ensures that when any governmental unit takes private property for public use, it must compensate the owner.

Procedural due process The doctrine that ensures that before the government takes liberty or property, the affected person has a fair chance to oppose the action.

Attachment The process by which a court bars a defendant from selling property.

CHAPTER 5 Constitutional Law 123

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

the factfinder must have no personal interest in the outcome. In Ward v. Monroeville,17the plaintiff was a motorist who had been stopped for traffic offenses in a small town. He

protested his innocence and received a judicial hearing. But the “judge” at the hearing was

the town mayor. Traffic fines were a significant part of the town’s budget. The motorist

argued that the town was depriving him of procedural due process because the mayor had a

financial interest in the outcome of the case. The United States Supreme Court agreed and

reversed his conviction.

Attachment of Property As described earlier, a plaintiff in a civil lawsuit often seeks to attach the defendant’s property. Attachment protects the plaintiff, but it may also harm the defendant if, for example, he is about to close a profitable real estate deal. Attachments

used to be routine. In Connecticut v. Doehr, the Supreme Court required more caution.18

Based on Doehr, when a plaintiff seeks to attach at the beginning of the trial, a court must look at the plaintiff’s likelihood of winning. Generally, the court must grant the defendant a

hearing before attaching the property. The defendant, represented by a lawyer, may offer evidence as to how attachment would harm him and why it should be denied.

Government Employment A government employee must receive due process before being fired. Generally, this means some kind of hearing, but not necessarily a formal court

hearing. The employee is entitled to know the charges against him, to hear the employer’s

evidence, and to have an opportunity to tell his side of the story. He is not entitled to have a

lawyer present. The hearing “officer” need only be a neutral employee. Further, in an

emergency, where the employee is a danger to the public or the organization, the govern-

ment may suspend with pay, before holding a hearing. It then must provide a hearing before

the decision becomes final.

Academic Suspension There is still a property interest here, but it is the least important of those discussed. When a public school concludes that a student has failed to

meet its normal academic standards, such as by failing too many courses, it may dismiss him

without a hearing. Due process is served if the student receives notice of the reason and has

some opportunity to respond, such as by writing a letter contradicting the school’s claims.

In cases of disciplinary suspension or expulsion, courts generally require schools to

provide a higher level of due process. In the hypothetical at the beginning of this section,

the university has failed to provide adequate due process. 19

The school has accused the

student of a serious infraction. The school must promptly provide details of the charge and

cannot wait until the hearing to do so. The student should see the two papers and have a

chance to rebut the charge. Moreover, Professor Holmes has demonstrated bias. He appears

to have made up his mind in advance. He has placed the burden on the student to disprove

the charges. And he probably feels obligated to support Watson’s original conclusion, since

Watson will be deciding his tenure case next year.

THE TAKINGS CLAUSE Florence Dolan ran a plumbing store in Tigard, Oregon. She and her husband wanted to

enlarge it on land they already owned. But the city government said that they could expand

only if they dedicated some of their own land for use as a public bicycle path and for other

public use. Does the city have the right to make them do that? For an answer, we must look

to a different part of the Fifth Amendment.

The Takings Clause prohibits a state from taking private property for public use without just compensation. A town wishing to build a new football field may boot you out of your

17 409 U.S. 57, 93 S. Ct. 80, 1972 U.S. LEXIS 11 (1972).

18 501 U.S. 1, 111 S. Ct. 2105, 1991 U.S. LEXIS 3317 (1991).

19 See, for example, University of Texas Medical School at Houston v. Than, 901 S.W.2d 926, 1995 Tex.

LEXIS 105 (Tex. 1995).

124 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

house. But the town must compensate you. The government takes your land through the

power of eminent domain. Officials must notify you of their intentions and give you an opportunity to oppose the project and to challenge the amount the town offers to pay. But

when the hearings are done, the town may write you a check and level your house, whether

you like it or not.

More controversial issues arise when a local government does not physically take the

property but passes regulations that restrict its use. Tigard is a city of 30,000 in Oregon. The

city developed a comprehensive land use plan for its downtown area in order to preserve

green space, to encourage transportation other than autos, and to reduce its flooding problems.

Under the plan, when a property owner sought permission to build in the downtown section, the

city could require some of her land to be used for public purposes. This has become a standard

method of land use planning throughout the nation. States have used it to preserve coastline,

urban green belts, and many environmental features.

When Florence Dolan applied for permission to expand, the city required that she

dedicate a 15-foot strip of her property to the city as a bicycle pathway and that she preserve,

as greenway, a portion of her land within a floodplain. She sued, and though she lost in the

Oregon courts, she won in the United States Supreme Court. The Court held that Tigard

City’s method of routinely forcing all owners to dedicate land to public use violated the

Takings Clause. The city was taking the land, even though title never changed hands. 20

The Court did not outlaw all such requirements. What it required was that, before a government may require an owner to dedicate land to a public use, it must show that this owner’s proposed building requires this dedication of land. In other words, it is not enough for Tigard to have a general plan, such as a bicycle pathway, and to make all owners participate in

it. Tigard must show that it needs Dolan’s land specifically for a bike path and greenway. This argument will be much harder for local governments to demonstrate than merely showing a

city-wide plan. A related issue arose in the following controversial case. A city used eminent

domain to take property on behalf of private developers. Was this a valid public use? The Kelo decision was controversial, and in response, some states passed statutes

prohibiting eminent domain for private development.

KELO V. CITY OF NEW LONDON, CONNECTICUT

545 U.S. 469 United States Supreme Court, 2005

C A S E S U M M A R Y

Facts: New London, Connecticut, was declining economically. The city's unemployment rate was double

that of the state generally, and the population was at its

lowest in 75 years. In response, state and local officials

targeted a section of the city, called Fort Trumbull, for

revitalization. Located on the Thames River, Fort Trumbull

comprised 115 privately owned properties and 32 additional

acres of an abandoned naval facility. The development plan

included one section for a waterfront conference hotel and

stores; a second one for 80 private residences; and one for

research facilities.

The state bought most of the properties from willing

sellers. However, 9 owners of 15 properties refused to sell,

and filed suit. The owners claimed that the city was trying to

take land for private use, not public, in violation of the Takings

Clause. The case reached the United States Supreme Court.

Issue: Did the city's plan violate the Takings Clause?

Decision: No, the plan was constitutional. Affirmed.

Reasoning: The Takings Clause allows for some trans- fers of real property from one private party to another, so

20Dolan v. City of Tigard, 512 U.S. 374, 114 S. Ct. 2309, 1994 U.S. LEXIS 4826 (1994).

Eminent domain The power of the government to take private property for public use.

CHAPTER 5 Constitutional Law 125

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

SUBSTANTIVE DUE PROCESS This doctrine is part of the Due Process Clause, but it is entirely different from procedural

due process and from government taking. During the first third of the twentieth century,

the Supreme Court frequently nullified state and federal laws, asserting that they interfered

with basic rights. For example, in a famous 1905 case, Lochner v. New York,21 the Supreme Court invalidated a New York statute that had limited the number of hours that bakers

could work in a week. New York had passed the law to protect employee health. But the

Court declared that private parties had a basic constitutional right to contract. In this case,

the statute interfered with the rights of the employer and the baker to make any bargain

they wished. Over the next three decades, the Court struck down dozens of state and

federal laws that were aimed at working conditions, union rights, and social welfare gen-

erally. This was called substantive due process22 because the Court was looking at the underlying rights being affected, such as the right to contract, not at any procedures.

Critics complained that the Court was interfering with the desires of the voting public

by nullifying laws that the justices personally disliked (judicial activism). During the Great

Depression, however, things changed. Beginning in 1934, the Court completely reversed

itself and began to uphold the types of laws it earlier had struck down.

The Supreme Court made an important substantive due process ruling in the case of

BMW v. Gore.23 A BMW dealership sold Gore a car that had sustained water damage. Instead of telling him of the damage, they simply repainted the car and sold it as new.

In Chapter 6, we will examine two different types of cash awards that juries may make in

tort cases. For now, let’s call them “ordinary” and “punitive” damages. When plaintiffs win tort

cases, juries may always award ordinary damages to offset real, measureable losses. In addition,

juries are sometimes allowed to add to an award to further punish a defendant for bad behavior.

In the BMW case, the jury awarded Gore $4,000 in ordinary damages as the difference in value between a flawless new car and a water-damaged car. The jury then awarded a delighted Gore $4

million in punitive damages. In the end, the Supreme Court decided that the punitive award was so disproportionate to the harm actually caused that it violated substantive due process rights.

5-4d Fourteenth Amendment: Equal Protection Clause Shannon Faulkner wanted to attend The Citadel, a state-supported military college in

South Carolina. She was a fine student who met every admission requirement that The

Citadel set except one: She was not a man. The Citadel argued that its long and distin-

guished history demanded that it remain all male. Faulkner responded that she was a citizen

long as the land will be used by the public. For example,

land may be taken to allow for the construction of a rail-

road, even if private railroad companies will be the pri-

mary beneficiaries of the transfer.

New London’s economic development plan aims to cre-

ate jobs and increase the city’s tax receipts. The Supreme

Court has not previously considered this type of public

use, but now determines that economic development is a

legitimate public purpose. New London did not violate the

Takings Clause.

Dissent by Justice O’Connor: Any public benefit in this case would be incidental and secondary. Under the majority’s opinion, the government can now take private property for any purpose. This case will most likely benefit those with inside access to government officials, at the expense of small property owners.

21 198 U.S. 45, 25 S. Ct. 539, 1905 U.S. LEXIS 1153 (1905).

22 Be the first on your block to pronounce this word correctly. The accent goes on the first syllable:

substantive. 23 517 U.S. 559 (1996).

Substantive due process A form of due process that holds that certain rights are so fundamental that the government may not eliminate them.

126 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

of the state and ought to receive the benefits that others got, including the right to a military

education. Could the school exclude her on the basis of gender?

The Fourteenth Amendment provides that “No State shall … deny to any person

within its jurisdiction the equal protection of the laws.” This is the Equal Protection Clause, and it means that, generally speaking, governments must treat people equally. Unfair classifications among people or corporations will not be permitted. A notorious example of

unfair classification would be race discrimination: Permitting only white children to attend a

public school violates the Equal Protection Clause.

Yet clearly, governments do make classifications every day. People with high incomes

pay a higher tax rate than those with low incomes; some corporations are permitted to

deal in securities, while others are not. To determine which classifications are constitution-

ally permissible, we need to know what is being classified. There are three major groups of

classifications. The outcome of a case can generally be predicted by knowing which group it

is in.

• Minimal Scrutiny: Economic and Social Relations. Government actions that classify people or corporations on these bases are almost always upheld.

• Intermediate Scrutiny: Gender. Government classifications are sometimes upheld.

• Strict Scrutiny: Race, Ethnicity, and Fundamental Rights. Classifications based on any of these are almost never upheld.

MINIMAL SCRUTINY: ECONOMIC AND SOCIAL REGULATION Just as with the Due Process Clause, laws that regulate economic or social issues are

presumed valid. They will be upheld if they are rationally related to a legitimate goal. This means a statute may classify corporations and/or people, and the classifications will be

upheld if they make any sense at all. The New York City Transit Authority excluded all

methadone users from any employment. The United States District Court concluded that

this practice violated the Equal Protection Clause by unfairly excluding all those who

were on methadone. The court noted that even those who tested free of any illegal drugs

and were seeking non-safety-sensitive jobs, such as clerks, were turned away. That

reasoning, said the district court, was irrational.

Not so, said the United States Supreme Court. The Court admitted that the policy

might not be the wisest. It would probably make more sense to test individually for illegal

drugs rather than automatically exclude methadone users. But, said the Court, it was not up

to the justices to choose the best policy. They were only to decide if the policy was rational.

Excluding methadone users related rationally to the safety of public transport and therefore

did not violate the Equal Protection Clause. 24

INTERMEDIATE SCRUTINY: GENDER Classifications based on sex must meet a tougher test than those resulting from economic or

social regulation. Such laws must substantially relate to important government objectives. Courts have increasingly nullified government sex classifications as societal concern with gender

equality has grown.

At about the same time Shannon Faulkner began her campaign to enter The

Citadel, another woman sought admission to the Virginia Military Institute (VMI), an

all-male state school. The Supreme Court held that Virginia had violated the Equal

Protection Clause by excluding women from VMI. The Court ruled that gender-based

24New York City Transit Authority v. Beazer, 440 U.S. 568, 99 S. Ct. 1355, 1979 U.S. LEXIS 77 (1979).

Equal Protection Clause A clause in the Fourteenth Amendment that generally requires the government to treat people equally.

CHAPTER 5 Constitutional Law 127

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

government discrimination requires an “exceedingly persuasive justification,” and that

Virginia had failed that standard of proof. The Citadel promptly opened its doors to

women as well. 25

STRICT SCRUTINY: RACE, ETHNICITY, AND FUNDAMENTAL RIGHTS Any government action that intentionally discriminates against racial or ethnic minorities, or interferes with a fundamental right, is presumed invalid. In such cases, courts will look at the statute or policy with strict scrutiny; that is, courts will examine it very closely to determine whether there is compelling justification for it. The law will be upheld only if

it is necessary to promote a compelling state interest. Very few meet that test.

• Racial and Ethnic Minorities. Any government action that intentionally discriminates on the basis of race, or ethnicity is presumed invalid. For example, in Palmore v. Sidoti,26 the state had refused to give child custody to a mother because her new spouse was racially different from the child. The practice was declared

unconstitutional. The state had made a racial classification, it was presumed

invalid, and the government had no compelling need to make such a ruling.

• Fundamental Rights. A government action interfering with a fundamental right also receives strict scrutiny and will likely be declared void. For example, New York State

gave an employment preference to any veteran who had been a state resident when

he entered the military. Newcomers who were veterans were less likely to get jobs,

and therefore this statute interfered with the right to travel, a fundamental right. The

Supreme Court declared the law invalid. 27

EXAM Strategy

Question: Megan is a freshman at her local public high school; her older sister Jenna attends a nearby private high school. Both girls are angry because their schools

prohibit them from joining their respective wrestling teams, where only boys are

allowed. The two girls sue based on the U.S. Constitution. Discuss the relevant law

and predict the outcomes.

Strategy: One girl goes to private school and one to public school. Why does that matter? Now ask what provision of the Constitution is involved, and what legal

standard it establishes.

Result: The Constitution offers protection from the government. A private high school is not part of the government, and Jenna has no constitutional case. Megan’s

suit is based on the Equal Protection Clause. This is gender discrimination, mean-

ing that Megan’s school must convince the court that keeping girls off the team

substantially relates to an important government objective. The school will probably argue that wrestling with stronger boys will be dangerous for girls. However, courts are

increasingly suspicious of any gender discrimination and are unlikely to find the

school’s argument persuasive.

25United States v. Virginia, 518 U.S. 515, 116 S. Ct. 2264, 1996 U.S. LEXIS 4259 (1996). 26 466 U.S. 429, 104 S. Ct. 1879, 1984 U.S. LEXIS 69 (1984).

27Attorney General of New York v. Soto-Lopez, 476 U.S. 898, 106 S. Ct. 2317, 1986 U.S. LEXIS 59 (1986).

Fundamental rights Rights so basic that any governmental interference with them is suspect and likely to be unconstitutional.

128 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter Conclusion The legal battle over power never stops. The obligation of a state to provide equal educa- tional opportunity for both genders relates to whether Tigard, Oregon, may demand some of

Ms. Dolan’s store lot for public use. Both issues are governed by one amazing document.

That same Constitution determines what tax preferences are permissible and even whether

a state may require you to wear clothing. As social mores change in step with broad cultural

developments, as the membership of the Supreme Court changes, the balance of power

between federal government, state government, and citizens will continue to evolve. There

are no easy answers to these constitutional questions because there has never been a

democracy so large, so diverse, or so powerful.

EXAM REVIEW 1. CONSTITUTION The Constitution is a series of compromises about power.

(p. 111)

2. ARTICLES I, II, AND III Article I of the Constitution creates the Congress and grants all legislative power to it. Article II establishes the office of President and

defines executive powers. Article III creates the Supreme Court and permits lower

federal courts; the article also outlines the powers of the federal judiciary. (p. 111)

3. COMMERCE CLAUSE Under the Commerce Clause, Congress may regulate any activity that has a substantial effect on interstate commerce. (p. 112)

4. INTERSTATE COMMERCE A state may not regulate commerce in any way that will interfere with interstate commerce. (p. 112)

Question: Maine exempted many charitable institutions from real estate taxes but denied this benefit to a charity that primarily benefited out-of-state residents.

Camp Newfound was a Christian Science organization, and 95 percent of its

summer campers came from other states. Camp Newfound sued Maine. Discuss.

Strategy: The state was treating organizations differently depending on what states their campers come from. This raised Commerce Clause issues. Did the

positive aspect or dormant aspect of that clause apply? The dormant aspect

applied. What does it state? Apply that standard to these facts. (See the “Result”

at the end of this section.)

5. SUPREMACY CLAUSE Under the Supremacy Clause, if there is a conflict between federal and state statutes, the federal law preempts the field. Even without a

conflict, federal law preempts if Congress intended to exercise exclusive control. (p. 114)

6. PRESIDENTIAL POWERS The President’s key powers include making agency appointments, proposing legislation, conducting foreign policy, and acting as

commander in chief of the armed forces. (p. 111)

E X A M

S tr

a te

g y

CHAPTER 5 Constitutional Law 129

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

7. FEDERAL COURTS The federal courts adjudicate cases and also exercise judicial review, which is the right to declare a statute or governmental action

unconstitutional and void. (pp. 115–117)

8. FREEDOM OF SPEECH Freedom of speech includes symbolic acts. Political speech by both people and organizations is protected unless it is intended and likely

to create imminent lawless action. (pp. 118–122)

9. REGULATION OF SPEECH The government may regulate the time, place, and manner of speech. (p. 120)

10. COMMERCIAL SPEECH Commercial speech that is false or misleading may be outlawed; otherwise, regulations on this speech must be reasonable and directed

to a legitimate goal. (pp. 121–122)

Question: A federal statute prohibits the broadcasting of lottery advertisements, except by stations that broadcast in states permitting lotteries. The purpose of the

statute is to support efforts of states that outlaw lotteries. Truth Broadcasting

operates a radio station in State A (a nonlottery state) but broadcasts primarily in

State B (a lottery state). Truth wants to advertise State A’s lottery but is barred by

the statute. Does the federal statute violate Truth’s constitutional rights?

Strategy: This case involves a particular kind of speech. What kind? What is the rule about that kind of speech? (See the “Result” at the end of this section.)

11. PROCEDURAL DUE PROCESS Procedural due process is required whenever the government attempts to take liberty or property. The amount of process that is

due depends upon the importance of the liberty or property threatened. (pp. 123–124)

Question: Fox’s Fine Furs claims that Ermine owes $68,000 for a mink coat on which she has stopped making payments. Fox files a complaint and also asks the

court clerk to garnish Ermine’s wages. A garnishment is a court order to an employer to withhold an employee’s wages, or a portion of them, and pay the

money into court so that there will be money for the plaintiff, if it wins. What

constitutional issue does Fox’s request for garnishment raise?

Strategy: Ermine is in danger of losing part of her income, which is property. The Due Process Clause prohibits the government (the court) from taking life,

liberty, or property without due process. What process is Ermine entitled to? (See

the “Result” at the end of this section.)

12. TAKINGS CLAUSE The Takings Clause prohibits a state from taking private property for public use without just compensation. (pp. 124–126)

13. SUBSTANTIVE DUE PROCESS A substantive due process analysis presumes that any economic or social regulation is valid, and presumes invalid any law that

infringes upon a fundamental right. (p. 126)

E X A M

S tr

a te

g y

E X A M

S tr

a te

g y

130 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

14. EQUAL PROTECTION CLAUSE The Equal Protection Clause generally requires the government to treat people equally. Courts apply strict scrutiny in any

equal protection case involving race, ethnicity, or fundamental rights; intermediate

scrutiny to any case involving gender; and minimal scrutiny to an economic or social

regulation. (pp. 126–128)

4. Result: The dormant aspect holds that a state statute that discriminates against interstate

commerce is almost always invalid. Maine was subsidizing charities that served in-state

residents and penalizing those that attracted campers from elsewhere. The tax rules violated

the Commerce Clause and were void. 28

10. Result: An advertisement is commercial speech. The government may regulate this speech so long as the rules are reasonable and directed to a legitimate goal. The goal of supporting

nonlottery states is reasonable, and there is no violation of Truth’s free speech rights. 29

11. Result: Ermine is entitled to notice of Fox’s claim and to a hearing before the court garnishes her wages.

30

MULTIPLE-CHOICE QUESTIONS 1. Greenville College, a public community college, has a policy of admitting only male

students. If the policy is challenged under the Fourteenth Amendment,

scrutiny will be applied.

(a) strict

(b) intermediate

(c) rational

(d) none of the above

2. You begin work at Everhappy Corp. at the beginning of November. On your second day at work, you wear a political button on your overcoat, supporting your choice for

governor in the upcoming election. Your boss glances at it and says, “Get that stupid

thing out of this office or you’re history, chump.” Your boss violated

your First Amendment rights. After work, you put the button back on and start

walking home. You pass a police officer who blocks your path and says, “Take off that

stupid button or you’re going to jail, chump.” The officer violated your

First Amendment rights.

(a) has; has

(b) has; has not

(c) has not; has

(d) has not; has not

28Camps Newfound/Owatonna, Inc. v. Town of Harrison, Maine, 520 U.S. 564, 117 S. Ct. 1590 (1997). 29United States v. Edge Broadcasting, 509 U.S. 418, 113 S. Ct. 2696 (1993). 30Sniadach v. Family Finance Corp., 395 U.S. 337 (1969).

CHAPTER 5 Constitutional Law 131

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3. Which of the following statements accurately describes statutes that Congress and the President may create?

(a) Statutes must be related to a power listed in Article I, section 8, of the Constitution.

(b) Statutes must not infringe on the liberties in the Bill of Rights.

(c) Both (a) and (b)

(d) None of the above

4. Which of the following is true of the origin of judicial review?

(a) It was created by Article II of the Constitution.

(b) It was created by Article III of the Constitution.

(c) It was created in the Marbury v. Madison case. (d) It was created by the Fifth Amendment.

(e) It was created by the Fourteenth Amendment.

5. Consider Kelo v. City of New London, in which a city with a revitalization plan squared off against property owners who did not wish to sell their property. The key

constitutional provision was the Takings Clause in the ____________ Amendment.

The Supreme Court decided the city ____________ use eminent domain and take the

property from the landowners.

(a) Fifth; could

(b) Fifth; could not

(c) Fourteenth; could

(d) Fourteenth; could not

ESSAY QUESTIONS 1. YOU BE THE JUDGE WRITING PROBLEM Scott Fane was a CPA licensed

to practice in New Jersey and Florida. He built his New Jersey practice by making

unsolicited phone calls to executives. When he moved to Florida, the Board of

Accountancy there prohibited him (and all CPAs) from personally soliciting new

business. Fane sued. Does the First Amendment force Florida to forgo foreclosing

Fane’s phoning? Argument for Fane: The Florida regulation violates the First Amendment, which protects commercial speech. Fane was not saying anything false

or misleading, but was just trying to secure business. This is an unreasonable

regulation, designed to keep newcomers out of the marketplace and maintain steady

business and high prices for established CPAs. Argument for the Florida Board of Accountancy: Commercial speech deserves—and gets—a lower level of protection than other speech. This regulation is a reasonable method of ensuring that the level of

CPA work in our state remains high. CPAs who personally solicit clients are obviously

in need of business. They are more likely to bend legal and ethical rules to obtain

clients and keep them happy, and will lower the standards throughout the state.

2. President George H. W. Bush insisted that he had the power to send American troops into combat in the Middle East, without congressional assent. Yet before authorizing

force in Operation Desert Storm, he secured congressional authorization. President Bill

Clinton stated that he was prepared to invade Haiti without a congressional vote. Yet he

bargained hard to avoid an invasion, and ultimately American troops entered without

the use of force. Why the seeming doubletalk by both Presidents?

132 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

3. In the landmark 1965 case of Griswold v. Connecticut, the Supreme Court examined a Connecticut statute that made it a crime for any person to use contraception. The

majority declared the law an unconstitutional violation of the right of privacy. Justice

Black dissented, saying, “I do not to any extent whatever base my view that this

Connecticut law is constitutional on a belief that the law is wise or that its policy is a

good one. [It] is every bit as offensive to me as it is to the majority. [There is no

criticism by the majority of this law] to which I cannot subscribe—except their

conclusion that the evil qualities they see in the law make it unconstitutional.” What

legal doctrines are involved here? Why did Justice Black distinguish between his

personal views on the statute and the power of the Court to overturn it?

4. Gilleo opposed American participation in the war in the Persian Gulf. She displayed a large sign on her front lawn that read, “Say No to War in the Persian Gulf, Call

Congress Now.” The city of Ladue prohibited signs on front lawns and Gilleo sued.

The city claimed that it was regulating “time, place, and manner.” Explain that

statement, and decide who should win.

5. David Lucas paid $975,000 for two residential lots on the Isle of Palms near Charleston, South Carolina. He intended to build houses on them. Two years later,

the South Carolina legislature passed a statute that prohibited building seaward of a

certain line, and Lucas’s property fell in the prohibited zone. Lucas claimed that his

land was now useless and that South Carolina owed him its value. Explain his claim.

Should he win?

DISCUSSION QUESTIONS 1. Return to the opening scenario and the Citizens

United case. Is political advertising purchased by corporations appropriate? Do you agree with the

five members of the Supreme Court who voted to

allow it, or with the four who dissented and would

have drawn distinctions between free speech by

individuals and organizations? Why?

2. Ethics Is political advertising by a nonprofit political organization like Citizens United any

more or less appropriate than advertising by for-

profit corporations like the one described in the

opening scenario? If you were a board member in

the opening scenario, which (if any) of the three

ads would you vote to authorize?

3. Consider the “tea party” movement. Do you believe that the federal government should be able

to create whatever laws it deems to be in the

country’s best interests, or do you believe that

individual states, like Florida and California,

should have more control over the laws within their

own borders?

4. This chapter is filled with examples of statutes that have been struck down by the courts. A Texas law

banning flag burning was rejected by the Supreme

Court, as was a Louisiana death penalty statute.

The Affordable Healthcare Act was voided by

multiple lower court judges before the Supreme

Court ultimately upheld the law.

Do you like the fact that courts can void laws which

they determine to be in violation of the Constitution?

Or is it wrong for appointed judges to overrule “the

will of the majority,” as expressed by elected

members of Congress and state legislatures?

5. Gender discrimination currently receives “intermediate” Fourteenth Amendment scrutiny.

Is this right? Should gender receive “strict”

scrutiny as does race? Why or why not?

CHAPTER 5 Constitutional Law 133

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

CHAPTER 6 TORTS AND PRODUCT LIABILITY In a small Louisiana town, Don Mashburn ran a

restaurant called Maison de Mashburn. The New Orleans States-Item newspaper reviewed his eatery, and here is what the article said:

’Tain’t Creole, ’tain’t Cajun, ’tain’t French, ’tain’t

country American, ’tain’t good. I don’t know how

much real talent in cooking is hidden under the

mélangeofhideoussauceswhichmakethisfoodandthemenu

a travesty of pretentious amateurism, but I find it all quite

depressing. Put a yellow flour sauce on top of the duck, flame

it for drama, and serve it with some horrible multiflavored rice

in hollowed-out fruit and what have you got? A well-cooked

duck with an ugly sauce that tastes too sweet and thick and

makes you want to scrape off the glop to eat the plain duck.

[The stuffed eggplant was prepared by emptying] a shaker full

(more or less) of paprika on top of it. [One sauce created] trout à

la green plague [while another should have been called] yellow

death on duck.

Mashburn sued, claiming that the newspaper had committed libel, damaging his reputation

and hurting his business. 1 Trout à la green plague will be the first course on our menu of tort law.

Mashburn learned, as you will, why filing such a lawsuit is easier than winning it.

’Tain’t Creole, ’tain’t Cajun, ’tain’t French,

’tain’t country American, ’tain’t good.

1Mashburn v. Collin, 355 So.2d 879 (La. 1977).

n u tt a ki t/ S h u tt e rs to ck .c o m ; ©

S ta s V o li k/ S h u tt e rs to ck .c o m

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

The odd word “tort” is borrowed from the French, meaning “wrong.” And that is what it

means in law: a wrong. More precisely, a tort is a violation of a duty imposed by the civil law. When a person breaks one of those duties and injures another, it is a tort. The injury

could be to a person or her property. Libel, which the restaurant owner in the opening

scenario alleged, is one example of a tort. A surgeon who removes the wrong kidney from a

patient commits a different kind of tort, called negligence. A business executive who

deliberately steals a client away from a competitor, interfering with a valid contract, commits

a tort called interference with a contract. A con artist who tricks you out of your money with

a phony offer to sell you a boat commits fraud, yet another tort.

Because tort law is so broad, it takes a while to understand its boundaries. To start with,

we must distinguish torts from two other areas of law: criminal law and contract law.

It is a crime to steal a car, to embezzle money from a bank, to sell cocaine. As discussed in Chapter 1, society considers such behavior so threatening that the government itself will

prosecute the wrongdoer, whether or not the car owner or bank president wants the case to

go forward. A district attorney, who is paid by the government, will bring the case to court,

seeking to send the defendant to prison, fine him, or both. If there is a fine, the money goes

to the state, not to the victim.

In a tort case, it is up to the injured party to seek compensation. She must hire her own

lawyer, who will file a lawsuit. Her lawyer must convince the court that the defendant

breached some legal duty and ought to pay money damages to the plaintiff. The plaintiff

has no power to send the defendant to jail. Bear in mind that a defendant’s action might be

both a crime and a tort. A man who punches you in the face for no reason commits the tort of

battery. You may file a civil suit against him and will collect money damages if you can

prove your case. He has also committed a crime, and the state may prosecute, seeking to

imprison and fine him.

Differences between Contract, Tort, and Criminal Law

Type of Obligation Contract Tort Criminal Law

How the obligation is created

The parties agree on a contract, which creates duties for both.

The civil law imposes duties of conduct on all persons.

The criminal law prohibits certain conduct.

How the obligation is enforced

Suit by plaintiff. Suit by plaintiff. Prosecution by government.

Possible result Money damages for plaintiff.

Money damages for plaintiff.

Punishment for defendant, including prison and/or fine.

Example Raul contracts to sell Deirdre 5,000 pairs of sneakers at $50 per pair, but fails to deliver them. Deirdre buys the sneakers elsewhere for $60 per pair and receives $50,000, her extra expense.

A newspaper falsely accuses a private citizen of being an alcoholic. The plaintiff sues and wins money damages to compensate for her injured reputation.

Leo steals Kelly’s car. The government prosecutes Leo for grand theft, and the judge sentences him to two years in prison. Kelly gets nothing.

© C e n g a g e L e a rn in g

Tort A violation of a duty imposed by the civil law.

CHAPTER 6 Torts and Product Liability 135

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

A tort is also different from a contract dispute. A contract case is based on an agreement

two people have already made. For example, Deirdre claims that Raul promised to sell her

10,000 pairs of sneakers at a good price but has failed to deliver them. She files a contract

lawsuit. In a tort case, there is usually no “deal” between the parties. Don Mashburn had

never met the restaurant critic who attacked his restaurant and obviously had never made

any kind of contract. The plaintiff in a tort case claims that the law itself creates a duty that

the defendant has breached.

Tort law is divided into categories. In the first part of this chapter, we consider inten- tional torts; that is, harm caused by a deliberate action. The newspaper columnist who wrongly accuses someone of being a drunk has committed the intentional tort of libel. In

the last sections, we examine negligence and strict liability, which involve injuries and

losses caused by neglect and oversight rather than by deliberate conduct.

A final introductory point: When we speak of intentional torts, we do not necessa-

rily mean that the defendant intended to harm the plaintiff. If the defendant does

something deliberately and it ends up injuring somebody, she is probably liable even if

she meant no harm. For example, intentionally throwing a snowball at a friend is a

deliberate act. If the snowball permanently damages his eye, the harm is unintended, but the defendant is liable for the intentional tort of battery because the act was intentional.

We look first at the most common intentional torts and then at the most important

intentional torts that are related to business.

6-1 INTENTIONAL TORTS 6-1a Defamation The First Amendment guarantees the right to free speech, a vital freedom that enables us to

protect other rights. But that freedom is not absolute.

The law of defamation concerns false statements that harm someone’s reputation.

Defamatory statements can be written or spoken. Written defamation is called libel. Suppose a newspaper accuses a local retail store of programming its cash registers to overcharge customers

when the store has never done so. That is libel. Oral defamation is slander. If Professor Wisdom, in class, refers to Sally Student as a drug dealer when she has never sold drugs, he

has slandered her. Exhibit 6.1 maps the tension in every defamation case—between an

individual’s right to protect his reputation and the public’s right to know.

There are four elements to a defamation case. An element is something that a plaintiff

must prove to win a lawsuit. The plaintiff in any kind of lawsuit must prove all of the elements to prevail. The elements in a defamation case are:

• Defamatory statement. This is a statement likely to harm another person’s reputation. Professor Wisdom’s accusation will clearly harm Sally’s reputation.

• Falseness. The statement must be false. If Sally Student actually sold marijuana to a classmate, then Professor Wisdom has a defense to slander.

• Communicated. The statement must be communicated to at least one person other than the plaintiff. If Wisdom speaks privately to Sally and accuses her of dealing drugs, there is no slander.

Intentional torts Harm caused by a deliberate action.

Libel Written defamation.

Slander Oral defamation.

136 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

• Injury. In many slander cases, the plaintiff generally must show some injury. Sally’s injury would be lower reputation in the school, embarrassment, and

humiliation. But in slander cases that involve false statements about sexual behavior,

crimes, contagious diseases, and professional abilities, the law is willing to assume

injury without requiring the plaintiff to prove it. Lies in these four categories amount

to slander per se.

Libel cases are treated like cases of slander per se, and courts award damages without

proof of injury. 2

OPINION Thus far, what we have seen is uncontroversial. If a television commentator refers to Frank

Landlord as a “vicious slumlord who rents uninhabitable units,” and Frank actually main-

tains his buildings perfectly, Frank will be compensated for the harm. But what if the

television commentator states a harsh opinion about Frank? Remember that the plaintiff must demonstrate a “false” statement. Opinions generally cannot be proven true or false,

and so they do not usually amount to defamation.

Suppose that the television commentator says, “Frank Landlord certainly does less than

many rich people do for our community.” Is that defamation? Probably not. Who are the

“rich people”? How much do they do? How do we define “does less”? These vague

assertions indicate the statement is one of opinion. Even if Frank works hard feeding

homeless families, he will probably lose a defamation case.

A related defense involves cases where a supposed statement of fact clearly should not

be taken literally. Mr. Mashburn, who opened the chapter suing over his restaurant review,

lost his case. The court held that a reasonable reader would have understood the statements

to be opinion only. “A shaker full of paprika” and “yellow death on duck” were not to be

taken literally but were merely the author’s expression of his personal dislike.

PUBLIC PERSONALITIES The rules of the game change for those who play in the open. Government officials and other

types of public figures such as actors and athletes receive less protection from defamation. In

the landmark case New York Times Co. v. Sullivan,3 the Supreme Court ruled that the free exchange of information is vital in a democracy and is protected by the First Amendment to the

Constitution.

The rule from the New York Times case is that a public official or public figure can win a defamation case only by proving actual malice by the defendant. Actual malice means that the defendant knew the statement was false or acted with reckless disregard of the truth. If

the plaintiff merely shows that the defendant newspaper printed incorrect statements, even

very damaging ones, that will not suffice to win the suit. In the New York Times case, the police chief of Birmingham, Alabama, claimed that the Times falsely accused him of racial violence in his job. He lost because he could not prove that the Times had acted with actual malice. If he had shown that the Times knew the accusation was false, he would have won.

Slander per se Slander involving false statements about sexual behavior, crimes, contagious diseases, and professional abilities.

2 When defamation by radio and television became possible, the courts chose to consider it libel,

analogizing it to newspapers because of the vast audience. This means that in broadcasting cases, a

plaintiff generally does not have to prove damages. 3 376 U.S. 254, 84 S. Ct. 710, 1964 U.S. LEXIS 1655 (1964).

CHAPTER 6 Torts and Product Liability 137

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ONLINE DEFAMATION Kenneth Zeran awoke one day to learn he had become notorious. An unidentified person

had posted a message on an AOL bulletin board advertising “Naughty Oklahoma T-Shirts.”

The shirts featured deeply offensive slogans relating to the 1995 bombing of a federal building

in Oklahoma City, in which hundreds of innocent people died. Those interested in purchasing

such a T-shirt were instructed to call “Ken” at Zeran’s home telephone number. In fact, Zeran

had nothing to do with the posting or the T-shirts. He was quickly inundated with phone

messages from furious callers, some of whom made death threats.

Zeran could not conveniently change his number because he ran his business from his

home. A radio talk show host in Oklahoma City angrily urged its listeners to call Zeran,

which they did. Before long, Zeran was receiving an abusive call every two minutes. He

sued AOL for defamation—and lost.

The court held that AOL was immune from a defamation suit based on a third-party

posting, based on the Communications Decency Act (CDA). Section 230 of the CDA

creates this immunity for any Internet service provider, the court declared, adding:

It would be impossible for service providers to screen each of their millions of postings for

possible problems. Faced with potential liability for each message republished by their services,

interactive computer service providers might choose to severely restrict the number and type of

messages posted. Congress considered the weight of the speech interests implicated and chose to

immunize service providers to avoid any such restrictive effect. 4

PRIVILEGE Defendants receive additional protection from defamation cases when it is important

for them to speak freely. Absolute privilege exists in courtrooms and legislative hearings. Anyone speaking there, such as a witness in court, can say anything at all and never be sued

for defamation. (Deliberately false testimony would be perjury, but still not slander.)

Absolute Privilege

Internet Service Provider

Public Personality‘s Reputation

s Private Citizen‘s

Reputation P

The Public‘s Need to Exchange Information

Private Right to a Good Reputation

Harder to Prove Defamation

Easier to Prove Defamation

Opinion

© C e n g a g e L e a rn in g

EXHIBIT 6.1 Defamation cases show a tension between the public’s need for information and a citizen’s right to protect his reputation.

4Zeran v. America Online, Inc., 129 F.3d 327, 1997 U.S. App. LEXIS 31791 (4th Cir. 1997).

Absolute privilege A witness testifying in a court or legislature may never be sued for defamation.

138 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

6-1b False Imprisonment False imprisonment is the intentional restraint of another person without reasonable cause and without consent. Suppose that a bank teller becomes seriously ill and wants to go to the

doctor, but the bank will not permit her to leave until she makes a final tally of her accounts.

Against her wishes, company officials physically bar her from leaving the bank. That is false

imprisonment. The restraint was unreasonable because her accounts could have been verified

later. 5

False imprisonment cases most commonly arise in retail stores, which sometimes detain

employees or customers for suspected theft. Most states now have statutes governing the

detention of suspected shoplifters. Generally, a store may detain a customer or worker for alleged shoplifting provided there is a reasonable basis for the suspicion and the detention is done reasonably. To detain a customer in the manager’s office for 20 minutes and question him about where he got an item is lawful. To chain that customer to a display counter for

three hours and humiliate him in front of other customers is unreasonable and constitutes

false imprisonment.

6-1c Intentional Infliction of Emotional Distress What should happen when a defendant’s conduct hurts a plaintiff emotionally but not

physically? Historically, not much did happen. Courts once refused to allow recovery,

assuming that if they awarded damages for mere emotional injury, they would be inviting

a floodgate of dubious claims. But gradually judges reexamined their thinking and reversed

this tendency. Today, most courts allow a plaintiff to recover for emotional injury that a

defendant intentionally caused. Some courts will also permit recovery when a defendant’s

negligent conduct caused the emotional injury.

The intentional infliction of emotional distress results from extreme and outrageous conduct that causes serious emotional harm. A credit officer was struggling vainly to

locate Sheehan, who owed money on his car. The officer phoned Sheehan’s mother,

falsely identified herself as a hospital employee, and said she needed to find Sheehan

because his children had been in a serious auto accident. The mother provided

Sheehan’s whereabouts, which enabled the company to seize his car. But Sheehan

spent seven hours frantically trying to locate his supposedly injured children, who in

fact were fine. The credit company was liable for the intentional infliction of emotional

distress. 6

By contrast, a muffler shop, trying to collect a debt from a customer, made six phone

calls over three months, using abusive language. The customer testified that this caused her

to be upset, to cry, and to have difficulty sleeping. The court ruled that the muffler shop’s

conduct was neither extreme nor outrageous. 7

The following case arose in a setting that guarantees controversy—an abortion clinic.

5Kanner v. First National Bank of South Miami, 287 So.2d 715, 1974 Fla. App. LEXIS 8989 (Fla. Dist. Ct. App. 1974). 6Ford Motor Credit Co. v. Sheehan, 373 So.2d 956, 1979 Fla. App. LEXIS 15416 (Fla. Dist. Ct. App. 1979). 7Midas Muffler Shop v. Ellison, 133 Ariz. 194, 650 P.2d 496, 1982 Ariz. App. LEXIS 488 (Ariz. Ct. App. 1982).

False imprisonment Is the intentional restraint of another person without reasonable cause and without consent.

Intentional infliction of emotional distress An intentional tort in which the harm results from extreme and outrageous conduct that causes serious emotional harm.

CHAPTER 6 Torts and Product Liability 139

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

6-1d Additional Intentional Torts Battery is an intentional touching of another person in a way that is unwanted or offensive. There need be no intention to hurt the plaintiff. If the defendant intended to do the physical act, and a reasonable plaintiff would be offended by it, battery has occurred.

Suppose an irate parent throws a chair at a referee during his daughter’s basketball

game, breaking the man’s jaw. It is irrelevant that the father did not intend to injure the

referee. But a parent who cheerfully slaps the winning coach on the back has not committed

battery because a reasonable coach would not be offended.

Assault occurs when a defendant does some act that makes a plaintiff fear an imminent battery. It is assault even though the battery never occurs. Suppose Ms. Wilson shouts “Think fast!” at her husband and hurls a toaster at him. He turns and sees it flying at him.

His fear of being struck is enough to win a case of assault, even if the toaster misses.

Fraud is injuring another person by deliberate deception. It is fraud to sell real estate knowing that there is a large toxic waste deposit underground of which the buyer is ignorant. Fraud

is a tort that typically occurs during contract negotiation, and it is discussed in more detail in Unit 2,

on contracts.

6-2 DAMAGES 6-2a Compensatory Damages Mitchel Bien, who is deaf and mute, enters the George Grubbs Nissan dealership, where

folks sell cars aggressively. Very aggressively. Maturelli, a salesman, and Bien communicate

by writing messages back and forth. Maturelli takes Bien’s own car keys, and the two then

JANE DOE AND NANCY ROE V. LYNN MILLS

212 Mich. App. 73 Michigan Court of Appeals, 1995

C A S E S U M M A R Y

Facts: Late one night, an anti-abortion protestor named Robert Thomas climbed into a dumpster located behind the

Women’s Advisory Center, an abortion clinic. He found docu-

ments indicating that the plaintiffs were soon to have abortions

at the clinic. Thomas gave the information to Lynn Mills. The

next day, Mills and Sister Lois Mitoraj created signs, using the

women’s names, indicating that they were about to undergo

abortions and urging them not to “kill their babies.”

Doe and Roe (not their real names) sued, claiming

intentional infliction of emotional distress (as well as breach of

privacy, discussed later in this chapter). The trial court dis-

missed the lawsuit before trial, ruling that the defendants’

conduct was not extreme and outrageous. The plaintiffs

appealed.

Issue: Did the plaintiffs make a valid claim of intentional infliction of emotional distress?

Decision: Yes. The plaintiffs made a valid claim of intentional infliction of emotional distress.

Reasoning: A defendant is liable for the intentional infliction of emotional distress only when his conduct is

outrageous in character, extreme in degree, and utterly

intolerable in a civilized community. A good test is

whether the average member of the community would

respond to the defendant’s conduct by exclaiming,

“Outrageous!”

These defendants had a constitutional right to protest

against abortions, but they had no such right to publicize

private matters. Their behavior here might well have

caused the average person to say, “Outrageous!” The

plaintiffs were entitled to a trial, so that a jury could decide

whether the defendants inflicted emotional distress.

Battery An intentional touching of another person in a way that is harmful or offensive.

Assault An act that makes a person reasonably fear an imminent battery.

Fraud Injuring another person by deliberate deception.

140 U N I T 1 The Legal Environment

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

test drive a 300ZX. Bien says he does not want the car, but Maturelli escorts him back inside

and fills out a sales sheet. Bien repeatedly asks for his keys, but Maturelli only laughs,

pressuring him to buy the new car. Minutes pass. Hours pass. Bien becomes frantic, writing

a dozen notes, begging to leave, threatening to call the police. Maturelli mocks Bien and his

physical disabilities. Finally, after four hours, the customer escapes.

Bien sues for the intentional infliction of emotional distress. Two former salesmen from

Grubbs testify they have witnessed customers cry, yell, and curse as a result of the aggressive

tactics. Doctors state that the incident has traumatized Bien, dramatically reducing his con-

fidence and self-esteem and preventing his return to work even three years later.

The jury awards Bien damages. But how does a jury calculate the money? For that

matter, why should a jury even try? Money can never erase pain or undo a permanent injury.

The answer is simple: Money, however inexact, is often the only thing a court has to give.

A successful plaintiff generally receives compensatory damages, meaning an amount of money that the court believes will restore him to the position he was in before the defendant’s

conduct caused injury. Here is how damages are calculated.

First, a plaintiff receives money for medical expenses that he has proven by producing bills

from doctors, hospitals, physical therapists, and psychotherapists. Bien receives all the money

he has paid. If a doctor testifies that he needs future treatment, Bien will offer evidence of how

much that will cost. The single recovery principle requires a court to settle the matter once and for all, by awarding a lump sum for past and future expenses, if there will be any. A plaintiff may not return in a year and say, “Oh, by the way, there are some new bills.”

Second, the defendants are liable for lost wages. The court takes the number of days or months

thatBienmissedworkandmultipliesthatbyhissalary.If Bienis

currently unable to work, a doctor estimates how many more

monthshewillmisswork,andthecourtaddsthattohisdamages.

Third, a plaintiff is paid for pain and suffering. Bien

testifies about how traumatic the four hours were and how

the experience has affected his life. He may state that he now

fears shopping, suffers nightmares, and seldom socializes. To

bolster the case, a plaintiff uses expert testimony, such as the

psychiatrists who testified for Bien. Awards for pain and

suffering vary enormously, from a few dollars to many mil-

lions, depending on the injury and depending on the jury. In

some lawsuits, physical and psychological pain are momentary

and insignificant; in other cases, the pain is the biggest part of

the verdict. In this case, the jury awarded Bien $573,815,

calculated as in the table that follows. 8

Awards for future harm (such as future pain and suffering) involve the court making its

best estimate of the plaintiff’s hardship in the years to come. This is not an exact science. If

the judgment is reasonable, it will rarely be overturned. Ethel Flanzraich, aged 78, fell on

stairs that had been badly maintained. In addition to her medical expense, the court awarded

her $150,000 for future pain and suffering. The day after the court gave its award, Ms.

Flanzraich died of other causes. Did that mean her family must forfeit that money? No.

The award was reasonable when made and had to be paid. 9

Bien becomes frantic, writing a dozen notes,

begging to leave, threatening to call the

police.

8 The compensatory damages are described in George Grubbs Enterprises v. Bien, 881 S.W.2d 843, 1994 Tex. App. LEXIS 1870 (Tex. Ct. App. 1994). In addition to the compensatory damages described, the jury awarded $5

million in punitive damages. The Texas Supreme Court reversed the award of punitive damages, but not the

compensatory. Id., 900 S.W.2d 337, 1995 Tex. LEXIS 91 (Tex. 1995). The high court did not dispute the appropriatenessofpunitivedamages,butreversedbecausethetrialcourtfailedtoinstructthejuryproperlyasto

how it should determine the assets actually under the defendants’ control, an issue essential to punitive

damages but not compensatory. 9 We looked at discovery issues from this case in Chapter 3. Stinton v. Robin’s Wood, 45 A.D.3d 203, 842 N.Y.S.2d 477 (N.Y.App.Div. 2007).

Compensatory damages Money intended to restore a plaintiff to the position he was in before the injury.

Single recovery principle Requires a court to settle the matter once and for all, by awarding a lump sum for past and future expenses.

CHAPTER 6 Torts and Product Liability 141

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Past medical $ 70.00

Future medical 6,000.00

Past rehabilitation 3,205.00

Past lost earning capacity 112,910.00

Future lost earning capacity 34,650.00

Past physical symptoms and discomfort 50,000.00

Future physical symptoms and discomfort 50,000.00

Past emotional injury and mental anguish 101,980.00

Future emotional injury and mental anguish 200,000.00

Past loss of society and reduced ability to socially interact with family, former fiancee, and friends, and hearing (i.e., nondeaf) people in general

10,000.00

Future loss of society and reduced ability to socially interact with family, former fiancee, and friends, and hearing people

5,000.00

TOTAL $573,815.00

6-2b Punitive Damages Here we look at a different kind of award, one that is more controversial and potentially more

powerful: punitive damages. The purpose is not to compensate the plaintiff for harm, because

compensatory damages will have done that. Punitive damages are intended to punish the defendant for conduct that is extreme and outrageous. Courts award these damages in relatively

few cases. The idea behind punitive damages is that certain behavior is so unacceptable that

society must make an example of it. A large award of money should deter the defendant from

repeating the mistake and others from ever making it. Some believe punitive damages

represent the law at its most avaricious, while others attribute to them great social benefit.

Although a jury has wide discretion in awarding punitive damages, the Supreme Court

has ruled that, if a verdict is unreasonable, it violates the Due Process clause of the

Constitution. Ira Gore purchased a new BMW automobile from an Alabama dealer and

then discovered that the car had been repainted. He sued. At trial, BMW acknowledged a