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Chapter Two Introduction to Law and the Legal Environment of Business

This book is about the legal environment in which the business community operates today. Although we concentrate on law and the legal variables that help shape business decisions, we have not overlooked the ethical, political, and economic questions that often arise in business decision making. In this chapter, we are especially concerned with legal variables in the context of critical thinking, as outlined in  Chapter 1 . In addition, we examine the international dimensions of several areas of law. In an age of sophisticated telecommunication systems, computer networking, and wrist watch software it would be naïve for our readers to believe that, as citizens of a prosperous, powerful nation situated between two oceans, they can afford to ignore the rest of the world. Just as foreign multinational companies must interact with U.S. companies and government agencies, so must U.S. entities interact with regional and international trade groups and agencies of foreign governments.

The United States, Canada, and Mexico created the North American Free Trade Agreement (NAFTA) to lower trade barriers among themselves. In the Asian-Pacific Economic Cooperation (APEC) forum, the United States and 22 Pacific Rim nations are discussing easing barriers to trade and investments among themselves and creating a Pacific free trade zone extending from Chile to China. The European Union has added new member nations, bringing its total to 28 as of mid-2015. The World Trade Organization continues to lower trade barriers among the 144 nations that have joined it. No nation is an island unto itself today, and economic globalization is accelerating in the twenty-first century. (See  Chapter 8  for a discussion of the global legal environment of business.)

Critical Thinking About The Law

This chapter serves as an introduction to the legal and ethical components of the business environment. You will learn about different schools of jurisprudence and about sources and classifications of law. In addition, this chapter offers the opportunity to practice the critical thinking skills you learned in  Chapter 1 . The following critical thinking questions will help you better understand the introductory topics discussed in this chapter.

1. Why should we be concerned with the ethical components of the legal environment of business? Why shouldn’t we just learn the relevant laws regarding businesses?

Clue:  Which critical thinking questions address the ethical components of the legal environment of business?

2. As you will soon discover, judges and lawyers often subscribe to a particular school of legal thought. Judges and lawyers, however, will probably not explicitly tell us which school of thought they prefer. Why do you think this knowledge might be beneficial when critically evaluating a judge’s reasoning?

Clue:  Think about why we look for missing information. Furthermore, why do we want to identify the ethical norms fundamental to a court’s reasoning?

3. You tell your landlord that your front door lock is broken, but he does not repair the lock. A week later, you are robbed. You decide to sue the landlord, and you begin to search for an attorney. As a legal studies student, you ask the potential lawyers what school of jurisprudence they prefer. Although you find a lawyer who prefers the same school of jurisprudence you prefer, your decision is not final. What else might you want to ask the lawyer?

Clue:  Think about the other factors that might affect a lawyer’s performance.

Definition of the Legal Environment of Business

The legal environment of business is defined in various ways. For our purposes, the study of the legal environment includes:

· The study of the legal reasoning, critical thinking skills, ethical norms, and schools of ethical thought that interact with the law.

· The study of the legal process and our present legal system, as well as alternative dispute resolution systems such as private courts, mediation, arbitration, and negotiation.

· The study of the administrative law process and the role of businesspeople in that process.

· The study of selected areas of public and private law, such as securities regulation, antitrust, labor, product liability, contracts, and consumer and environmental law. In each of these areas, we emphasize the processes by which business managers relate to individuals and government regulators.

· The examination of the international dimensions of the legal environment of law.

Our study of the legal environment of business is characterized by five features:

1. Critical thinking skills.

2. Legal literacy. A survey by the Hearst Corporation found that 50 percent of Americans believe that it is up to the criminally accused to prove their innocence, despite our common-law heritage that a person is presumed innocent until proven guilty. Of those responding to the survey, 49.9 percent had served on a jury, and 31 percent were college graduates.

3. An understanding that the law is dynamic, not static. The chapters on discrimination law, securities regulation, antitrust law, and labor law in particular have had to be constantly updated during the writing of this book, because federal regulatory agencies issue new regulations, rules, and guidelines almost daily.

A. Becoming aware of the rules of doing business.

B. Familiarizing yourself with the legal limits on business freedom.

C. Forming an alertness to potential misconduct of competitors.

D. Appreciating the limits of entrepreneurship.

E. Being able to communicate with your lawyer.

F. Making you a more fully informed citizen.

G. Developing an employment-related skill.

H. Exploring the fascinating complexity of business decisions.

I. Providing a heightened awareness of business ethics.

J. Opening your eyes to the excitement of the law and business.

Exhibit 2-1 Top 10 Reasons for Studying the Legal Environment of Business

4. Real-world problems. You will be confronted with real (not theoretical) legal and ethical problems. As the great American jurist Oliver Wendell Holmes once pointed out, the law is grounded in “experience.” In reading the cases excerpted in this book, you will see how business leaders and others either were ignorant of the legal and ethical variables they faced or failed to consider them when making important decisions.

5. Interdisciplinary nature. Into our discussions of the legal environment of business we interweave materials from other disciplines that you either are studying now or have studied in the past, especially economics, management, finance, marketing, and ethics. You may be surprised to learn how often officers of the court (judges and attorneys) are obliged to consider material from several disciplines in making decisions. Your own knowledge of these other disciplines will be extremely helpful in understanding the content of this book.

The connections to other areas of business are so significant that we have chosen to highlight many of them in subsequent chapters of this book. As you are reading, you will encounter boxes entitled “Linking Law and Business.” These boxes contain material from other business disciplines that are related to the business law material you are studying. By highlighting these connections, we hope to provide greater cohesiveness to your education as a future business manager. As listed in  Exhibit 2-1 , there are a number of benefits to be gained by studying the legal environment of business.

Definition of Law and Jurisprudence

Jurisprudence  is the science or philosophy of law, or law in its most generalized form. Law itself has been defined in different ways by scholarly thinkers. Some idea of the range of definitions can be gained from the following quote from a distinguished legal philosopher:

jurisprudence

The science or philosophy of law; law in its most generalized form.

We have been told by Plato that law is a form of social control; by Aristotle that it is a rule of conduct, a contract, an ideal of reason; by Cicero that it is the agreement of reason and nature, the distinction between the just and the unjust; by Aquinas that it is an ordinance of reason for the common good; by Bacon that certainty is the prime necessity of law; by Hobbes that law is the command of the sovereign; by Hegel that it is an unfolding or realizing of the idea of right. 1 *

1  See H. Cairns, Legal Philosophy from Plato to Hegel (Baltimore: Johns Hopkins University Press, 1949).

*  Excerpt from “Legal Philosophy from Plato to Hegel” by Huntington Cairns. Published by John Hopkins University Press, © 1949.

The various ideas of law expressed in this passage represent different schools of jurisprudence. To give you some sense of the diversity of meaning

School	Characteristics
Natural Law School	Source of law is absolute (nature, God, or reason)
Positivist school	Source of law is the sovereign
Sociological school	Source of law is contemporary community opinion and customs
American realist school	Source of law is actors in the legal system and scientific analysis of their actions
Critical legal studies school	Source of law is a cluster of legal and nonlegal beliefs that must be critiqued to bring about social and political change
Feminist school	Jurisprudence reflects a male-dominated executive, legislative, and judicial system in which women's perspectives are ignored and women are victimized
Law and economics school	Classical economic theory and empirical methods are applied to all areas of law in order to arrive at decisions

Exhibit 2-2 Schools of Jurisprudence

the term law has, we will examine seven accepted schools of legal thought: (1) natural law, (2) positivist, (3) sociological, (4) American realist, (5) critical legal studies, (6) feminist, and (7) law and economics.  Exhibit 2-2  summarizes the outstanding characteristics of each of these schools of jurisprudence.

Natural Law School

For adherents of the natural law school, which has existed since 300 b.c., law consists of the following concepts: (1) There exist certain legal values or value judgments (e.g., a presumption of innocence until guilt is proved); (2) these values or value judgments are unchanging because their source is absolute (e.g., nature, God, or reason); (3) these values or value judgments can be determined by human reason; and (4) once determined, they supersede any form of human law. Perhaps the most memorable statement of the natural law school of thought in this century was made by Martin Luther King, Jr., in his famous letter from a Birmingham, Alabama, city jail.

In that letter he explained to a group of ministers why he had violated human laws that discriminated against his people. He explained that not all laws were the same, and that some laws were consistent with God’s law, and those laws were just and should be obeyed. But the laws that were inconsistent with God’s law were unjust and should not be obeyed. In particular, laws that degrade the human personality are inconsistent with God’s law and therefore not just. He cited segregation laws as an example of laws that harm the human spirit and therefore are unjust, which is why he urged disobedience to those laws.

Now, what is the difference between the two? How does one determine when a law is just or unjust? A just law is a manmade code that squares with the moral law or the law of God. An unjust law is a code that is out of harmony with the moral law. To put it in the terms of the writings of Saint Thomas Aquinas, an unjust law is a human law that is not rooted in eternal and natural law. Any law that uplifts human personality is just. Any law that degrades human personality is unjust. All segregation statutes are unjust because segregation distorts the soul and damages the personality.

Let us turn to a more concrete example of just and unjust law. An unjust law is a code that a majority inflicts on a minority but that is not binding on the majority itself. In contrast, a just law is a code that a majority compels a minority to follow that it is willing to follow itself. This is sameness made legal.

Let me give another explanation. An unjust law is a code inflicted upon a minority that that minority had no part in enacting or creating because they did not have the unhampered right to vote. 2

2  See M. L. King, Jr., Letters from a Birmingham Jail (April 16, 1963), reprinted in M. McGuaigan, Jurisprudence (New York: Free Press, 1979), p. 63.

Adherents of other schools of legal thought view King’s general definition of law as overly subjective. For example, they ask, “Who is to determine whether a manmade law is unjust because it is ‘out of harmony with the moral law’?” Or: “Whose moral precepts or values are to be included in the ‘moral law’?” The United States is a country of differing cultures, races, ethnic groups, and religions, each of which may hold or reflect unique moral values.

Positivist School

Early in the 1800s, followers of positivism developed a school of thought in opposition to the natural law school. Its chief tenets are (1) law is the expression of the will of the legislator or sovereign, which must be followed; (2) morals are separate from law and should not be considered in making legal decisions (thus, judges should not take into consideration extralegal factors such as contemporary community values in determining what constitutes a violation of law); and (3) law is a closed logical system in which correct legal decisions are reached solely by logic and the use of precedents (previous cases decided by the courts).

Disciples of the positivist school would argue that when the Congress of the United States has not acted on a matter, the U.S. Supreme Court has no power to act on that matter. They would argue, for example, that morality has no part in determining whether discrimination exists when a business pays workers differently on the basis of their sex, race, religion, or ethnic origin. Only civil rights legislation passed by Congress, and previous cases interpreting that legislation, should be considered. Laws of other nations should not be considered when U.S. courts must make decisions, as Justice Scalia of the U.S. Supreme Court has argued.

Positivism has been criticized by adherents of other schools of thought as too narrow and literal minded. Critics argue that the refusal to consider social, ethical, and other factors makes for a static jurisprudence that ill serves society.

Sociological School

Followers of the sociological school propose three steps in determining law:

1. A legislator or a judge should make an inventory of community interests.

2. Judges and legislators should use this inventory to familiarize themselves with the community’s standards and mores.

3. The judge or legislator should rule or legislate in conformity with those standards and mores.

For those associated with this school of legal thought, human behavior or contemporary community values are the most important factors in determining the direction the law should take. This philosophy is in sharp contrast to that of the positivist school, which relies on case precedents and statutory law. Adherents of the sociological school seek to change the law by surveying human behavior and determining present community standards. For example, after a famous U.S. Supreme Court decision stating that material could be judged “obscene” on the basis of “contemporary community standards,” 3  a mayor of a large city immediately went out and polled his community on what books and movies they thought were obscene. (He failed to get a consensus.)

3  Roth v. United States, 354 U.S. 476, 479 (1957).

Critics of the sociological school argue that this school would make the law too unpredictable for both individuals and businesses. They note that contemporary community standards change over time and, thus, the law itself would be changing all the time and the effects could harm the community. For example, if a state or a local legislature offered a corporation certain tax breaks as an incentive to move to a community and then revoked those tax breaks a few years later because community opinion on such matters had changed, other corporations would be reluctant to locate in that community.

American Realist School

The American realist school, though close to the sociological school in its emphasis on people, focuses on the actors in the judicial system instead of on the larger community to determine the meaning of law. This school sees law as a part of society and a means of enforcing political and social values. In the landmark book The Bramble Bush, Karl Llewellyn wrote: “This doing of something about disputes, this doing it reasonably, is the business of the law. And the people who have the doing of it are in charge, whether they be judges, or clerks, or jailers, or lawyers, they are officials of the law. What these officials do about disputes is, to my mind, the law itself.” 4  *  For Llewellyn and other American realists, anyone who wants to know about law should study the judicial process and the actors in that process. This means regular attendance at courthouses and jails, as well as scientific study of the problems associated with the legal process (e.g., plea bargaining in the courtroom).

4  K. Llewellyn, The Bramble Bush (Oceana Publications, 1950), p. 12.

*  Excerpt from “The Bramble Bush: On Our Law and Its Study” by Karl Nickerson Llewellyn. Published by Oxford University Press, © 1951.

Positivists argue that if the American realist definition of law were accepted, there would be a dangerous unpredictability to the law and legal decisions.

Critical Legal Studies School

As a contemporary extension of American legal realism, critical legal studies seek to connect what happens in the legal system to the political–economic context within which it operates. Adherents of critical legal jurisprudence believe that law reflects a cluster of beliefs that convince human beings that the hierarchical relations under which they live and work are natural and must be accommodated. According to this school, this cluster of beliefs has been constructed by elitists to rationalize their dominant power. Using economics, mass communications, religion, and, most of all, law, members of society’s elite have constructed an interlocking system of beliefs that reinforces established wealth and privilege. Only by critiquing these belief structures, critical legal theorists believe, will people be able to break out of a hierarchical system and bring about democratic social and political change.

Traditional critics argue that the critical legal theorists have not developed concrete strategies to bring about the social and political changes they desire. Essentially, they have constructed only a negative position.

Feminist School

There is a range of views as to what constitutes feminist jurisprudence. Most adherents of this school, believing that significant rights have been denied to women, advocate lobbying legislatures and litigating in courts for changes in laws to accommodate women’s views. They argue that our traditional common law reflects a male emphasis on individual rights, which at times is at odds with women’s views that the law should be more reflective of a “culture of caring.” To other adherents of this school of jurisprudence, the law is a means of male oppression. For example, some feminists have argued that the First Amendment, forbidding Congress from making any laws abridging the freedom of speech, was authored by men and is presently interpreted by male-dominated U.S. courts to allow pornographers to make large profits by exploiting and degrading women.

Traditional critics of feminist jurisprudence argue that it is too narrow in scope and that it fails to account for changes taking place in U.S. society, such as the increasing number of women students in professional and graduate schools and their movement into higher-ranking positions in both the public and private sectors.

Law and Economics School

The law and economics school of jurisprudence started to evolve in the 1950s, but has been applied with some rigor only for the past 30 years. It advocates using classical economic theory and empirical methods of economics to explain and predict judges’ decisions in such areas as torts, contracts, property law, criminal law, administrative law, and law enforcement. The proponents of the law and economics school argue that most court decisions, and the legal doctrines on which they depend, are best understood as efforts to promote an efficient allocation of resources in society.

Critics of the school of law and economics argue that there are many schools of economic thought, and thus no single body of principles governs economics. For example, neo-Keynesians and classical market theorists have very different views of the proper role of the state in the allocation of resources. A related criticism is that this school takes a politically conservative approach to the legal solution of economic or political problems. Liberals and others argue that it is a captive of conservative thinkers.

Sources of Law

The founders of this country created in the U.S. Constitution three direct sources of law and one indirect source (see  Appendix A ). The legislative branch (Article I) is the maker or creator of laws; the executive branch (Article II) is the enforcer of laws; and the judicial branch (Article III) is the interpreter of laws. Each branch represents a separate source of law while performing its functions ( Table 2-1 ). The fourth (indirect) source of law is administrative agencies, which will be briefly discussed in this chapter and examined in detail in  Chapter 18 .

The Legislature as a Source of Statutory Law

Article I,  Section 1 , of the U.S. Constitution states, “All legislative Powers herein granted shall be vested in a Congress of the United States which shall consist of a House and Senate.” It is important to understand the process by which a law (called a statute) is made by the Congress, because this process and its results have an impact on such diverse groups as consumers, businesspeople, taxpayers, and unions. It should be emphasized that at every stage of the process, each of the groups potentially affected seeks to influence the proposed piece of legislation through lobbying. The federal legislative process described here ( Exhibit 2-3 ) is similar in most respects to the processes used by state legislatures, though state constitutions may prescribe some differences.

Table 2-1 Where to Find the Law

Levels of Government	Legislative Law	Executive Orders	Common Law/Judicial Interpretations	Administrative Regulations
Federal	· United States Code (U.S.C.) · United States Code Annotated (U.S.C.A.) · United States Statutes at Large (Stat.)	· Title 3 of the Code of Federal Regulations · Codification of presidential proclamations and Executive Orders	· United States Reports (U.S.) · Supreme Court Reporter (S. Ct.) · Federal Reporter (F., F.2d, F.3d) · Federal Supplement (F. Supp., F. Supp. 2d) · Federal agency reports (titled by agency; e.g., F.C.C. Reports) · Regional reporters · State reporters	· Code of Federal Regulations (C.F.R.) · Federal Register (Fed. Reg.)
State	State code or state statutes (e.g., Ohio Revised Code Annotated, Baldwin’s)	Executive Orders of governors and proclamations		State administrative code or state administrative regulations
Local	· Municipal ordinances		· Varies; often difficult to find. Many municipalities do not publish case decisions, but do preserve them on microfilm. Interested parties usually must contact the clerk’s office at the local courthouse.	Municipality administrative regulations

Note: Databases (e.g., Westlaw and LexisNexis) online assist in finding all sources of law listed here.

This graphic sets out steps in the legislative process outlined in the text. Although this route is simpler, it should be noted that there are other, more complex ways for a bill to become a law. Bills are subject to amendments and changes as part of the process shown here.

When such changes are made, a compromise version of the original bill is sent back to both the House and Senate for a vote. If a compromise bill is approved, the compromise version is sent to the president of the United States for signature, or it becomes law in 10 days without the president’s signature. The president may veto the bill, which may then become law only if two-thirds of the House and Senate approve it following the veto.

Exhibit 2-3 How a Bill becomes a law

Steps in the Legislative Process

1. Step 1 A bill is introduced into the U.S. House of Representatives or Senate by a single member or by several members. It is generally referred to the committee of the House or Senate that has jurisdiction over the subject matter of the bill. (In most cases, a bill is simultaneously introduced into the Senate and House. Within each body, committees may vie with each other for jurisdictional priority.)

2. Step 2 Let’s briefly follow through the House of Representatives a bill proposing to deregulate the trucking industry by doing away with the rate-making power of the Interstate Commerce Commission (ICC). This bill would be referred to the House Committee on Energy and Commerce, which, in turn, would refer it to the appropriate subcommittee.

3. Step 3 The House subcommittee holds hearings on the bill, listening to testimony from all concerned parties and establishing a hearing record.

4. Step 4 After hearings, the bill is “marked up” (drafted in precise form) and then referred to the subcommittee for a vote.

5. Step 5 If the vote is affirmative, the subcommittee forwards the bill to the full House Energy and Commerce committee, which either accepts the subcommittee’s recommendation, puts a hold on the bill, or rejects it. If the House committee votes to accept the bill, it reports the bill to the full House of Representatives for a vote by all members.

6. Step 6 If the bill is passed by the House of Representatives and a similar bill is passed by the Senate, the bills go to a Senate–House Conference Committee to reconcile any differences in content. After compromise and reconciliation of the two bills, a single bill is reported to the full House and Senate for a vote.

7. Step 7 If there is a final affirmative vote by both houses of Congress, the bill is forwarded to the president, who may sign it into law or veto it. When the president signs the bill into law, it becomes known as a statute, meaning it is written down and codified in the United States Code. In the event of a presidential veto, a two-thirds vote of the Senate and House membership is required to override the veto. If the president takes no action within 10 days of receiving the bill from Congress, the bill automatically becomes law without the president’s signature.

The single exception to this procedure occurs when Congress adjourns before the 10-day period has elapsed: In that case, the bill would not become law. It is said to have been “pocket-vetoed” by the president: The president “stuck the bill in a pocket” and vetoed it by doing nothing. With either type of veto, the bill is dead and can be revived only by being reintroduced in the next session of Congress, in which case the procedure begins all over again.

The Judicial Branch as a Source of Case Law

The federal courts and most state courts make up the judicial branch of government. They are charged by their respective constitutions with interpreting the constitution and statutory law on a case-by-case basis. Most case interpretations are reported in large volumes called reporters. These constitute a compilation of our federal and state case law.

When two parties disagree about the meaning of a statute, they bring their case to court for the court to interpret. For example, when the bill to deregulate the trucking industry and take away the rate-making function of the ICC was signed by the president and became law, two parties could have disagreed about its meaning and asked the federal courts to interpret it. If the law had been challenged, the court would first have looked at the law’s legislative history to determine the intent of the legislature. This history can be found in the hearings held by the subcommittees and committees previously referred to, as well as any debates on the Senate and House floors. Hearings are published in the U.S. Code Congressional News and Administrative Reports, which may be ordered from the Government Printing Office or found in most university libraries in the government documents section. Debates on a bill are published in the daily Congressional Record, which may also be found in most university libraries.

The U.S. Supreme Court and most state supreme courts have the power of judicial review—that is, the power to determine whether a statute is constitutional. Although this power was not expressly provided for in the U.S. Constitution, the Supreme Court established it for the judiciary in the landmark case Marbury v. Madison 5  (see  Chapter 3  for a discussion of this case). The right of judicial review gives the U.S. Supreme Court the ultimate power to check the excesses of either the legislative or the executive branch.

5  U.S. (1 Branch) 137 (1803).

Furthermore, this decision establishes case law precedents, which are followed by all federal and state courts. Thus, through its case-by-case interpretation of the Constitution and statutes, the U.S. Supreme Court establishes a line of authoritative cases on a particular subject that has to be followed by the lower courts, both federal and state. Similarly, state supreme courts establish precedents that must be followed by lower courts in their particular state systems.

Case Law Precedents and the Internet

 Decisions by state and federal appellate courts were (and to some extent still are) printed in volumes that were placed on (law) library shelves. Today, decisions are not always published as in the past; many are unpublished at the appellate level (e.g., only about 10 percent of California’s appellants’ decisions are published). Many decisions are posted (published) to online databases (e.g., Westlaw or LexisNexis).

This has led to a debate as to whether these posted decisions should be given the same precedential value as published opinions in traditional volumes. In 2006, the U.S. Supreme Court announced that it would allow lawyers, judges, and other officers of the courts to cite (refer to) unpublished opinions of federal courts. See Rule 32.1 of the Federal Rules of Civil Procedure. However, this rule does not specify the weight that federal courts must give to unpublished opinions. Over time (often a lengthy time), the weight to be given such opinions and their value as precedents become evident.

Restatements of the Law

 Scholars writing in various areas of the law—including torts, contracts, agency, property, security, and conflicts of laws—have published summaries of the case law generally followed by the 50 states. The American Law Institute published these scholarly compilations. The Restatements are secondary sources, which in and of themselves may not have the force of law, but are often still relied upon by judges in making decisions. Throughout this text, you may see references to the Restatements (e.g., the Restatement (Third) of Contracts). Over a number of years, the areas referred to here have been updated to the second or third edition as the case law has evolved.

The Executive Branch as a Source of Law

The executive branch is composed of the president, the president’s staff, and the cabinet, which is made up of the heads of each of the executive departments (e.g., the secretary of state, the secretary of labor, the secretary of defense, and the secretary of the treasury) and the counselor to the president. The Executive Office is composed of various offices, such as the Office of Management and Budget (OMB) and the Office of Personnel Management (OPM). The executive branch is a source of law in two ways.

Treaty Making

 The president has the power, subject to the advice and consent of the Senate, to make treaties. These treaties become the law of the land, on the basis of the Supremacy Clause of the U.S. Constitution (Article VI), and supersede any state law. When President Carter entered into a treaty returning the Panama Canal Zone to the nation of Panama under certain conditions, it became the law of the land, and the treaty provisions superseded any federal or state laws inconsistent with the treaty.

Executive Orders

 Throughout history, the president has made laws by issuing executive orders. For example, as we shall see in  Chapter 18 , President Reagan, by virtue of an executive order, ruled that all executive federal agencies must do a cost-benefit analysis before setting forth a proposed regulation for comment by interested parties. President Truman, by executive order, directed the secretary of commerce to seize all the nation’s steel mills to prevent a strike in this essential industry during the Korean Conflict. President Johnson issued Executive Order No. 11246 requiring government contractors to set out an affirmative action plan for hiring and promoting minorities and women. (This executive order is discussed in  Chapter 21 .)

The executive order as a source of law is also used by state governors to deal with emergencies and budget functions. Often, a governor will call out the National Guard or, in some states, implement particular aspects of the budget by executive order. For example, a governor may order a freeze on the hiring of employees in the state university system or order an across-the-board cut in budgets in all state departments.

Administrative Agencies as a Source of Law

Less well known as a source of law are the federal regulatory agencies, among which are the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), the Equal Employment Opportunity Commission (EEOC), and the Occupational Safety and Health Administration (OSHA). Congress has delegated to these agencies the authority to make rules governing the conduct of business and labor in certain areas. This authority was delegated because it was thought to be in the public interest, convenience, and necessity. Because each of the agencies must notify the public of proposed rulemaking and set out a cost-benefit analysis, all proposed and final rules can be found in the Federal Register.

Administrative agencies constitute what many have called a fourth branch of government. They exist at the state and local levels as well. (See  Chapter 18  on administrative law.)

Classifications of Law

Besides  statutory law  made by the legislative branch and  case law  resulting from judicial interpretation of constitutions and statutes, there are several other classifications of law that are necessary to an understanding of the legal environment of business.

statutory law

Law made by the legislative branch of government.

case law

Law resulting from judicial interpretations of constitutions and statutes.

Criminal Law and Civil Law

Criminal law  comprises those federal and state statutes that prohibit wrongful conduct such as arson, rape, murder, extortion, forgery, and fraud. The purposes of criminal law are punitive (punishing offenders by imprisonment or fines), rehabilitative (rehabilitating offenders), and restitutive (making restitution to victims). The plaintiff in a criminal case is the United States, State X, County X, or City X, representing society and the victim against the defendant, who is most likely to be an individual but may also be a corporation, partnership, or single proprietorship. The plaintiff must prove beyond a reasonable doubt that the defendant committed a crime.

criminal law

Composed of federal and state statutes prohibiting wrongful conduct ranging from murder to fraud.

Crimes are generally divided into felonies and misdemeanors. In most states, felonies are serious crimes (e.g., rape, arson, and criminal fraud) that are punishable by incarceration in a state penitentiary. Misdemeanors are less serious crimes (e.g., driving while intoxicated) that are usually punishable by shorter periods of imprisonment in a county or city jail or by fines. An act that is a misdemeanor in one state could be a felony in another state. White-collar felonies and misdemeanors are discussed in  Chapter 6 .

Civil law  comprises federal and state statutes governing litigation between two private parties. Neither the state nor the federal government is represented in most civil cases (exceptions will be pointed out in future chapters). Rather than prosecutors, there are plaintiffs, who are usually individuals or businesses suing other individuals or businesses (the defendants) to obtain compensation for an alleged breach of a private duty. For example, A, a retailer, enters into a contract with B, a manufacturer, who agrees to supply A with all the bicycles of a certain brand that the retailer can sell. A advertises and sales exceed all expectations. B refuses to ship any more bicycles, and A’s customers sue him for reneging on the rain check he gave them. In turn, A sues B for breach of contract. A must show by a preponderance of evidence (a lower standard of proof than the “beyond a reasonable doubt” standard that prevails in criminal cases) that B is liable (legally obligated) to fulfill the contract. Note that A is not seeking to put B in prison or to fine B. A is seeking only to be compensated for his advertising costs, his lost sales, and what it may cost him in lawyers’ fees, court costs, and damages to settle with his customers ( Table 2-2 ).

civil law

Law governing litigation between two private parties.

Public and Private Law

Public law  deals with the relationship of government to individual citizens. Constitutional law, criminal law, and administrative law fit this classification. Constitutional law (discussed in  Chapter 5 ) comprises the basic principles and laws of

Table 2-2 Comparison of Civil and Criminal Law

	Civil Law	Criminal Law
Parties	Individual or corporate plaintiff (in most cases) versus individual or corporate defendant (in most cases)	County, city, state, or federal prosecutor versus individual or corporate defendant (in most cases)
Purpose	Compensation Deference-deterrence	Punishment Deference-deterrence Rehabilitation
Burden of proof and sanctions	Preponderance of evidence Monetary damages Equitable terms	Beyond a reasonable doubt Imprisonment Fines

the nation as set forth in the U.S. Constitution. It determines the powers and obligations of the government and guarantees certain rights to citizens. Examples of questions that fall under constitutional law: Does an individual citizen have a Sixth Amendment right to counsel when stopped by a police officer, taken into custody, and interrogated? Is it cruel and unusual punishment under the Eighth Amendment to electrocute a person when that person has been found guilty of certain crimes, such as first-degree murder or killing a police officer in the line of duty? We have already touched on criminal law (which is discussed more fully in  Chapter 6 ).

public law

Law dealing with the relationship of government to individual citizens.

Administrative law (examined in  Chapter 18 ) covers the process by which individuals or businesses can redress grievances against regulatory agencies such as the FTC and the SEC. It prevents the agencies from acting in an arbitrary or capricious manner and from extending their power beyond the scope that Congress has given them. For example, when the Federal Communications Commission (FCC) ruled that cable television corporations had to set aside so many channels for access by any public group that requested time, the courts reversed this FCC rule, deciding that it was beyond the agency’s authority and in violation of a provision of the Federal Communications Act. Administrative law also covers the process whereby government agencies represent individuals or classes of individuals against business entities—for example, when the EEOC represents individuals alleging discrimination in pay under the provisions of the Civil Rights Act of 1964.

Private law  is generally concerned with the enforcement of private duties between individuals, between an individual and a business, or between two businesses. Contracts, torts, and property law fall under this classification. Note that the government is not a concerned party in most private law cases.

private law

Law dealing with the enforcement of private duties.

Substantive and Procedural Law

Substantive Law

 Substantive law creates and regulates legal rights. For example, the rules of contract law (set out for your study in  Chapters 9  and  10 ) determine whether an agreement between two parties is binding and, thus, an enforceable contract.

Procedural Law

 Procedural law sets forth the rules for enforcing substantive rights in a court of law. In effect, procedural law defines the manner by which one obtains a remedy in a court of law. For example, when there is a possible breach of contract, the plaintiff will have to file a complaint indicating the basis for the suit, and the defendant will set forth an answer responding to the complaint, indicating why the defendant should not have to compensate the plaintiff.

Cyberlaw

Over the past 20 years, the use of the Internet to carry out commercial transactions has brought about a body of law that is largely traditional in the above categories, but often unique to cyberspace communication. Cyberlaw is not really a new type of law, but rather traditional categories (e.g., private law—contracts and torts) applied to a relatively new form of communication (online). Many chapters in this text include discussions of cyberlaw. In  Chapters 9  and  10  on the law of contracts and sales, we have dedicated parts of each chapter to online applications. In  Chapters 6  and  11  we see further examples of the application of traditional law to online situations involving white-collar crime and torts, respectively. Those prepared to enter business today need to know traditional laws and their application when dealing with cyberlaw issues.

Global Dimensions of the Legal Environment of Business

At the beginning of this chapter, we stated that managers need to be aware of the impact of international variables on their business. As of 2011, approximately 40 percent of all jobs in the United States depended on exports, and in the view of many experts, that percentage will soon rise to 50 percent. Additionally, many jobs are being outsourced to other countries by American corporations for cost purposes. Trade treaties will make the international dimensions of the legal environment of business increasingly important to U.S. firms. Throughout this book, therefore, we discuss the international dimensions of product liability, tort, contracts, labor, securities, and antitrust law, as well as ethics whenever appropriate. For example, current U.S. securities laws include the Foreign Corrupt Practices Act of 1977 (FCPA), as amended in 1988 and 1998. If the laws of Country X do not forbid bribery in order to obtain a $10 million contract to build an oil pipeline, should U.S. companies be constrained by the FCPA prohibitions against such bribery? Ethical and cultural relativists would say no: “When in Rome, do as the Romans do.” Normative ethical theorists, such as rule utilitarians, would say yes, arguing that rules agreed upon by the world community, or a preponderance of its members, cannot be compromised by a particular situation. They would point out that both the United Nations Multinational Code and the laws of most of the UN member states prohibit bribery.

Summary

The study of the legal environment of business includes the study of legal reasoning, critical thinking skills, and ethical norms; the legal and administrative law processes; selected areas of public and private law; and relevant international law. Jurisprudence is the science or philosophy of law, or law in its most generalized form. The major schools of jurisprudence are natural law, positivism, sociological, American realism, critical legal studies, feminism, and law and economics.

The three direct sources of law are the legislative (statutory), judicial (case law), and executive (executive orders) branches of government. Administrative agencies, which promulgate regulations and rules, constitute the fourth (indirect) source of law. The international dimensions of law include legal, financial, economic, and ethical variables that have an impact on business decision making.

Assignment On The Internet

This chapter introduces you to seven different schools of jurisprudence, each with distinct elements. Yet, the various schools also share a number of similarities that often blur the lines separating one from the other. Using the Internet, research at least two of the schools of jurisprudence discussed here to go beyond the information provided in this chapter. Then apply the critical thinking skills highlighted in  Chapter 1  to compare the two schools you researched. How are they similar? How are they different?

For example, if you wanted to compare the critical legal studies school to the feminist school, you could begin by visiting this page on critical legal theory:  www.law.cornell.edu/ , then search for the topic(s) you are interested in.