Project 1: Introduction to the Legal Environment of Business

Project 1 Course Resources

Introduction to the Legal Environment of Business

The Legal Environment: Courts, Alternative Dispute Resolution, and Agency

by Rosemary Hartigan and Paula O'Callaghan, Professors,

Why Should I Care about the Law?

Why do businesspeople need to know anything about the law? Some people think of lawyers in business as a necessary evil. There is some truth to the "necessary" part: if everyone were scrupulously honest and had photographic memories regarding all statements uttered that could constitute promises, perhaps lawyers wouldn't be needed. But, alas, we are mere mortals with failing memories and sometimes failing ethics.

A Systems View of the Roles of the Lawyer and the Manager

One view of the respective roles of the lawyer and the manager in a business is that the lawyer should guide the manager in analyzing risk—this is in the lawyer's training, and it's the lawyer's responsibility to accurately convey the nature of legal risks to the client; however, it is up to the manager to make the final business call.

Generally speaking, lawyers are inherently conservative when it comes to risk. Managers can't abdicate responsibility for making the business call. This is one of the main reasons for managers to have legal literacy. You need to know when you need legal advice, and then what to do with it. Sometimes, basic legal knowledge is necessary on the front lines of dealing with customers and coworkers.

Knowing something about the law can assist you in prevention. Legal analysis skills help you to avert lawsuits and other unpleasantness so that you can stay focused on running your business. However, there will be instances in which you have to bring a legal-related matter to closure. Perhaps you've taken over from an executive who has left the department or company and left behind a problem that requires a legal solution. Or, you did something that triggered a legal response from a customer or vendor. If you know the relevant legal rules for your area of business, you'll know when it's appropriate to involve legal counsel.

Let's begin with a basic overview of the two types of law.

Differences between Civil and Criminal Law

American society highly values ingenuity and entrepreneurship, but there are legal limits on the conduct of commerce. Some of these limits are statutory, which means that a law-making body has enacted a specific law to regulate a specific activity (e.g., the Sherman Act statute regulating antitrust). Some of these legal limits are found in the common law (e.g., tort law imposing liability on an infinite variety of behaviors). Most of the legal limits on business fall into the category of civil law.

One big difference between civil and criminal law is in the potential penalties. Civil law liability carries penalties that are monetary—so-called damages. The culpable party pays damages in an amount the court believes will make the wronged party whole. This contrasts with criminal law, where the possible penalties are limits on personal freedom (such as incarceration or death), although monetary penalties are also possible (such as a fine payable to the government or restitution to the victim).

There is one major exception to the rule that business contracts do not involve criminal penalties for breach: this is in government contracting. Because so many students at UMGC have employment that involves contracts with the US government in some manner, this is often a point of confusion.

Government contracting is a special circumstance where the contracts involve civil law, yet breach of contract potentially involves criminal penalties. The criminal penalties can include jail time for serious violations. Those of you who work in this area probably have attended or will attend a professional development seminar about contract compliance in which you learn the particulars of your contractual obligations.

Trend Developments in Business Law

The past 20 years have seen a rise in the criminalization of business law. While it's still true that no one goes to prison for breaking the terms of a contract (notable exception: government contracting), there has been a marked increase in the number of business-related activities that carry possible criminal penalties.

Business activities that are punishable by criminal penalties (in addition to fines and damages) are known as white-collar crimes. Many of you are familiar with famous cases involving business people—Martha Stewart (ImClone), Kenneth Lay (Enron), Dennis Kozlowski (Tyco), and, of course, Bernie Madoff. Those businesspeople got themselves into the criminal justice system by committing fraud, lying to federal authorities, or otherwise invoking specific laws to deter commercial crimes such as insider trading of stock. The possible penalties for white-collar crime do include imprisonment as well as fines and damages.

When you see a businessperson in handcuffs doing the "perp walk," ask yourself, "What law has allegedly been broken?" Typically, there will be a law (statute) or a regulation (e.g., Securities and Exchange Commission [SEC] rule) that allegedly has been transgressed.

Resources

· Court System

Learning Resource

Court System

What Is the Authority for the Federal and State Judicial Systems in the United States?

The authority for the federal and state judicial systems is found in the US and state Constitutions. Below is a breakdown of the courts as authorized under Articles I, II, and III of the US Constitution. State constitutions are modeled after the US Constitution and generally establish a similar court structure.

Federal System

Article I 

Article I of the Constitution creates the legislative branch of the federal government. Pursuant to the authorization of Article I, Congress has the authority to create inferior courts under the US Supreme Court. Also, Congress has the authority to create legislative courts and a limited ability to delegate law-making authority to other branches. The Supreme Court has ruled that Congress has the latitude to delegate regulatory powers to executive agencies as long as it provides an "intelligible principle" to govern the agency's exercise of the delegated authority. As such, Congress delegates to the administrative agencies the responsibility for formulating regulations to effectuate and expand upon the statutes passed by Congress. These agencies, under the supervision of the executive branch, establish administrative courts to adjudicate disputes arising pursuant to agency regulations.

Ask Yourself

· How do you feel about Congress' ability to delegate law-making authority? Have you ever thought about who drafts regulations surrounding a statute?

· Congress passes a federal act easing the restrictions on the sale of securities by private companies. Congress outlines the specific purposes of the Act, but fails to provide any procedural mechanisms for carrying out its function. Congress, in the Act, direct the Securities and Exchange Commission (an Independent federal Agency), to create regulations sufficient to carry out the statutory provisions. Where does Congress receive the authority to make this delegation and what statutory level of guidance is required to make this delegation constitutional?

Article II

Article II of the Constitution establishes the executive branch. It grants the president authority to preside over certain administrative agencies and legislative courts created by Congress. Many administrative agencies create special courts for the adjudication of disputes arising under its jurisdiction or within its regulatory authority. These administrative courts are known as "Article I courts" based upon their authorization. Legislative courts are courts of special jurisdiction created by Congress to hear special matters.

Article I courts include bankruptcy, military, tax, and immigration courts. Appeals from these special courts go to Article III courts.

Ask Yourself

· How do you feel about administrative agencies establishing their own courts? How do you feel about the executive branch overseeing administrative courts? Does the ability to appeal administrative decisions to an Article III court provide sufficient check on the executive branch's authority?

· The Internal Revenue Service (IRS) is an executive agency under the purview of the president of the United States. John receives a letter from the IRS explaining that he has income tax liability far beyond what John believes is accurate. After disputing the IRS's tax assessment, John decides to bring a legal action in the US tax court challenging the tax amount. What is the authority of the US tax court and does it have authority to hear the matter of John's tax assessment?

Article III

Article III of the Constitution holds, "The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish." The US Supreme Court is the only court specifically established by the Constitution. Congress has created several subordinate courts below the Supreme Court, which include the federal district courts, federal circuit courts, and numerous ancillary courts that have special jurisdiction. Pursuant to Articles I and II, all members of Article III courts and tribunals are appointed by the president and are confirmed by vote of the Senate.

Ask Yourself

· Can you think of any reasons why Congress decided to create numerous courts that are subordinate to the Supreme Court? How do you feel about the right of the president to nominate judges? How do you feel about the requirement that the Senate approve judicial nominees? Can you recall any instances where the Senate has refused to confirm a presidential nominee to a federal court?

· At the end of the year, it is expected that there will be approximately 150 federal judgeships open. The president of the United States has assembled a list of nominees for the positions. His list is very well planned and all of the candidates have the appropriate credentials for the position. Can the president rest assured that all of his nominees will receive the nominated judicial position?

Article IV

Article IV courts are US territorial courts, such as those of Guam, Northern Mariana Islands, and the US Virgin Islands, established under the Territory Clause of Article IV.

Ask Yourself

· Think about the formation of courts in these jurisdictions. These are not states and, therefore, Congress must act to establish courts with jurisdiction over these protectorates. How do you feel about territories of the United States that are not represented in the federal government, but are subject to federal jurisdiction?

· In the US territory of Guam, Hanna is the victim of a crime when someone steals her automobile. What laws would be effected in this scenario and how would this situation differ from a similar occurrence in California?

State System

The US Constitution, pursuant to the Tenth Amendment, provides for both federal and state governments. While the US Constitution provides the authority for federal courts, a state's constitutions provides the authority for state courts. Generally state constitutions follow a model that is very similar to that of the US Constitution and allow for judicial, legislative, and administrative courts.

Ask Yourself

· Why do you think state constitutions follow a structure that closely resembles that of the US Constitution? Is there any requirement for state judiciaries to function similarly to federal courts?

What Is the Authority for Federal Courts?

Article I Federal Courts

Article I federal courts include legislative courts and administrative courts. Legislative courts are those created by Congress pursuant to authority granted under Article II to handle special jurisdictional matters. Administrative courts are those created to adjudicate disputes of a particular administrative agency.

Examples of legislative and administrative courts include the following: DC judiciary, DC Court of Appeals, DC Superior Court, US Court of Appeals for Armed Forces, (Several Military courts of Appeal), US Court of Appeals for Military Claims, Armed Services Board of Contract Appeals, Civilian Board of Contract Appeals, Board of Immigration Appeals, US Immigration Courts, Board of Patent Appeals and Interferences, Trademark Trial and Appeal Board, US Postal Service Board of Contract Appeals, US Court of Federal Claims, US Tax Court, US Bankruptcy Courts, Social Security Administration Office of Disability Adjudication and Review, US Merit Systems Protection Board, Board of Veterans' Appeals, US Courts-Martial, Guantanamo Military Commissions, and US Court of Military Commission Review.

Ask Yourself

· Lawrence, a member of the US Army, is charged with deserting his unit at Fort Campbell, Kentucky. He is later apprehended by state police and extradited back to military control. The military decides to bring charges against him for the crime of desertion under the military code of justice. What is the authority for bringing criminal charges against Lawrence and who oversees the process?

Article III Federal Courts

Article III federal courts include the following:

· US Supreme Court—Article III of the Constitution establishes the US Supreme Court as the highest court in the land. It has "original jurisdiction" over certain matters, but serves almost entirely as an appellate court. It provides appellate review of the decisions of the highest state court and decisions from all federal appellate courts.

· federal appellate courts—These courts serve as the appellate courts for matters decided by judge or jury in the District Court. There are 13 federal appellate courts consisting of 11 enumerated US Circuit Courts of Appeal, the District of Columbia Circuit, and the Federal Circuit.

· ancillary federal courts—These are Article III federal courts with special authority and vested with specific jurisdiction by Congress. These ancillary courts include: US Foreign Intelligence Surveillance Court of Review; US Foreign Intelligence Surveillance Court; US Court of International Trade, and US Alien Terrorist Removal Court.

· district courts—These are the Article III trial courts for the federal system. There are approximately 94 district courts spread throughout the United States. They do not follow state boundaries; rather, they are positioned within pre-established federal jurisdictions. There are also courts of limited jurisdiction, known as federal magistrate courts, which exist in support of the federal district courts.

Ask Yourself

· Why do you think that there are such fewer federal trial and appellate courts than in the state court systems? How many cases does the US Supreme Court hear in a year? Does this number surprise you? Why or why not? What do you think is the reasoning behind the creation of special ancillary courts?

· Meredith is involved in a civil trial in the US District Court located in the state of Maryland. At the conclusion of the trial, she appeals the court's decision to the appropriate appellate court. Which Circuit Court of Appeals would be charged with reviewing Meredith's request for appeal?

Article IV Courts

Article IV courts are territorial courts specially created to act as the court of general jurisdiction in select federal jurisdictions. These courts have jurisdictions similar to that of a federal district courts; however, they also exercise subject-matter jurisdiction over matters typically reserved to state and local courts in a jurisdiction. These courts are designated to a specific circuit court of appeals for all appeals from the trial court.

With regard to appellate matters, the Virgin Islands district court falls under the 3rd Judicial Circuit Court of Appeals, while the district courts of Guam and the Mariana Islands fall under the 9th Circuit Court of Appeals.

Ask Yourself

· State governments generally create laws pursuant to its police power. The federal government generally creates laws pursuant to the Commerce Clause or taxing and spending power under the US Constitution. How do you feel about the creation of federal courts to hear matters traditionally controlled under state law?

What Types of Courts Exist in the State Judicial System?

State governments establish courts pursuant to Articles III and I of their respective state constitutions. The general structure for the state court system is outlined below.

Article I State Courts

All state constitutions allow for administrative state agencies to handle regulatory issues between citizens and the state government. These courts are structurally and operationally similar in nature to federal administrative courts. They fall under the state executive branch's authority. Examples of state administrative courts include revenue (taxation), licensing, disability, employment, etc.

Article III State Courts

State Supreme Court

The State Supreme Court is generally the highest court in a state. In some states there is a different naming convention. In New York, for example, the highest court is the Court of Appeals. Nonetheless, the purpose of the highest state court is the same across all states. They review cases generally to ensure the correct or appropriate application of law  in accordance with the state's constitution. Cases generally go before the Supreme Court via a writ of certiorari or pursuant to request for appeal by a losing party. This process is similar to that of the federal system. Some state cases have automatic appeal rights to the state Supreme Court. This is the case for all capital murder cases.

Appellate Court 

Many state judicial systems have an intermediate court of review. Not every state is big enough to have an intermediate appeals court. As such, appeals must go directly to the State Supreme Court. The function of the intermediate state court of appeals is similar to that of the Federal Circuit Court of Appeals. It reviews the decisions of lower courts based on their interpretation and application of law to the facts of the case – as present in the record of trial.

Superior Court

The superior court is generally the naming convention for the highest level of trial court in the state. That is, the superior trial court is the court with general jurisdiction empowered by the state constitution to hear any matter of state law. It is the trial court for the most serious offenses (criminal and civil). It will hear any cases falling outside of the jurisdiction of subordinate trial courts. These courts generally employ juries as triers of fact.

Intermediate Trial Court 

Nearly all states have an intermediate trial court that has limited jurisdiction over certain types of cases. This court will generally hear criminal cases involving charges that have a specified limit in the potential sentence if found guilty. Further, it will generally hear civil lawsuits that have a specific limit in the dollar amount in dispute or in controversy. These courts often have special limitations, such as no right to jury trial and special court rules. The geographic jurisdiction of the court is generally broken down by county or district.

Courts of Limited or Special Jurisdiction

Most states designate special courts to hear cases of a particular subject matter. This frees up the intermediate and superior trial courts to focus on criminal and civil trials that meet their jurisdictional requirements. Common examples of courts of limited jurisdiction include the following:

· municipal court—Municipal courts are courts of limited jurisdiction to handle local ordinance violations. The geographic jurisdiction is generally limited to within the city or town limits. Common municipal court cases include citations (tickets) based on speeding or noise violations.

· magistrate court (small-claims court)—This is a special court of limited jurisdiction to empowered to hear minor criminal offenses and small civil disputes. Magistrate court is important for small businesses. It handles much of the litigation between businesses and customers that falls within a jurisdictional limit (commonly $10-20K or less). The benefits of the magistrate court are that it generally has very informal court procedures and low court costs.

· probate courts—Probate courts handle matters involving death and estate administration. Specifically, the word probate signifies the process of administering an individual's estate. The court may also hear matters of child welfare and related family matters, such as guardianship, adoption, etc.

· family courts—Some states have a designated court to handle family law matters. The primary subject- matter jurisdiction for these courts includes divorce, annulments, and spousal and child support disputes.

· courts of equity—Some states designate special equity courts that operate based on principles of fairness. These courts apply "equitable maxims," rather than statutes, to reach a fair and just result. Most states have unified courts of law and equity and do not designate stand-alone courts of equity. Equity courts often hear civil disputes that do not involve the commission of a tort (such a mortgage default). They may act as a special form of mediator to certain disputes between individuals and businesses. States that have courts of equity include: Delaware, New Jersey, Mississippi, South Carolina, and Tennessee.

· business courts—States increasingly create a separate court or docket within the trial system to hear business law matters. These courts recognize the need to employ judges who are subject-matter experts in business principles.

Ask Yourself

· How do you feel about state's developing such extensive courts of special jurisdiction? Do these special courts provide any advantages or disadvantages for parties appearing before them?

Licenses and Attributions

Business Law: An Introduction, by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC. 

Employment at Will

Employment at will is a doctrine of common law that allows either the employee or the employer to terminate an employment relationship at any time, for any reason, with or without notice, and even for a morally reprehensible reason, so long as the ending of the relationship does not fall into an exception to the employment-at-will doctrine.

Employment at will is the prevailing legal doctrine concerning employment relationship termination in 49 US states (not Montana). In the overwhelming majority of the United States, employment at will and its exceptions govern the rules by which one may legally terminate an employee.

The generally accepted exceptions to employment at will include

· express contract,

· implied contract,

· promissory estoppel,

· public policy violations, and

· good faith and fair dealing.

We discuss these five exceptions below.

Express Contract Exception

If an employer terminates an employee in violation of the terms of an express contract between the employer and employee, then the employee can sue the employer for breach of contract (and, in some states, wrongful termination).

For example, an employment contract guarantees that the employee will be employed by the employer for a definite duration of time, with cognizable boundaries, such as a "one-year period" or "for six months." The employer terminates the employee before the stated period has expired, and that termination is not otherwise permitted by the contract.

Likewise, consider a case where an employment contract states that an employee can be terminated only "for cause" or "for just cause," and the employee is terminated without cause.

Implied Contract Exception

Implied contracts are contracts created by the conduct of the parties, which include any representations or assurances made by the employer prior to or during the term of employment. In some states, an implied contract is an exception to the employment-at-will doctrine.

For example, if an employer provides an employee handbook to a new employee, the provisions in the handbook may be considered part of the contractual relationship. Often, such handbooks outline a procedure for performance review, discipline, and discharge of the employee. An employer who fails to live up to procedural obligations prior to discharging an employee could be liable.

Promissory Estoppel Exception

In many states, promissory estoppel acts as an exception to the employment-at-will doctrine. That is, when an employer makes a promise to an employee of employment or a period of employment, and the employee relies on that promise to his detriment, and it leads to injustice, then an employee may be able to have that promise enforced regardless of employment at will.

For example, John is offered a job with Widget Co. He discusses with Widget's manager that, to take the job, he needs to move from California to New Jersey and give up an already lucrative position with benefits. The manager assures John that he will have gainful employment and a substantially larger income with Widget Co. for at least a year if he makes the move. In reliance on this promise, John quits his job and moves to New Jersey to begin work at Widget Co. After one week, John is laid off. Despite being an employee at will, John may be able to recover under the theory of promissory estoppel.

Public Policy Violations Exception

Most states in the United States prohibit an employer from firing an employee if the reason for the action violates some readily accepted public policy. This prohibition prevents an employer from terminating an employee for exercising a legal right, including a right contained in state and federal laws; or for failing to perform an illegal act for the employer.

Firing an employee for performing some public duty (showing up to jury duty), for exposing illegal conduct (such as reporting violation of some law to the employer or a government agency), or for exercising her rights as a US or state citizen (such as voting) are all against public policy.

This exception to employment at will encompasses the inability to terminate an employee if doing so would violate her state or federal statutory rights. If an employee is terminated because of her race, this may be a violation of Title VII of the Civil Rights Act of 1964, and so an otherwise at-will employee would have a claim against the employer for violating a federal statute.

Moreover, it is against public policy to terminate an employee for refusing to commit an illegal act, such as a crime.

Good Faith and Fair Dealing Exception

A minority of states impose upon the employer a duty to exercise good faith and fair dealing in regard to all employees. This doctrine, to varying degrees, means that an employer must treat an employee fairly in the decision to fire her. This generally means that an employer would violate these duties in firing an employee without due cause or justification.

The preceding five generally accepted exceptions to employment at will allow injured parties to seek recovery even in the face of the employment-at-will doctrine. As such, they limit the circumstances by which an employer can terminate an employee.

Licenses and Attributions

Business Law: An Introduction, by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC. 

Business Criminal Law

Criminal laws prohibit or require certain conduct such that violations of the laws would constitute an offense against the general public (society as a whole). Criminal law convictions may result in jail or prison sentences, fines (paid to the government), or, in some cases (in some states and federally), the death penalty.

The Constitution provides both state governments and the federal government with the power to pass and enforce criminal laws, and also places limitations and affirmative obligations on the government in relation to criminal defendants. That is, the Constitution sets the outermost boundaries of how the government can investigate, arrest, try, and sentence criminal defendants. The Constitution, through its Eighth Amendment, also sets the minimum requirements for the bail and prison conditions of criminal offenders.

Resources

· Receiving Stolen Property

· Criminal Law & Procedure

Receiving Stolen Property

All jurisdictions criminalize receiving stolen property to deter theft and to break up organized criminal enterprises that benefit from stealing and selling stolen goods. Criminal statutes on receiving stolen property are often targeted at pawnbrokers or fences who regularly buy and sell property that is the subject of one of the theft crimes. The Model Penal Code, a model law adopted by many states, includes receiving stolen property in its consolidated theft offense (Model Penal Code §§ 223.1, 223.6). Receiving stolen property has the elements of criminal act, criminal intent, attendant circumstances, causation, and harm.

Receiving Stolen Property Act

The criminal act element required for receiving stolen property in many jurisdictions is receiving, retaining, disposing of (Ala. Code § 13A-8-16, 2011), selling (Cal. Penal Code § 496, 2011), trafficking in (Fla. Stat. Ann. § 812.019, 2011), buying, or aiding in concealment (Mass. Gen. Laws ch. 266 § 60) of stolen personal property. The Model Penal Code defines the criminal act element as receiving, retaining, or disposing of stolen movable property (Model Penal Code § 223.6(1)). The criminal act does not generally require the defendant to be in actual physical possession of the property, as long as the defendant retains control over the item(s) (Ga. Code § 16-8-7, 2011). This would be a constructive possession. The Model Penal Code defines receiving as "acquiring possession, control or title, or lending on the security of the property" (Model Penal Code § 223.6(1)). Note that the criminal act element of receiving stolen property includes both buying and selling. Thus dealers that regularly purchase and then sell stolen items can be prosecuted for both of these acts under the same statute.

Example of Receiving Stolen Property Act

Chanel, a fence who deals in stolen designer perfume, arranges a sale between one of her thieves, Burt, and a regular customer, Sandra. Chanel directs Burt to drop off a shipment of one crate of the stolen perfume at Chanel's storage facility and gives Burt the key. Chanel pays Burt five thousand dollars for the perfume delivery. Chanel thereafter accepts a payment of ten thousand dollars from Sandra and gives Sandra another key with instructions to pick up the perfume the next day after it has been delivered. Chanel could probably be charged with and convicted of receiving stolen property in most jurisdictions. Although Chanel did not ever acquire actual possession of the stolen designer perfume, Chanel had control over the property or constructive possession through her storage facility. Chanel's acts of buying the perfume for five thousand dollars and then selling it for ten thousand dollars both would be criminalized under one statute in many jurisdictions. Chanel could be prosecuted for both acts as separate charges of receiving stolen property.

Receiving Stolen Property Intent

The criminal intent element required for receiving stolen property has two parts. First, the defendant must have the intent to commit the criminal act, which could be specific intent or purposely, general intent or knowingly, recklessly, or negligently to either buy-receive or sell-dispose of stolen personal property, depending on the jurisdiction. This means that the defendant must have actual knowledge that the property is stolen (Mass. Gen. Laws ch. 266 § 60, 2011), or the defendant must be aware or should be aware of a risk that the property is stolen (Ala. Code § 13A-8-16(a), 2011). The Model Penal Code requires the defendant to purposely commit the act knowing that the property is stolen or believing that the property has probably been stolen (Model Penal Code § 223.6(1)). The Model Penal Code also provides a presumption of knowledge or belief when the defendant is a dealer, which is defined as a "person in the business of buying or selling goods, including a pawnbroker," and has been found in possession or control of property stolen from two or more persons on more than one occasion, or has received stolen property in another transaction within the year preceding the transaction charged, or acquires the property for consideration far below its reasonable value (Model Penal Code § 223.6(2)). Many state statutes have a similar provision (Ala. Code § 13A-8-16, 2011).

The second aspect of criminal intent for receiving stolen property is the defendant's specific intent or purposeful desire to deprive the victim of the property permanently, which is required in some jurisdictions (Hawaii Criminal Jury Instructions No. 10.00, 10.20, 2011). This creates a failure of proof or affirmative defense that the defendant received and retained the stolen property with the intent to return it to the true owner (Ga. Code § 16-8-7(a), 2011). The Model Penal Code also provides a defense if "the property is received, retained, or disposed of with purpose to restore it to the owner" (Model Penal Code § 223.6(1)).

Example of Receiving Stolen Property Intent

Chip's iPod breaks, so he decides to go to the local electronics store and buy a new one. As he is approaching the store, Heather saunters over from a nearby alley and asks him if he wants to buy a brand new iPod for ten dollars. Suspicious of the price, Chip asks Heather to see the iPod. She hands it to him, and he notices that the box looks like it has been tampered with and a price tag removed. He shrugs, takes ten dollars out of his wallet, and hands it to Heather in exchange for the iPod. In jurisdictions that require actual knowledge that the property is stolen, Chip probably does not have the appropriate criminal intent for receiving stolen property because he did not know Heather and had no way of knowing if Heather was selling him stolen property. In jurisdictions that require awareness of a risk that the property is stolen, Chip may have the appropriate criminal intent because he knew the price was too low and noticed that the box had been tampered with to remove evidence of an actual price or vendor.

Change the example so that Chip is a pawnshop broker, and Heather brings the iPod into his shop to pawn for the price of ten dollars. In many jurisdictions, if Chip accepts the iPod to pawn, this creates a presumption of receiving stolen property criminal intent. Chip is considered a dealer, and in many jurisdictions, dealers who acquire property for consideration that they know is far below the reasonable value are subject to this type of presumption.

Change the example again so that Chip notices the following message written on the back of the iPod box: "This iPod is the property of Eugene Schumaker." Chip is Eugene Schumaker's friend, so he pays Heather the ten dollars to purchase the iPod so he can return it to Eugene. In many jurisdictions and under the Model Penal Code, Chip can use his intent to return the stolen property to its true owner as a failure of proof or affirmative defense to receiving stolen property.

Licenses and Attributions

4.6 SWOT Analysis from Mastering Strategic Management by the University of Minnesota Libraries Publishing is an adaptation of a work whose original author and publisher request anonymity and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International license. © 2015, University of Minnesota.

Criminal Law and Procedure

Criminal law is public law passed by the federal, state, or local government. It restricts or requires affirmative conduct of its citizens under the threat of prosecution. These prohibitions may be in the form of a statute, common law rule, regulatory rule or decision, or local ordinance. Criminal laws prohibit conduct that is either considered malum in se or malum prohibitum:

· Malum in se  means that conduct is inherently wrong without regard to a statute proscribing the conduct. For example, most people consider murder and theft to be innately wrong or evil without regard to a government's prohibition of the conduct.

· Malum prohibitum  means that conduct is not necessarily wrong or evil, but it is made illegal based upon a law. For example, a public company's failure to adequately disclose corporate information to the public is made illegal by statute. Without such a statute, it may not be considered inherently wrong.

The authority for each type of law may differ, but generally criminal laws are enforced by the government and exist to protect the health, safety, and welfare of citizens. This includes protecting the property and rights of those citizens. Failing to comply with criminal laws can result in fines or imprisonment.

Ask Yourself

· Do you generally believe that criminal laws are effective at curbing prohibited conduct? Do they effectively protect the health, safety, and welfare of citizens? Does a criminal penalty ever violate the purpose of protecting citizens? With the prison population at record levels in the US, is there a need to reform the criminal punishment system? If so, what are some alternatives that may achieve a similar purpose to the penalty of imprisonment?

· Explain the primary differences between criminal law and civil law?

What Are the Elements of a Crime?

Every crime is composed of certain elements. Common among all crimes are the physical and mental characteristic of the defendant in failing to comply with the criminal law.

Actus Reus

Actus reus is a latin phrase meaning "guilty act." This element simply means that the individual committed the act proscribed by the statute. In some cases a threat to act or a failure to act constitutes the crime. In any event, the defendant must be responsible for that action or inaction.

For example, if an individual is involuntarily intoxicated, this may negate the actus reus. If someone slips drugs in a person's drink unknowingly, it may excuse the voluntary act required to find a person guilty of a criminal offense. That is, she may not have the control over her physical actions necessary to satisfy the actus reus. The act of voluntary intoxication, however, will not excuse the actus reus. Voluntarily drinking or taking medications is a sufficient act.

Mens Rea

Mens rea is a latin phrase meaning a "guilty mind." This generally means that there must be some mental intent to commit the act that is wrongful under the law.

General Intent 

General intent crimes simply require that the individual intend to do the act that constitutes a crime, without specific intent as to the results of the harmful action. General intent crimes include the following:

· criminal negligence—If an actor intends a physical act that is negligent under the circumstances, she may be criminally liable for the harm resulting from the action. Generally, the action must pose a foreseeable risk of harm and the actor's failure to observe due care brings about that harm. For example, Bob is driving while texting on his phone. He takes his eyes off of the road and accidentally strikes a pedestrian who is killed. In this instance, he may be criminally negligent.

· strict liability crimes—This type of crime does not require a defendant's mens rea. That is, if an individual undertakes an action, regardless of whether there was intent, she is criminally liable. For example, An individual who has sexual intercourse with someone under the legal age of consent may be convicted of statutory rape. It does not matter if the defendant believed that the other person was above the legal age of consent. A strict liability crime looks solely at the action and not the intent of the parties.

Specific Intent

Specific intent crimes require that the individual have the intent to achieve that harmful result or be indifferent or reckless with regard to the probable results of her conduct. The specific intent requirement is generally satisfied if the defendant acts recklessly with regard to the potential harm that could result from her actions or inactions. Specific intent crimes include both intentional crime and criminal recklessness:

· intentional crime—The actor intends the physical act and the likely result of that act constituting a crime. For example, Tom intentionally provides false information to a bank when applying for a line of credit. When the bank learns of the false information, it presses charges against Tom for fraud. If Tom is able to demonstrate that he did not know that the information was false, it will negate the specific intent required for a charge of fraud.

· criminal recklessness—An actor may be criminally liable for undertaking an action without regard for the potential harm to persons or property. Generally, the actor must understand the substantial risk and consciously disregard it. For example, Merrick is anxious to try out his new bow and arrow. He walks outside and fires an arrow straight up into the air. Merrick lives in the city and the area is densely populated. He knows that it is a substantial risk that the arrow will strike someone, but he disregards this risk. He will likely be criminally reckless if that arrow strikes someone.

In some instances, a guilty act may constitute more than one crime. This may be the case when one crime is a "lesser-included offense" of another crime. That is, less than all of the elements required for one crime may meet all of the elements of another crime. For example, theft may be a lesser-included crime of burglary. A general intent crime may be a lesser-included offense of a specific intent crime.

Ask Yourself

· Do you think the mental element of a crime is important? If a person causes harm without intent, is there less reason to subject that individual to criminal punishment?

· Donald is driving down the road listening to his favorite heavy metal songs. He gets so excited that he does not realize that he is traveling 20 mph over the speed limit. A police officer witnesses the speeding, stops Donald's car, and issues him a citation. Donald goes home and looks up the citation under state law. The statute indicates that speeding is a strict liability crime. What does this mean for Donald? Does it matter that Donald's excessive speed was accidental? Would it matter if Donald were temporarily disoriented when driving due to a carbon monoxide leak in his car that caused him to lose the ability to effectively control his automobile?

Classifications of Criminal Conduct

Criminal conduct is generally classified by the level of severity and the potential punishment from breaking the law. The two primary classifications of crimes are as follow:

· misdemeanor—a crime of lesser significance that is punishable by a fine or a joint sentence of less than one year

· felony—a more serious crime punishable by fine or imprisonment in a penitentiary for a period of one year or more

Historically, the common law identified treason as a class of serious offense that was separate from a felony. Also, today, many jurisdictions identify a less severe form of criminal act, known as an infraction. The infraction is generally a minor violation of an ordinance or regulation.

Ask Yourself

· Do you believe that laws are always classified appropriately? Do you believe that criminal conduct is generally classified too leniently or too harshly? Do you believe that the misclassification of crimes has a negative impact on society?

· Clark is a college student at City College. He is at a house party drinking alcohol when the police arrive to break up the party. Clark is cited for underage drinking. Angry at the occurrence, Clark gets into an argument with a police officer and punches him. Clark is arrested and taken to jail. What is the likely classification of each of Clark's criminal acts? Why?

Process for Initiating and Processing Criminal Charges against a Defendant

The general process for initiating criminal charges against an accused is as follows:

· arrest—An arrest is the first step of the prosecutorial process. It involves the physical detention of an individual. If the defendant is an organization, the arrest may be carried out through injunctions against continued business operations. The arrest takes place pursuant to some form of legal authority. This may include the arresting individual witnessing criminal activity or pursuant to an arrest warrant.

· initial appearance—Once an individual is arrested, she has a right to be informed of the charges against her. As such, the defendant must go before a judicial officer within a statutory period (generally 72 hours) to receive notice of the charges.

· bringing charges—To bring formal charges against someone, the case is handed over to the prosecuting officer of the court. The prosecuting attorney may have any number of titles (solicitor, district attorney, etc.). This prosecuting officer orchestrates the process for bringing charges against a defendant in the name of the people of that jurisdiction. For example, the charges may read, "US v. John Smith" or "State of Georgia v. John Smith." Who has the decision- making authority to bringing charges against the defendant depends upon the classification of the alleged criminal conduct. A prosecutor must file an "information" with the court to begin prosecution of a misdemeanor. The prosecutor must submit the matter to a grand jury to bring felony charges against a defendant. The grand jury decides to bring felony charges against a defendant, this is known as handing down an "indictment."

· arraignment—The arraignment is the first appearance by the defendant before the court to answer the criminal charges. At the arraignment, the court will review the defendant's rights and accept the defendant's plea. The plea will either be guilty, not guilty, or nolo contendere (no contest). If the defendant pleads guilty (or no contest), the court will set a trial date for sentencing. If the defendant pleads not guilty, the court will set the matter for trial.

· trial burden—To convict a defendant of a crime, the government bears the burden of proof and the burden of persuasion. Burden of proof means that the government must demonstrate sufficient evidence to demonstrate each element of the charged offense. The burden of persuasion means that evidence must be sufficient to convince a jury that the defendant is guilty beyond a reasonable doubt.

Each step of the criminal process may vary slightly among jurisdictions. Prosecution of a violation of a criminal law is carried out in an Article III court (judicial branch court). Article I courts (administrative courts) do not prosecute violations of criminal law.

Note that states establish a special court, juvenile court, to handle criminal infractions by adolescents.

Ask Yourself

· Of the major steps in the criminal process, do you think any procedural step is more important in terms of observing a defendant's due process rights? Can you think of situations or examples of how a defendant's rights could be infringed upon in each of the steps?

· Laura receives notice from the state's criminal law division that she has been indicted for illegally trading in corporate securities. The criminal detective advises Laura to report to the local police station where she will be processed for arrest and detention. On the way to the police station, Laura calls her attorney and asks about the process that she will face if the government continues with the charges against her. If you are Laura's attorney, explain to Laura the process that she can expect.

Common Crimes Involving the Property of Others

Each state adopts its own criminal statutes. Some of the more common types of named criminal offenses against someone else's property include the following:

· larceny—Larceny is the unlawful taking (theft) of personal property with the intent to permanently deprive the rightful owner of it.

· robbery—Robbery is theft through violence or threat.

· burglary—Burglary is theft by breaking into a building (sometimes at night) with intent to commit a felony therein.

· extortion—Extortion is the unlawful obtaining of another's property though coercion, such as the threat of violence.

· embezzlement—Embezzlement is the theft of money by an individual entrusted to hold it.

· fraud, false pretenses, and theft by deception—Fraud, false pretenses, and theft by deception involve deceiving someone to unlawfully take possession of her property. While fraud generally involves deception, false pretenses and theft by deception requires a knowingly false representation.

There are many statutory and common-law charges involving the property of others. These above- mentioned examples, however, are generally uniform across jurisdictions.

Ask Yourself

· How do you feel about the premise of revoking an individual's liberty for actions that harm the possessions or property of others? Does the individual's intent when carrying out these actions influence your opinion?

· What is the difference between larceny, robbery and burglary? What is the difference between extortion and embezzlement? What is the difference between fraud and theft by deception?

Activities Constituting Fraud

The elements of the crime of fraud vary between jurisdictions. Consistent with the federal fraud statute, fraud is the unlawful taking of another's property through the following types of knowing and willful conduct:

· falsifying, concealing, or covering up any trick, scheme, or device

· making any material false fictitious, or fraudulent statement or representation about a material fact

· making or using any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry

Related charges, commonly known as false pretenses and theft by deception generally constitute the following types of conduct:

· intentionally creating or reinforcing an impression that is false

· failing to correct an impression that is false and that the person does not believe to be true if there is a confidential or fiduciary relationship between the parties

· preventing another from acquiring information that is relevant to a transaction

· failing to disclose a known lien or other legal impediment to property being transferred.

The elements of the above charges are generally common among most jurisdictions, with slight variations in the language or wording.

Ask Yourself

· Fraud generally entails wrongfully obtaining resources or benefits from another person by deceptive means. In your opinion, does the fact that the individual voluntarily provides the resources or benefits to the fraudster in any way mitigate or lessen the reprehensible nature of the actions?

· Doreen is seeking to borrow funds to run her business. She approaches several wealthy individuals in town and pitches the virtues of her business. She goes further than over representing the strength of her business. She lies about the incomes generated over the past several months. Convinced by her presentation and the business's strong performance, several individuals make loans to the business of $10,000 or more. Doreen continues operations and uses the funds to pay herself a substantial salary. Ultimately, the business fails and shuts down. Has Doreen committed a crime? If so, what?

Good Faith and Fraud

Fraud requires knowing and willful conduct carried out with the intent to defraud someone. As such, good faith in one's actions is a defense to the allegations. The defense is that the defendant acted in good faith and did not have the necessary intent to defraud anyone. It does not matter that a person's statement or belief is wrong, there is no action for fraud unless intent is deceive is present. Further, an individual's lack of due care in making a statement is not relevant in determining fraud.

Ask Yourself

· How do you feel about the mental intent requirement for a charge of fraud? Do you think a person should be able to escape a criminal fraud charge if she is reckless in her actions? What if she recognizes that her assertions are extremely unlikely, but she leads a customer or client to believe that the unlikely result is reasonably certain?

· Mitchell owns a baseball card of Mickey Mantle. He believes that the card is an original rookie card. He offers to sell the card to Amy for $1,500. Amy buys the card. No long afterward, she has the card inspected and learns that it is simply a reproduction of the original card and is not worth any money. She is angry at Mitchell and asks your opinion on whether she should report the incident to the police. Has Mitchell committed fraud? Why or why not?

Common Types of Business Fraud

Many examples of business fraud include a scheme or plan designed to take from a person the tangible right of honest services. Below are some common examples of fraud in the business context:

· mail or wire fraud—It is illegal to use the US postal service or electronic means of interstate communication to carry out a scheme to defraud. This is a very broad statute, as it includes any fraudulent conduct employing mail or wire transmission. To mail means a communication is sent or received through use of the US Postal Service or any interstate carrier. Wire transmission includes the use of radio, television, telephone, Internet, or other wired form of communication.

· securities fraud—Federal laws defining securities fraud are the Securities Acts of 1933 and the Securities Exchange Act of 1934. Section 17 of the 1933 Act covers fraudulent activity in the issuance of securities Section 10 and Rule 10(b)(5) of the 1934 Act cover fraud in the purchase or sale of a security.

· insurance fraud—This is a common state-law crime in which an insured makes a fraudulent claim for benefits under an insurance policy. For example, intentionally setting fire to the building of a failing business to collect the insurance proceeds is insurance fraud.

· health care fraud—Health care fraud generally involves making fraudulent claims for payment or reimbursement of health care expenses. The common offenders are health care providers who make fraudulent claims for reimbursement for services never performed or unnecessary. The prosecution usually falls under the False Claims Act.

· tax fraud—Tax fraud is the knowing concealment of transactions or property ownership in an attempt to illegally avoid paying federal, state, or local taxes.

Ask Yourself

· Do you think there should be varying degrees of fraud? When does in individual's conscious decision to do a poor job or cut corners amount to a plan or scheme to defraud the individual paying for the services? Could an intentional misstatement amount quality of services or effectiveness of a product amount to fraud? Could it be fraud if an individual misrepresents (or lies about) a work process in order to get hired or win a contract?

· Javier opens a personal wealth investment business. He represents to clients that he can generate above-average returns on their investment with minimal risk. He claims to have insider information on many new business ventures that makes them a certain success. He makes up fake disclosure documents for business that do not exist or have no connection with Javier. In reality, Javier is running a Ponzi scheme in which he takes money from investors and uses the funds to pay returns to other investors. He also spends much of the remaining funds soliciting new investors through email and direct-mail advertisements. What crimes, if any, has Javier committed? Why?

Conspiracy

Conspiracy involves an agreement between individuals to commit a crime. Conspiracy is a separate charge or crime than the crime agreed to by the parties. In a conspiracy, each member becomes the agent of the other member or members. Each person in the conspiracy does not have to know all of the details. Each person simply needs to understand that the plan is illegal and knowingly and willfully join in that plan on one occasion. The conspiracy or conspired act does not have to be successful. The formal elements of a conspiracy charge are as follows:

· multiple people—There must be two or more persons.

· mutual understanding—In some way or manner, these people must come to a mutual understanding to try to accomplish a common and unlawful plan.

· willfulness—The defendant must willfully become a member of the conspiracy.

· overt act—During the existence of the conspiracy, one of the conspirators must knowingly commit at least one of the overt acts described in the indictment (formal charge).

· purposeful act—The overt act was knowingly committed in an effort to carry out or accomplish some objective of the conspiracy.

The essence of a conspiracy offense is the making of an agreement followed by the commission of any overt act in furtherance of that agreement. While direct evidence is preferable, circumstantial evidence may be used to prove a conspiracy.

Ask Yourself

· Do you think a person should be liable for conspiracy to commit a crime if they were not involved in the planning of the crime? What if conspirators solicit a third party to commit an illegal act that is part of the conspiracy, but the third party does not know about or agree upon the conspired scheme? How much evidence do you think must be present to demonstrate alleged conspirators have arrived at a mutual understanding?

· Sarah, Jane, and Tommy need money to support their drug habits. They devise a plan to break into April's house and rob her. As soon as they begin planning, Sarah realizes that this is a very bad idea. She tells Tommy and Jane that she made a mistake and she wants no part of the plan. Tommy and Jane, undeterred by Sarah backing out, go to April's house to determine the best way to break in. A neighbor notices them creeping around the house and calls the police. The police arrest Tommy, Jane, and Sarah and charge them all with conspiracy. Will Sarah, Jane, and Tommy be found guilty of conspiracy? Why or why not?

Obstruction of Justice

Obstruction of justice is an intentional act carried out with the intent to obstruct the legislative or judicial process. This charge seeks to protect legislative, judicial, and administrative proceedings.

Ask Yourself

· How do you feel about charging a friend or family member of an accused individual for harboring (hiding) that individual to prevent her arrest? What if a friend or family member withholds or fails to give to authorities any information that implicates a family member in a crime? What if a friend or family member specifically lies when questioned by authorities to prevent an arrest?

· Barry witnesses a masked individual pull a pistol on two unsuspecting tourists and demand their valuables. He then watches the perpetrator run away down the street. At the end of the street, the perpetrator throws his weapon in the trashcan and continues to flee. Barry walks to the end of the street and removes the robber's weapon from the trash can. He likes the gun and decides to keep it for himself. When the police arrive on the scene, they question everyone in the area, including Barry. Barry refuses to answer the police questions and does not mention the weapon he found. Has Barry committed a crime?

Providing a False Statement

False Statement to a Bank

Making a false statement to a bank involves presenting financial information to a bank when requesting a loan. It is a federal crime for anyone to willfully make a false statement to a federally insured financial institution. Lending institutions rely upon a company's financial statements in extending credit or granting a loan. An individual must intentionally make the false statement to the financial institution in order to secure some form of financial rights (such as a loan or guarantee). The statement must relate to a material fact or consideration that the individual knows to be false. A fact is material if it is an important consideration in the determination of whether or not to extend a financial benefit.

False Statement to a Federal Agency

The US Code makes it a federal crime for an individual to willfully and knowingly make a false or fraudulent statement to a department or agency of the United States. The false statement must be material in nature. Making a materially false statement to another person with knowledge that it will be transmitted to a federal agency is also a crime.

Federal appellate courts recognize the "exculpatory no" exception for simple denials made in response to government questioning as part of a criminal investigation. This type of reaction to government questioning will not lead to charges of making a false statement.

Ask Yourself

· How does a false statement to a financial institution compare to a false statement to a governmental agency? Does criminal liability for a false statement to a governmental agency implicate the 1st Amendment?

· Donnie needs capital to run his business. He goes to the local bank and talks with a loan officer. As part of the loan application process, Donnie must submit his business's financial history. Donnie makes up some financial statements with false information about the business's operations and sales. The bank relies on these statements in loaning $30,000 to Donnie's business. Donnie's business takes off and is successful. He is easily able to repay the loan. Has Donnie committed a crime?

Aiding and Abetting Criminal Activity

Aiding and abetting involves providing assistance to someone accused of a crime. The assistance must relate to the criminal activity, such as assistance preparing to commit the crime, covering up the criminal activity, or evading law enforcement. This charge can be very similar to conspiracy. Under state law, the crime of aiding and abetting is often referred to as accessory. An individual can be an accessory before or after the commission of the crime. Accessory before the fact means that the individual helps in preparation of the criminal activity. Accessory after the fact means that the individual helps conceal or cover up the crime.

Ask Yourself

· When should offering general support to an individual who commits a crime constitute accessory? Is a person an accessory if she knowingly provides the accused with a weapon or tools to commit a crime? What if the third party simply provides information to the accused that is useful in committing the crime? What if a person allows the accused to stay with them after learning that there is a warrant for the accused's arrest?

· Hank commits a violent crime and is on the run from the police. Prior to committing the crime, he expressed to his friend, Joanna, that he needed a handgun to rob someone. Joanna, ever the loyal friend, helps him acquire the gun. After the crime is committed, Hank flees and asks his mother Edith for help in leaving the state. Edith allows Hank to take her vehicle and flee the state. Has Joanna or Edith committed crimes?

White-Collar Crime?

White-collar crime characterizes crimes by criminals of high socioeconomic status or individuals who hold high-ranking, professional positions, such as corporate executives. More broadly, it includes any offense that occurs in a business or professional setting. These crimes can either be for personal gain or with the purpose of harming or benefiting the business.

Unlike individuals, corporations cannot be put into jail. Corporations can, however, be fined and face other criminal penalties, such as involuntary dissolution.

White-collar crimes includes: embezzling money, making electronic advances to fictitious employee, and accepting kickbacks from suppliers.

Ask Yourself

· Do you feel like white-collar crimes are punished as regularly or severely as non-white-collar crimes? How do you feel about the inability to incarcerate a business entity, when these entities receive many of the same rights and procedural protections of human beings?

· Gina is the Chief Financial Officer of ABC, Inc. In her role, she approves all major expenditures of corporate funds. She authorizes the use of corporate funds to pay for her vacation to the Bahamas with her family. She uses the funds for travel, lodging, gambling, and dining. She is able to conceal the expenditures by acting as disbursing and approval authority. Do Gina's actions constitute white-collar crime?

Crimes Directed at Conduct Endangering Workers

In some instances, a corporate official may be charged with a crime for conduct committed in furtherance of her job duties. Particularly, conduct by business officials that endanger workers may be criminal in nature.

The Occupational Safety and Health Administration (OSHA) or equivalent state agencies may investigate businesses for violation of health and safety standards. If an agency uncovers potentially criminal conduct, it can turn the investigation over to state or federal authorities for investigation and potential prosecution.

Examples of such criminal actions include when a business official commits an assault and battery of an employee or makes decisions that recklessly endanger or company workers. If a company official orders extremely dangerous process, such as handling dangerous chemicals, or fails to institute adequate safety precautions, she may face criminal liability if a worker is injured or killed.

Ask Yourself

· If you have read the famous book by Upton Sinclair, The Jungle, you are aware of the harsh working conditions that workers in the United States faced at the turn of the twentieth century. Do you think that criminalizing decision making by corporate executives helped to curve these harsh employer practices? Do you think the criminal penalties against businesses are sufficient to deter these practices?

· Earl is a movie director. He is known for the action sequences in his documentary films. He hires, Faith, a recent film graduate to work on his movie set. As part of a film, Earl wants to film a chase sequence on a railroad track. Earl mounts a camera on the bumper of a vehicle and instructs faith to maneuver it during the action scene. During the scene, Faith is bounced from the vehicle and severely injured. Has Earl committed a crime against faith.

Bribery and Other Illegal Payments

Offering, receiving, or soliciting something of value for the purpose of influencing the action of an official in the discharge of her public or legal duties is illegal in both the domestic and international contexts. Under federal law, this sort of activity is prohibited by the Foreign Corrupt Practices Act (FCPA), which specifically serves to prevent kickbacks to facilitate business transactions.

There is an exception under the FCPA that allows payment to individuals to undertake their procedural or routine tasks when such payments are customary in a country.

Ask Yourself

· Do you think businesses should be prevented from paying government officials for official action that helps or favors the business? Should these prohibitions apply outside of the United States as well? Does it change your opinion if the act of paying officials in a particular foreign country is so common that it is expected? Should there be an exception when bidding for contracts against foreign companies that are openly paying officials?

· Sean owns a company and seeks to sell goods to the Brazilian government, specifically the development department. Sean knows that the Brazilian market is difficult to break into for foreigners. Sean, with the purpose of improving his chances of winning the contract, buys very lavish gifts and has them delivered to the home of the director of the development department. Has Sean committed a crime?

RICO Act

The Racketeer Influenced and Corrupt Organizations Act (RICO) imposes criminal and civil liability upon those businesspersons who engage in certain prohibited activities that directly affect interstate commerce. The law is commonly used to impose criminal sanctions and forfeiture of resources used in furtherance of the criminal enterprise. Elements of a RICO action include:

· involvement in an enterprise—This may include using or investing income from prohibited activities to acquire an interest in or to operate an enterprise; acquiring or maintaining an interest in or control of an enterprise; or conducting or participating in the conduct of an enterprise while being employed by or associated with it.

· pattern of racketeering—Racketeering is defined as "any act or threat" involving a specified state crime or any "act" subject to indictment under various federal statutes. There must be some pattern of or recurring activity constituting racketeering.

The law makes it unlawful for any person employed by or associated with any enterprise to conduct or participate in a violation of the law. The law foresees two separate entities: person and the enterprise. Generally, employment alone is insufficient to hold someone liable under RICO.

Ask Yourself

· Do you think this statute goes too far by allowing the government to charge individuals who are not directly involved in the criminal activity? Is the ability to reach those facilitating a criminal activity (and their assets) necessary to the administration of justice?

· Gloria makes a living by illegally importing cocaine into Florida from Colombia, SA. She does not have any hands on the process. Rather, she hires every part of the activity. Once the drugs arrive, she hires Terry to pack them in the trunk of a car and sends them to a distributor in New York. She hires Robert to drive the vehicle carrying the drugs. On the way, Robert is stopped and arrested by North Carolina police officers. The Federal Bureau of Investigation gets involved and traces the scheme back to Gloria. How can the FBI potentially charge Gloria for her involvement in drug trafficking?

False Claims Act

The False Claims Act (FCA) is a federal law that provides criminal and civil sanctions for those who commit fraud against the US Government. It is well known for authorizing a special type of civil action, qui tam, or whistleblowing, which allows a civil plaintiff to bring an action against a company on behalf of the federal government. The criminal and civil provisions of the FCA prohibit the following conduct:

· knowingly presenting, or causing to be presented a false claim for payment or approval

· knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim

· conspiring to commit any violation of the False Claims Act

· falsely certifying the type or amount of property to be used by the government

· certifying receipt of property on a document without completely knowing that the information is true

· knowingly buying Government property from an unauthorized officer of the government

· knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the government

· retaliation based upon reporting any of the above infractions.

The unique aspect of the FCA is that it allows individuals reporting criminal fraud against the government and those bringing qui tam actions to receive a portion of the proceeds recovered by the government.

Ask Yourself

· What do you think is the justification for allowing civilians to bring an action on behalf of the government? What do you think about awarding a whistleblowing civilian a portion of the civil damages recovered against a company? What is the reasoning behind allowing these types of actions?

· Ron works in the manufacturing services unit for ABC, Inc. ABC has a large contract with the federal government to manufacture steel storage containers. The contract allows ABC to charge the government for all materials used in manufacturing and for the labor costs. Ron noticed that ABC was routinely ordering shipments of steel fittings at $25,000 each as part of the materials order for the government contract. In reality, ABC was only using a small portion of the fittings on the contract, and was selling the remaining units to third parties. Ron decides to inform the government that it is being routinely over charged by ABC. Has ABC committed a crime? What rights and protections does Ron have in reporting ABC's conduct?

Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) is a set of federal laws addressing criminal and unethical conduct of public company boards and management. It also addresses the accounting and auditing practice of firms servicing these public companies. The criminal sanctions under the statute are as follows:

· Title VIII & XI—This portion of SOX contains the Corporate and Criminal Fraud Accountability Act of 2002. It provides criminal charges for the creation or destruction of fraudulent corporate records. It generally addresses fraud through the uses of corporate records and provides established ranges of criminal penalty. It also establishes protections against retaliation for those reporting such activity.

· Title IX—This portion of SOX is called the White Collar Crime Penalty Enhancement Act of 2002. It provides criminal charges for illegal and unethical conduct by officers and managers that harms the public. It specifically requires corporate managers to certify that records are true and accurate.

SOX was passed in the wake of numerous corporate scandals that rocked the financial markets, such as World Com, TyCo, Enron, and Arthur Andersen.

Ask Yourself

· Do you think that additional government regulation of corporate practices in the form of criminal penalties helps to curb unethical conduct? Do any positive effects outweigh the negative consequences to the business (such as increased costs, bureaucracy, etc.)?

· Derek is CFO of ABC, Inc. After years of declining profits, Derek devises a method for improving the appearance of ABC's balance sheet. Derek creates a group of limited liability companies that are owned by ABC. ABC transfers corporate debt to these entities, which is reported off of the main balance sheet and in the footnotes of the financial statements. Derek knows that this form of disclosure is likely to convince investors that ABC has a strong financial position. Has Derek committed a crime?

Cyber Crime

Federal law provides that a person who intentionally accesses a computer without authorization or exceeds authorized access to obtain classified, restricted, or protected data, or attempts to do so, is subject to criminal prosecution.

Types of cybercriminal conduct include: hacking, cyber terrorism, destruction of data, unlawful appropriation of data or services.

Ask Yourself

· Do you think it should be a crime for individuals like Edward Snowden to disclose governmental data? Do you think it should be a crime to access the back-end database on someone's private website? At the opposite end of the spectrum, if someone walks away from a public computer and fails to log out of her email account, do you think it should be criminal to read that person's emails? What if you were to send an email (even as a joke) from that person's email account?

Defenses to Criminal Conduct

Common defenses to criminal conduct include:

· negating mental capacity—Certain conditions of the defendant may negate the mental capacity to commit a crime. Defenses commonly negating capacity include mental incompetence, insanity, involuntary intoxication, and infancy.

· negating intent—Certain conditions may negate the requisite intent (men rea) required by a particular crime. A mistake of fact or voluntary intoxication may negate the mental intent required to find guilt for a particular crime.

· other general defenses—These defenses constitute defenses to certain criminal charges. Common examples include the following:

· duress—This means applying undue pressure (often pursuant to a position of power or authority over an individual) to coerce activity deemed to be criminal conduct. Holding a gun to someone to make them steal would be an example of duress.

· necessity—Necessity is when an individual had no choice but to break the law in order to avoid significant harm. There must not be another reasonable manner of avoiding the harm and the harm avoided must be greater than the harm caused by breaking the law. For example, Hank sees an individual planting a bomb in a public park. The individual runs off. Hank pulls out his concealed weapon and fires it into the air multiple times. This act causes all the bystanders to flee running. His act of firing the weapon was criminal, but it was done out of necessity.

· entrapment—This involves the wrongful solicitation and inducement to commit criminal activity by a government official (particularly the police). For example, a police officer tells Adam that he can make some extra money by helping me transport drugs from Florida to New York. He or she provides Adam with a vehicle loaded with illegal drugs and then arrests Adam for carrying out the plan. The officer has entrapped him.

· justifiable use of force—Individuals may generally use a certain level of force to protect themselves and their property. The use of force is generally limited to the ability to respond with a reasonable amount of force given the situation. For example, Thomas is walking down the street when he is attacked by two men. Fearing for his physical safety, Thomas uses a can of mace to spray and disorient his attackers. Thomas has not battered his assailants, as his use of force was justified in defense of his safety.

The availability or applicability of any defense depends upon the type and nature of the criminal charges.

Ask Yourself

· What is your impression of defenses to criminal activity? Do you believe most defenses posed in criminal actions are valid or are they overused hindrances to the execution of justice? Can you think of any famous criminal cases where one of the defenses earned an acquittal for a defendant?

· Geoffrey is walking home from a party and is stopped by the police. The police are concerned that Geoffrey is intoxicated and administer a field sobriety test, which Geoffrey fails. The police charge Geoffrey for public intoxication. Geoffrey contends that he did not drink or take drugs that night. A blood test shows that Geoffrey has alcohol in his system. Unbeknownst to Geoffrey, someone at the party had spiked the punch bowl from which Geoffrey was drinking. What defenses might Geoffrey employ at trial?

Licenses and Attributions

Business Law: An Introduction, by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC. 

Law of Torts

The legal system in the United States is a common-law system with civil law and criminal law components. The civil-law component of the US common-law system should not be confused with the civil-law system, which is a separate system of law originating in ancient Rome and adopted by most European countries. The US common-law system includes different procedures for redressing civil-law violations (e.g., the law of tort, contract, agency, employment, divorce, and business organizations) than for redressing criminal-law violations (e.g., larceny, murder, rape, and robbery).

Tort law, an important component of civil law within the US common-law system, generally encompasses situations where an individual’s conduct causes harm to another. A tort is literally translated from French as a wrong. These wrongs give rise to claims in court, when a specific statutory or common-law tort is committed. When a tort is committed, one may seek monetary compensation (damages) for the tort in court.

Tort law may be divided into three broad categories of tort: intentional torts, negligence, and strict liability torts. Intentional torts generally require that one “intended” to cause the consequences of the act. That is, one must have intended to perform the act that caused harm to another. Negligence generally requires that one be at fault for committing the act. Negligence theory underlies many personal-injury actions, such as car accidents. Strict liability torts require neither intent nor fault; simply causing harm to an individual while performing one of an enumerated list of strict liability torts gives rise to damages (even if a person did not intend the act and was not at fault for it).

Intentional torts often have counterparts within criminal law. For example, if Joe strikes Dave across the face with a stick, Joe may be liable for a civil battery and a criminal battery. The civil action for battery may result in Dave receiving compensation for the harm done to him, including costs of medical bills, pain and suffering, and compensation for work missed while in the hospital. Simultaneously, a criminal action may be brought against Dave for a criminal battery. The criminal action is not about compensation, but instead is about punishing Joe for committing a crime. Punishments for the crime may include jail time, fines (paid to the government), and community service.

Although some intentional torts have criminal counterparts, not all do. In some cases, a wrong against an individual is merely a civil wrong and has no criminal repercussions. Certain defamation claims, for example, may result in compensation but have no criminal counterpart, so will not result in a correlative criminal action. One very famous incident involving both civil and criminal claims is that of O.J. Simpson, who was tried criminally and found not guilty. However, O.J. Simpson was found civilly liable to the family members of the deceased and had to pay those families millions in compensation for the civil wrongs.

Check Your Knowledge

Choose the best answer to each question.

Question 1

Which of the following is the key characteristic of a common law system (the answer being the central feature that distinguishes it from a civil law system)?

Common law systems use juries.

Common law systems utilize judges to interpret the law.

Common law systems abide by precedent.

Common law systems are rooted in Europe.

Question 2

Which of the following is NOT a type of tort?

intentional tort

breach of contract

negligence

strict liability

Question 3

Which of the following is the most accurate statement of the relationship between torts and crimes?

Some torts also involve correlative crimes, but not all torts involve correlative crimes.

All torts involve correlative crimes.

No torts involve correlative crimes.

Torts may be considered a branch of crimes.

Question 4

Which of the following is NOT a type of invasion of privacy?

disclosure of private information

use of name of likeness

invade physical solitude

defamation

Question 5

Which of the following torts involves a non-party to a contract knowingly inducing a party to the contract to fail to honor or breach the agreement?

interference with prospective advantage

disparagement

interference with contractual relations

wrongful appropriation of business interests

Resources

· Common Law versus Civil Law Legal Systems

· Legal Theory & Foundations and Law of Torts

Licenses and Attributions

Business Law: An Introduction, by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC.

Common Law Versus Civil Law Legal Systems

The two predominant legal systems in the world are the common law and civil law systems. These two systems have some commonalities but are distinct in many ways.

Common Law Legal Systems

Common law constitutes the basis of United States federal and state law (except Louisiana); Canadian federal and provincial law (except Quebec); Australian federal and state law; and the legal systems of England, Wales, Northern Ireland, the Republic of Ireland, New Zealand, South Africa, India, Israel, Sri Lanka, Malaysia, Brunei, Pakistan, Singapore, Malta, Hong Kong, and many other generally English-speaking countries or Commonwealth countries. Essentially, every country or province that had been colonized at some time by Britain uses common law except those that had been colonized by other nations, such as Quebec (which follows French law to some extent) and South Africa (which follows Roman Dutch law), where the prior civil law system was retained to respect the civil rights of the local colonists. India's system of common law is also a mixture of English law and the local Hindu law.

The twelfth-century British king Henry II developed the practice of sending judges from his own central court to hear the various disputes throughout the country. These judges resolved disputes on an ad hoc basis according to what they interpreted the local customs to be. On returning to court, they commonly discussed their judicial decisions with other court judges. These decisions would then be recorded and filed. In time, a rule, known as stare decisis (also commonly known as "precedent") developed, which meant that that if a judge was hearing a case that had similar facts to a case already tried, this subsequent judge was bound to follow the decision made by the judge who heard the earlier case. In other words, he was required to adopt the earlier judge's interpretation of the law and apply the same principles promulgated by that earlier judge. By this system of precedent, decisions "stuck" and became ossified, and so the pre-Norman system of disparate local customs was replaced by an elaborate and consistent system of laws that was common throughout the whole country, hence the name, "common law."

The 13 original colonies had been using English common law for many years, and they continued to do so after gaining independence from England. Early cases from the first states are full of references to already-decided English cases. As years went by, many precedents were established by US state courts, so that, today, a judicial opinion that refers to a seventeenth- or eighteenth-century English common law case is quite rare.

Courts in one state may look to common law decisions from the courts of other states if the reasoning in a similar case is persuasive. This will happen in “cases of first impression,” a fact pattern or situation that the courts in one state have never seen before. But if the supreme court in a particular state has already ruled on a certain kind of case, lower courts in that state will always follow the rule set forth by their highest court.

Today, precedent remains the key distinguishing feature of a common law system. In a common law jurisdiction, several stages of research and analysis are required to determine what the law is in a given situation. First, the facts of the case must be established. Next, relevant statutes and cases must be sought. Then, the various courts' principles, analogies, and statements of what they consider important must be honed in on that will determine how the next court is likely to rule on the facts of the present case. Later decisions and decisions of higher courts or legislatures carry more weight than earlier cases and those of lower courts. Next, all of the relevant lines of thought and are integrated to determine what the law is. This law is finally applied to the facts.

The United States’s common law system contains both civil law and criminal law. Criminal cases are certainly of interest to business, especially as companies may break criminal laws. A criminal case involves a governmental decision—whether state or federal—to prosecute someone (named as a defendant) for violating society’s laws. The law establishes a moral minimum and does so especially in the area of criminal laws: Breaking a criminal law can result in loss of freedom (jail) or life (if the crime is a capital offense). In a civil action, lawbreakers are not sent to prison; in the worst case, they can lose property (usually money or other assets). For example, Ford Motor Company lost a personal injury case and had to pay out $295 million to the plaintiffs. Some of the basic differences between civil law and criminal law cases within a common law system are summarized in the following table:

	Civil Cases	Criminal Cases
Parties	Plaintiff brings case; defendant must answer or lose by default	Prosecutor brings case; defendant may remain silent
Burden of proof	Preponderance of evidence	Beyond a reasonable doubt
Reason for this type of law	To settle disputes peacefully, usually between private parties	To maintain order in society To punish the most blameworthy To deter serious wrongdoing
Remedies	Money damages (legal remedy) Injunctions (equitable remedy) Specific performance (equity) Other equitable remedies	Fines, jail, and forfeitures

Regarding plaintiffs and prosecutors, a civil case can be distinguished from a criminal case by looking at the caption of a case going to trial. If the government appears first in the caption of the case (e.g., US v. Lieberman), it is likely that the United States is prosecuting on behalf of the people. The same is true of cases prosecuted by state district attorneys (e.g., State v. Seidel). However, this is not a foolproof formula. Governments will also bring civil actions to collect debts from or settle disputes with individuals, corporations, or other governments. Thus, US. v. Mayer might be a collection action for unpaid taxes, or US v. Canada might be a boundary dispute in the International Court of Justice. Governments can be sued, as well; constituents might attempt to sue their state or federal government, but they can only get a trial if the government waives its sovereign immunity and allows such suits. Warner v. US, for example, could be a claim for a tax refund wrongfully withheld or for damage caused to the Warner residence by a sonic boom from a US Air Force jet flying overhead.

Both civil law and criminal law exist within the common law legal system; however, this reference to civil law is not to be confused with a civil law system. The common law tradition is largely unique to England, the United States, and former colonies of the British Empire. Although differences exist among common law systems (e.g., most nations do not permit their judiciaries to declare legislative acts unconstitutional; some nations use the jury less frequently), all such systems recognize the use of precedent in judicial cases, whereas none of them relies on the comprehensive, legislative codes that are prevalent in civil law systems.

Civil Law Legal Systems

The main alternative to the common law legal system was developed in Europe and is based on Roman law, especially the Corpus Juris Civilis of Emperor Justinian, as later developed through the Middle Ages by medieval legal scholars. The acceptance of Roman law had different characteristics in different countries. In some, adopting Roman law resulted from legislative act; that is, it became positive law. In others, it was adopted by way of processing by legal theorists. Consequently, Roman law did not completely dominate in Europe. Roman law was a secondary source that was applied only as long as local customs and local laws lacked a pertinent provision on a particular matter. However, local rules, too, were interpreted primarily according to Roman law (it being a common European legal tradition, of sorts), with the result that Roman law also influenced the main source of law.

A second characteristic, beyond Roman law foundations, is the extended codification of the adopted Roman law, namely its inclusion into civil codes. The concept of codification evolved especially during the seventeenth and eighteenth centuries, as an expression of both natural law and the ideas of the Enlightenment. The political ideal of that era was expressed by the concepts of democracy, protection of property, and the rule of law. That ideal required the creation of certainty of law, through the recording of law and through its uniformity. So, the mix of Roman law and customary and local law ceased to exist, and the road opened for law codification, which could contribute to the aims of the aforementioned political ideal. Another factor that contributed to codification was that the notion of the nation state, which was born during the nineteenth century, required that law applicable to that state be recorded.

A civil law or code law system is one in which all the legal rules are in one or more comprehensive legislative enactments. During Napoleon’s reign, a comprehensive book of laws—a code—was developed for all of France. The code covered criminal law, criminal procedure, noncriminal law and procedure, and commercial law. The rules of the code are still used today in France and in other continental European legal systems. The code is used to resolve particular cases, usually by judges without a jury. Moreover, the judges are not required to follow the decisions of other courts in similar cases. As George Cameron of the University of Michigan has noted, “The law is in the code, not in the cases.” He goes on to note, “Where several cases all have interpreted a provision in a particular way, the French courts may feel bound to reach the same result in future cases, under the doctrine of jurisprudence constante. The major agency for growth and change, however, is the legislature, not the courts.”

Civil law systems are used throughout Europe as well as in Central and South America. Some nations in Asia and Africa have also adopted codes based on European civil law. Germany, Holland, Spain, France, and Portugal all had colonies outside of Europe, and many of these colonies adopted the legal practices that were imposed on them by colonial rule, much like the original 13 states of the United States, which adopted English common law practices.

One source of possible confusion at this point is that US civil law is separate from criminal law within the US common law system, but the European civil law system covers both civil and criminal law.

Civil law is the predominant system of law in the world, with its origins in Roman law, and sets out a comprehensive system of rules, usually codified, that are applied and interpreted by judges. Modern systems are descendants of the nineteenth-century codification movement, during which the most important codes (most prominently the Napoleonic Code and the Bürgerliches Gesetzbuch [BGB]) came into existence. Other types of legal systems differ significantly from the common law and civil law systems. The communist and socialist legal systems that remain (e.g., in Cuba and North Korea), for example, operate on very different assumptions than those of either English common law or European civil law. Islamic and other religion-based systems of law bring different values and assumptions to social and commercial relations.

Licenses and Attributions

Common Law from New World Encyclopedia is available under a Creative Commons Attribution-ShareAlike 3.0 Unported license.

Civil Law from New World Encyclopedia is available under a Creative Commons Attribution-ShareAlike 3.0 Unported license.

Legal Theory & Foundations and Law of Torts

Common Law and Civil Law Systems

Two legal systems exist within the United States: the common law system and the civil law system. Forty-nine of the fifty US states exclusively follow the common law system. Louisiana is the one state that recognizes common law and civil law systems. Despite the dominance of the common law system within the United States, it is important to understand the civil law system, as many foreign legal systems are based in civil law.

· civil law system—The civil law system is code based. The law-making body seeks to address specific areas of law through statute or codified rules. When a case comes before a court, the judiciary is charged with interpreting the codified rules when applying those rules to the facts of the case. This process is similar to that of the common law system. The difference lies in the effect of the judiciary's interpretation of the law. While the court's decision may be influential in future cases, its reasoning and interpretation of the law have little legal effect outside of the respective case. The judicial interpretation does not constitute precedent that binds the court (or any subordinate courts) in future trials.

· common law system—The common law system, in contrast, centers on the judicial interpretation of statutes. That is to say, courts interpret statutes to determine the intent of lawmakers in passing the law. This interpretation guides how the statute is to be applied in a given context. Appellate review of legal cases provides opportunity for the judiciary to write opinions explaining how the law should be applied. These opinions serve as precedent for the court and any subordinate courts within that jurisdiction. In Latin, this is known as stare decisis or "let the decision stand." The court's interpretation becomes the common law in that jurisdiction. In this way, the court develops a body of common law that applies alongside the statute.

Ask Yourself

· What do think are some of the advantages of the civil law system? What about the common law system? Try to identify some countries follow a common law system similar to that of the United States? Try to identify some countries that follow a civil law system similar to that of Louisiana.

Civil Law and Criminal Law

Do not be confused by the various uses of the word civil within the legal system. Civil law may refer to a system of law, but it generally refers to civil actions, which are legal actions between individuals. In this case, it means suing or bringing a lawsuit against an individual, a business, or a governmental body. Criminal law, in contrast, refers to the rules and procedures for enforcing those rules prohibiting "bad acts" of individuals within the governing body's jurisdiction. While civil actions seek compensation for losses or an order from the court restricting certain conduct, criminal actions seek to punish individuals for violating a criminal law. Often, an individual's actions will subject her to a criminal prosecution by the government as well as a civil action by an injured party.

Ask Yourself

· What are some types of criminal activity that are also civil causes of action? Can you think of any examples of criminal prosecutions that resulted in acquittal in a criminal trial but resulted in liability in a civil lawsuit?

· Anne-Marie is generally a likable person. One day while hanging out with her friends, she gets into an argument with Wilson. During the argument, he says some very offensive and slanderous things about Anne-Marie. Unwilling to take Wilson's verbal abuse, Anne-Marie sprays him in the face with a can of mace that she carries in her purse. Wilson falls to the ground in pain. Some bystanders see Wilson in pain and call the police and rescue squad. It turns out that Wilson suffers severe damage to his sight because of the caustic spray. Because of the incident, Anne-Marie ultimately serves 30 days in jail and is forced to pay a judgment to Wilson for $50,000. Is Anne-Marie's punishment a result of criminal law, civil law, or both?

Torts

A tort, in the legal context, means a wrong. More specifically, it is a civil wrong, as opposed to a breach of contract or other civil action. Individuals may be liable in tort for their own conduct and for the conduct of others.

Transcript

Types of Torts

There are three broad categories of torts:

· intentional torts—Intentional torts, as the name implies, are characterized by the mental intent of the tortfeasor. The tortfeasor undertakes an activity with either the desire to bring about an intended result or with the knowledge that the result is "substantially certain." When the action results in an identifiable harm or loss to a third party, it constitutes an intentional tort. If one person physically batters another person by punching him in the face. This is an intentional tort because the individual intended her actions and the probable result.

· negligence—Negligence is conduct by an individual that drops below a reasonable standard of care and causes harm to another person. Succinctly, an individual has a duty to act reasonably when interacting with others. When that individual fails to act reasonably and thereby causes harm to others, that individual is negligent. A person who is driving too quickly, following too closely, or not paying close attention may be negligent if her careless behavior results in an automobile accident.

· strict liability—Strict liability subjects an individual to liability for activity that causes harm to another without regard for her intent or the standard of care she shows in carrying out that activity. That is, simply undertaking the activity that results in harm is sufficient to make the actor liable. The injured party is not required to demonstrate the actor's intent or the level of care they exercised in undertaking the activity.

A person who deals in very hazardous material, has a vicious or wild animal, or takes part in the production or sale of an unreasonably dangerous product may be liable if her activity causes injury to someone. It does not matter that the person did not intend to harm anyone or that the person took extra precautions to not harm anyone. These activities alone are enough to subject the person to liability.

Ask Yourself

· Why do you think that torts are generally categorized based upon the mental state of the tortfeasor? Should the mental state of the tortfeasor affect the severity of the potential liability for the tort? Why or why not? How should the intent of the tortfeasor be compared against the result of the tort when determining the liability of the tortfeasor?

· Doug is speaking with his friend Annie about an unfortunate accident involving her pet dog. Her pit bull bit the mailman, apparently mistaking him for an intruder. The mailman is now suing Annie. Annie says that she is going to trial to contest her liability because her dog broke out of its cage and it wasn't her fault. Animal bites are strict liability torts in Annie's state. What does Annie need to know before going to trial?

Assault and Battery

Two commonly recognized intentional torts are assault and battery.

Assault is an action to place another person in immediate apprehension of a harmful or offensive physical contact. There are several elements to this tort. First, the individual must intentionally act and the action cannot be unconscious or inadvertent. Second, the individual witnessing the act must sense or apprehend immediate contact. Apprehension is more than fear. While the individual may also be scared, fear or intimidation is not required; rather, she only need be aware that a touching is likely to ensue. The apprehension of the touching is judged by a reasonable person standard. That is, would a reasonable person believe that physical contact is imminent. Lastly, the contact must be harmful or offensive. Offensiveness is judged based upon a reasonable person in the individual's situation.

For example, a person picks up a baseball bat and begins walking toward another person in a menacing manner. If the second individual reasonably believes that the first individual is going to hit him with the baseball bat, this is an assault. The second individual is in immediate apprehension of a harmful touching. The same situation could apply if the second individual believed that she would be touched inappropriately (such as groping of fondling), which would be considered offensive touching.

Battery is an illegal touching of another person. The touching is harmful or offensive and done without justification and without the consent of the person touched. A battery often accompanies an assault.

In the above example, actually hitting the individual with the bat or touching the individual in an unwanted sexual manner would be a battery.

Note that an individual can be assaulted but not battered (and vice versa). A battery without an assault occurs when the individual was not aware in advance or did not see the battery coming.

Ask Yourself

· Why do you think assault and battery are separated into different causes of action? Should one cause of action be more severe in liability than the other?

· Erin is very angry at Marshall. She walks up behind him and acts as if she is going to hit him with a baseball bat. Fortunately for Marshall, she decides against her plan before Marshall becomes aware. Still annoyed, however, she walks up to Marshal and slaps him in the face. Marshall did not expect to be slapped and was taken totally by surprise. If Marshall sues Erin, what causes of action will likely prevail?

Intentional Infliction of Mental Distress

The intentional infliction of mental distress upon another is a form of battery to the emotions. Like a battery, it is caused by intentional conduct that carries a strong probability of causing mental distress to the person at whom it is directed. Generally, the conduct must be very extreme or outrageous in nature to result in emotional distress. To recover for this tort, the plaintiff must demonstrate that the intentional conduct actually caused her mental distress that manifests itself physically. Intentionally exposing a person to extreme ridicule in front of a large crown may constitute such a tort.

Ask Yourself

· What type of conduct would you consider sufficiently extreme or outrageous to qualify as a battery on the emotions? Do you agree with the requirement that mental distress must also manifest itself through physical symptoms?

· Helen is shopping in the mall with her daughter, Penny. They are on the second floor of the mall looking over the railing at the large, central fountain when a stranger approaches Penny. The stranger picks up Penny and begins screaming at her. He then holds her over the railing and threatens to drop her into the fountain a floor below. Helen screams hysterically for help and begs the stranger to put her down safely on the ground. Some bystanders grab Penny and tackle the stranger to the ground. Helen is so emotionally distraught by the incident that she develops nightmares, insomnia, and begins seeing a therapist. Can Helen sue the stranger and, if so, for what? Explain.

Invasion of Privacy

Invasion of privacy is comprised of three principle types of invasion of personal interest:

· use of names or likeness—Individuals have a property interest in their name and physical image. As such, appropriating an individual's name or likeness for business use without her consent violates her property rights. Before using anyone's picture or name, a business must obtain a proper release from that person to avoid possible liability. For example, using a candid picture of Ann smiling in an advertisement for a local business without her consent violates her personal rights.

· invading physical solitude—Individuals have an expectation of privacy in their home and within other personal spaces. Viewing or monitoring such places is an invasion on the individual's physical solitude. Entering a person's home, spying through windows, illegal wiretapping, and persistent unwanted telephoning all may constitute an invasion of privacy.

· disclosure of private information—Disclosure of highly objectionable, private information about someone may be an invasion of that person's privacy. Generally, the information must be obtained by an individual who owes a duty of confidentiality to the individual whose rights are violated. In some cases, the information must be obtained without the person's consent. A personal or professional relationship could give rise to a confidential relationship. A nurse disclosing someone's private medical information could constitute an invasion of privacy. The tort generally requires that the private information result in disclosure to the public at large.

Ask Yourself

· Do you agree with the idea that an individual has an ownership interest in her name or physical likeness? Does it matter to you the nature of the likeness? Should a drawing or painting of an individual receive the same protections as a photograph or video? Why or why not?

· Judy owns a supermarket. She is advertising the sale of basketballs. She puts a small caption in her weekly newspaper flyer that uses an image of Steve Curly, a professional basketball player. Is there a legal issue?

· Do you think that an individual should have a right to prevent individuals from spying or eavesdropping on them in private places? What amount of effort should be required to constitute an invasion and how would you measure it? Should an individual have to show damages to bring an action for invasion of physical solitude?

· Scott is walking by Karla's house and sees her through the window. She forgot to close the blinds and is walking around her bedroom in a state of undress. Scott is very curious and makes an effort to get a better view. He even climbs the tree growing beside the street on public property to get a better view. Has Scott committed a tort against Karla?

· What type of information should be considered private for purposes of an invasion of privacy? Why? Should it matter whether there is a relationship between the individual whose information is disclosed and the discloser?

· Deshaun works in a pharmacy as a technician. One day, Dolly comes to the window and requests to fill a prescription. The prescription is for a a medicine commonly used to treat a common venereal disease. Deshaun does not like Dolly, so he immediately gossips to friends about Dolly's medication. The friends post the information on a popular social media site and the news quickly travels back to Dolly. Has Deshaun committed a tort?

False Imprisonment

False imprisonment is the wrongful detention of a person without that person's consent. The detention does not have to involve physical force. It can involve a threat of physical force or the apprehension of harm for failure to remain in a specific location. The key aspect is that the detained individual must reasonably believe that she cannot leave the detention without unjust repercussions. The detention area must be relatively defined.

This situation often arises when an agent of a retail establishment detains a suspected shoplifter. If the individual is not actually a shoplifter, the detention is wrongful and can constitute false imprisonment.

Ask Yourself

· What type of action do you believe would reasonably make a person believe that she is detained without the ability to leave? Why?

· Everett is a security guard at a local clothing store. He believes that a customer is shoplifting. He asks the customer to step into the back room of the store to interrogate her. Upon arriving in the back room, the customer says that she feels uncomfortable and wishes to leave the store. Everett tells her that the police are coming and that she cannot leave until they arrive. Under what conditions has Everett committed a tort?

Malicious Prosecution

Malicious prosecution is wrongfully subjecting someone to the prosecutorial process. This tort often arises from causing someone to be arrested or formally charged through intentional false swearing or malevolent pretenses.

For example, you cause the police to arrest Tom simply to harass him. You do so by stating to the police that he stole your computer, when this is not true.

Ask Yourself

· How would you propose balancing the objective of protecting the wrongfully accused against dissuading someone from pressing charges against someone who committed a crime against them

· Autumn cheats on her boyfriend with Isaac. She is very embarrassed when everyone, including her boyfriend, learns of her actions. To cover up her infidelity, she accuses Isaac of improperly taking advantage of her while she was intoxicated. She informs the police who proceed with pressing charges against Isaac. When pressed to take a lie detector test, Autumn comes clean and admits her false accusation. What are Isaac's options for suing Autumn?

Trespass

The tort of trespass is similar to the crime of trespass. It involves physically entering onto someone else's land without consent or remaining there after being asked to leave (consent is revoked). The difference between the civil action and the criminal charge is that a tort requires the existence of damages to be actionable.

In addition to personally entering someone's land, trespass can occur by projecting something (such as pollution or garbage) onto another's land without consent.

Ask Yourself

· How does the civil tort of trespass relate to constitutional protections? How do you feel about trespass and the requirement for damages to bring a civil action? Can you think of scenarios where trespass could take place with no damages, but a civil action is preferable to pursuing criminal charges?

· Jason is in a local bar and music venue listening to a popular musical group. He drinks too much and becomes intoxicated. The bar bouncers kindly asks Jason to leave, but he refuses on the grounds that he rightfully paid the cost of entrance. If Jason refuses to leave, has he committed a tort?

Conversion

Conversion is a civil cause of action for taking another person's property without her consent. It entails the wrongful exercise of dominion (power) and control over the personal (nonland) resources of someone else. In doing so, a person violates the owner's lawful right to exclude others from her resources. The deprivation may be temporary or permanent, but it must constitute a serious invasion of the owner's legal rights.

Stealing something from an employer is conversion, as is purchasing something that has been stolen. Failing to return something at a designated time, delivering something to the wrong party, and destruction or alteration of someone else's property also constitutes conversion.

Transcript

Ask Yourself

· What level of interference with another person's use and enjoyment should be considered conversion? How does the nature of the deprivation affect your opinion? Does the length of deprivation affect your opinion? Should the interference be intention? How would you balance the rights of an innocent transferee of the property against the rights of the original owner?

· Ervin purchases a luxury watch from Carl. Carl claims to have received the watch as a gift. In reality, Carl stole the watch from Todd. Todd learns that Ervin has possession of his watch, what are his options for securing its return?

Defamation

Defamation is the publication of an untrue statement about another that subjects that individual's character or reputation to contempt or ridicule. Publication simply means that the untruthful statement was told or made known to at least one other person.

Individuals and businesses can sue for defamation. In business, false accusations of dishonesty or inability to pay one's debts frequently lead to defamation suits. Approximately one-third of all defamation claims are brought by employees against present and former employers.

Types of Defamation

There are three general types of defamation:

· slander—Slander is spoken or oral defamation.

· libel—Libel is recorded defamation (i.e., written) or defamation over the television or radio.

· disparagement—Disparagement is defamation of another person's trade or business prowess, product, or service.

Ask Yourself

· Why do you think the government recognizes a legal cause of action for defamation? Should a business's reputation be treated differently than an individual's reputation? Why or why not? Should verbal defamation be treated differently than recorded defamation? Why or why not? Should defamatory statements be treated differently depending upon how they are communicated (written, spoken, text, song, video, etc.)? Why or why not? Why do you think actions for defamation are common in the employment context? Should employment related defamation be afforded greater or lesser protection that personal character defamation? Why or why not?

· Marvin gets into an argument with his supervisor and quits his job. He lists his employer on his résumé. When a potential employer calls his former employer to verify his employment, his former supervisor says all sorts of harsh and arguably untrue things about Marvin. Marvin does not get the job. Does Marvin have a legal action against his former employer?

Defenses to Defamation

There are several recognized defenses to a defamation claim. First, if the allegedly defamatory statement is true, it is an absolute defense. Second, a communication may be privileged under the law and specifically exempted from defamation actions.

In most circumstances, statements made by legislators, judges, attorneys, and those involved in lawsuits (in court or in session) are privileged.

Ask Yourself

· Do you think defamation should extend to truthful statements in some situations? Should truthful communications that are presented in a way to create a false impression about someone be defamatory? Why or why not? How do you feel about certain forums being privileged or exempt from defamation actions? What are the arguments for and against such privilege?

· Dora learns from Elvis that Sandra has a venereal disease. While this is true, Dora and Elvis are incorrect about the specific disease. When Dora incorrectly tells another person that Dora has a specific venereal disease, has she committed a tort?

First Amendment Considerations

Special rules apply to defamation of celebrities and public figures and defamation by the news media. The media is not liable for the defamatory untruths they print unless the plaintiff can prove the untruths were published with "malice" (evil intent that is the deliberate intent to injure) or with "reckless disregard for the truth." Likewise, for a celebrity or public figure to recover for defamation, she must demonstrate that the defendant defamed her with malice or with reckless disregard for the truth.

Ask Yourself

· Do you believe that defamation laws violate the 1st Amendment? Why or why not? How should the rights of individuals against defamation be balanced against individual freedom of speech? Do the higher standards for defamation against celebrities, public figures, and the media effectively balance those rights? Why or why not?

· Donald is running for political office. He routinely says things about his opponents that are not true. Many of the statements are very offensive and attack the opponent's personal character. Under what conditions could Donald be liable for his statements?

Fraud 

Fraud is the intentional misrepresentation of a material fact that is justifiably relied upon by someone to his or her injury. The false statement inducing the other party's misunderstanding must regard a material fact about the prospective transaction. Fraud often involves intentional misrepresentations regarding ownership of property or one's financial status.

Fraud may be an intentional failure to disclose a material fact that induces another into action which results in her harm. This may be the case when a legal duty to disclose the material fact exists.

Lying about assets or liabilities in order to get credit or a loan is a common form of fraud.

Ask Yourself

· How do feel about the requirement that fraud be intentional? Should a misrepresentation that is reckless and unverified be considered fraudulent, even if it is not intentional? Why or why not?

· Daryl is selling a poster bearing the signature of a known celebrity athlete. Daryl advertises that the poster is 15 years old and was signed when the athlete was a rookie. In reality, the poster was signed recently, following the athlete's retirement. If someone buys the poster based upon Daryl's representations, is there a tortious act? Why or why not?

Intentional Interference with Economic Relations

This is a tort based in common law rather than statute. There are several categories of conduct that may violate common law rights of individuals:

· disparagement—This is an untrue statement about someone's business acumen, product, or service. This tort may be addressed as defamation; however, some states lack a statute or common law protecting commercial rights against defamatory statements.

· interference with contractual relations—This tort occurs when a non-party to a contract knowingly induces a party to the contract to fail to honor or breach the agreement. This situation often arises when one company raids another for employees. The raiding company knowingly induces employees to breach their employment contracts with their current employer.

· interference with prospective advantage—This cause of action entails a situation in which there is a business relationship between the plaintiff and a third party. The defendant then acts in a way intended to disrupt the relationship. This conduct is done not for personal advantage but with the purpose of harming the plaintiff. The plaintiff may bring an action to recover the losses or damages sustained. A third party intentionally creating distrust between a supplier and vendor to harm the vendor may constitute an illegal interference.

· wrongful appropriation of business interests—This tort arises when a fiduciary breaches the duty of loyalty and appropriates someone else's intellectual property rights, such as patent, trademark, copyright, trade secret, or good will. This type of conduct is often addressed in non-compete and non-disclosure agreements. These agreements establish a contractual right. This is in addition to any common law rights to seek redress in tort for such conduct. An employee downloading an employer's client list (that is a trade secret) with the purpose of opening her own business would constitute wrongful appropriation.

Ask Yourself

· How do you feel about the tort of intentional interference with contractual relations? Does the tort conflict with valid business practice? Why or why not? Who do you think this cause of action is meant to protect?

· ABC, Inc., is a competitor of 123, Inc.? ABC knows that 123's contract with Supplier Corp is instrumental to its business operations. ABC offers Supplier Corp a substantial sum of money to breach its contract with 123, Inc. ABC does not plan on doing business with Supplier Corp. What are 123's legal options and why?

Licenses and Attributions

Business Law: An Introduction, by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC. 

The video Torts Defined has been adapted with permission from Jason M. Gordon. © 2016, Business Professor, Inc.

The video Conversion has been adapted with permission from Jason M. Gordon. © 2016, Business Professor, Inc

Legal Responsibilities of Agents and Employees

Agency law is a component of civil law and deals with the legal relationship by which one person acts on behalf of another. The agent is the person who acts on behalf of the principal to do something the principal has delegated the agent to do, which the principal him or herself is legally permitted to do.

The creation of an agency relationship gives rise to both rights and duties of the agent and the principal, as well as the potential for liability to each other and to third parties. Principals may be held liable by third parties for the acts of their agents under certain, but not all, circumstances. The potential liabilities a principal has to third parties for the agent's acts often depend on whether the agent is an employee or an independent contractor. Principals face potentially more liabilities to third parties for the acts of their employees than they do for the acts of their independent contractors.

Resources

· Agency and Liability

Agency and Liability

Agency law concerns the legal relationship by which one person acts on behalf of another. This resource will examine the agency relationship and the legal duties owed by principal and agent. It will focus on the scope of the agency relationship—particularly in the context of the employer-employee relationship. It will introduce the concept of vicarious liability and provide the elements necessary for a principal to be held liable for the actions of the agent. This topic will include liability for contracts entered into by the agent and torts committed by the agent.

What Is an Agency?

An agency relationship is one in which a party acts on behalf of and with the authority of another party. The principal appoints or authorizes the agent to act on her behalf. Thus, she is responsible for the actions of the agent taken in furtherance of her duties or per the instructions of the principal. The agent will interact with third parties on behalf of the principal. The agency relationship requires an understanding of the relationship between principal and agent, agent and third parties, and the principal and third parties’ roles, responsibilities, and rights.

For example, I hire Betty to negotiate a business deal on my behalf. I am the principal and Betty is my agent for this purpose. Betty will act as my representative in dealing with the third parties to this business deal.

Types of Agents

The principal will lay out the scope of the agency, including the responsibilities and limitations of the agent. Agents generally fall into three categories:

· limited agent—A limited agent has a special purpose and limited authority to act on behalf of the principal. Unless specifically limited by the principal, actions done in furtherance of that purpose are within the scope of the agent’s authority. For example, I hire a real estate agent to represent me in the purchase of a business. She is my limited agent for that purpose. Her authority to act on my behalf is limited to this situation.

· general agent—A general agent has broad authority to act on behalf of the principal. The scope of the agency is not limited to a special purpose. For example, Arthur is my employee. He serves as operations manager. As such, he is my general agent with regard to all aspects of operations falling under his responsibility. His authority to act as my agent is not limited to a specific task; rather, it is pursuant to his responsibilities in his position.

· independent contractor—Agency law considers an independent contractor to be a special form of agent of the principal. The independent contractor is hired to perform a service for the principal but is generally not under the direct control or supervision of the principal. In this way, the agent has very limited ability to represent or act on behalf of the principal outside of the context of the services contract.

Numerous subcategories of agent exist within these broader categories. For instance, an agent coupled with an interest is a type of special agent who earns compensation through performing her agency duties (rather than receiving compensation directly from the principal). A sales agent who receives a commission on sales may be an agent coupled with an interest. This type of agency is subject to contract rules and cannot be terminated without violating the legal rights of the agent or principal.

Other common categorizations of agents include co-agents and subagents. Co-agents are multiple agents who serve a single principal for the same purpose. Subagents are authorized agents of an agent.

Ask Yourself

· Why do you think there is a distinction between a general and limited agent? How should the authority of a limited agent be interpreted? What should be the limits placed upon the authority of the general agent?

· Erin is starting an interior design firm. She hires Ann as a senior designer, and Rachel as a design assistant. She hires Rita to handle her bookkeeping and Patricia to handle her business setup and legal matters. What is the status of each of these individuals (employee, independent contractor, general agent, or limited agent)?

Employee vs. Independent Contractor

An employer hires an employee to work on behalf of the employer as part of or in support of the business’s core functions. The employee generally works exclusively for the business in the functions for which she is hired. The employer exercises extensive control over the nature, time, and manner of work carried out by the employee. As such, the employee is a general agent of the business to the extent of her authority in the position.

An individual working on behalf of an employer does not have to be paid to be considered an employee. An unpaid person may be a “gratuitous employee.” This may be the case when individuals are volunteering for nonprofit ventures or working as part of an internship.

For example, ABC Corp hires me as an internal accountant. I report to ABC Corp from 8 a.m. to 6 p.m. five days per week. I work on any and all accounting functions assigned to me by my supervisor.

An independent contractor is not an employee; rather, she or it is a separate business that is hired to perform services for or on behalf of another person or business. One way of thinking of an independent contractor is that she has her own business that services the employer as a client or customer. The employer does not directly control the manner and method by which an independent contractor carries out her duties. Also, an independent contractor generally has more than one customer or client. As such, the independent contract is only a limited or special agent of the principal employer.

For example, I have my own professional accounting practice. I prepare the tax returns for any business or individual who pays me to do so. I do not have any employees. ABC Corp hires me to prepare its annual tax return. I promise to have the return completed within 1 month. I will invoice ABC Corp for my services. I am not an employee of ABC Corp. I am an independent contractor who is hired to perform a specific function for a limited amount of time. While I have a projected deadline, ABC Corp does not control the nature, time, and manner of the services I perform.

This distinction is important for determining a principal’s liability for the agent’s actions. Generally, absent specific instructions to do a task leading to liability, an employer is not liable for the actions of an independent contractor taken on behalf of the principal.

There are exceptions where an independent contractor may subject an employer to liability for her actions. This is the case when the work performed is inherently dangerous in nature; the tasks performed for the employer are illegal; the work is nondelegable; or the employer ratifies the contractor’s actions. A separate cause of action may exist if the employer was negligent in selecting a contractor to perform the duties. That is, she failed to exercise reasonable care in selecting a particular contractor. This may be the case where past performance demonstrated the contractor was unsuitable for the task.

Ask Yourself

· Why do you think employees have a different agency status from independent contractors? Is there any reason or justification for treating employees and independent contractors similarly for agency purposes?

· Donald drives for Super, a company that provides a network for drivers to pick up and drop off customers who need a ride. The service is very similar to a taxi service. The individuals driving for Super have their own cars and their own insurance. They work whenever they like. The driver logs into an application that notifies her when a Super customer needs a ride. She confirms that they will provide the ride and she is off. The passenger pays Super directly and Super later remits payment to the driver. What factors in this scenario would be used to determine whether Donald is an employee or an independent contractor?

Types of Principals

Principals are categorized based upon whether their identity is disclosed to third parties with whom the agent interacts on their behalf:

· disclosed principal—A disclosed principal’s identity is known to third parties dealing with the agent.

· partially disclosed principal—A partially disclosed principal is known by third-parties to exist, but her exact identity is unknown. This type of relationship exists when there is some benefit to the principal to remain anonymous to third parties interacting with the agent.

· undisclosed principal—The existence of an undisclosed principal is unknown to a third party. The third party believes that she is interacting only with the agent.

These categorizations of principal are important in determining the rights and duties of the principal, agent, and third party.

Ask Yourself

· How do you feel about the ability of an agent to act on behalf of a undisclosed and partially-disclosed principal? Is this fair to a third party? Why or why not?

· Winston is a special agent of ABC Corp hired to negotiate the purchase of intellectual property. He seeks to purchase a premium domain name from Alice. Alice is unaware that Winston wants to buy the domain name for some third party, but does not know that he works for ABC. What type of agent is Winston? How would it affect Winston’s status if Alice found out that he works for ABC? What if she did not know he was buying the domain name for a principal?

Principal-Agent Relationship Requirements

An agency relationship is created in the following manners:

· express agreement—A principal and agent may expressly agree to form an agency relationship. The agreement can be oral or in writing. The principal must simply confer the authority upon the agent to act on her behalf. The subject matter of the agency relationship must be legal. The agency has the express authority granted in the agency agreement and the implied authority to undertake tasks incidental to that objective. If the duties of the agent include executing a contract subject to the statute of frauds, the agency relationship may need to be in writing to be enforceable. An express agency relationship is often created pursuant to a legal document known as a power of attorney. The power of attorney may create a general or special agency relationship.

· implied agency—An agency may be implied from the facts or circumstances surrounding an individual’s actions on behalf of another. If the principal acts in a way that demonstrates an intent for an individual to act on her behalf, this may imply an agency relationship. The parties to an agency relationship do not need to understand the law of agency or understand what it means to be a principal or agent.

· ratification—Ratification is a contract principle. If an individual undertakes actions on behalf of another, these actions may be outside of any express or implied authority. If, however, the principal acknowledges and accepts the agent’s actions, this is known as “ratification” of the agency relationship. The principal ratifies the agent’s actions, after the fact. Agency by ratification is only possible when the principal is fully disclosed.

· by estoppel—If a third-party reasonably relies on an agent’s representation that she has authority to act on behalf of the principal, the principal may be bound by the actions of the agent. Generally, the principal must act or fail to act in a manner that causes a third party to reasonably believe that an agency relationship exists, when in fact there is no agency. Agency by estoppel is based upon principles of fairness. It would be unfair to detriment a third party who reasonably believed that the agent had authority to act on behalf of the principle, and the principal was the source or cause of that belief. Agency by estoppel is only possible with fully-disclosed principals. For example, Bill is James’ agent. James terminates the agency relationship. Nonetheless, unbeknownst to James, Bill continues to transact with third parties on James’ behalf. James fails to notify third parties of Bill’s termination. James may be bound to any agreement entered into by Bill.

· by necessity—Agency by necessity arises when one party makes a decision on behalf of another person who is unable to do so. The decision must be essential in nature and it must be in the interest of the principal in making that decision. As such, the law will impute a de facto agency relationship where no actual agency exists. For example, Bill is hired to deliver Tom’s goods. He drops the goods off at the fulfillment center. The center says that there is no contract in place and intends to reject the goods. Tom is out of country and cannot be reached. The goods will spoil if not accepted. Bill signs the warehousing agreement on Tom’s behalf.

Ask Yourself

· How do you feel about the ability to form an agency relationship without a principal expressly authorizing the agent to act on her behalf? What intent should be required before a court can find that an implied agency exists? What constitutes ratification of an agent’s actions by a principal? When is reliance upon an agent’s representations about her authority reasonable? Should a third party be required to verify an agent’s actual authority? How great must the need be for a court to find an agency by necessity?

· Terrence hires Joe as a general manager of his business. Joe routinely purchases supplies for the business, though this authority is not in his job description. Terrence never gave Joe the authority to enter into these purchase agreements, but he routinely acknowledges Joe’s actions and keeps the purchased goods. When Terrence falls sick, Joe handles all store operations, including signing some major purchase orders that Joe generally signs. These purchases were necessary to continue business operations. One of the purchase orders, however, is for the wrong type of goods. The error potentially costs Terrence’s business thousands of dollars. When Terrence recovers and learns of the purchase order, he is furious and refuses to honor the purchase agreement. What are the arguments for and against Terrence’s liability for Joe’s errant purchase order?

Duties of a Principal?

Generally, a principal owes the following duties to the agent:

· duty to compensate—An agency relationship may be paid or gratuitous. The terms of an agency may be laid out in the agency agreement. If the agency agreement does not indicate the terms of compensation, the principal is obligated to provide the agent with reasonable compensation. For example, default rules in a relationship with a sales agent dictate that the agent will earn a reasonable commission on sales induced or completed.

· duty to reimburse—The principal must reimburse the agent for a reasonable amount expended in carrying out her duties. Reasonable reimbursement includes the cost of travel, meals, lodging, incidental expenses, etc.

· duty to indemnify—Generally, a principal must indemnify an agent for liability incurred in the performance of her duties. This generally arises when the instructions of the principal subject the agent to liability to a third party. If an agent exceeds or acts outside of the scope of her authority, the principal may be relieved from the duty to indemnify. If the principal later ratifies the actions of the agent, she will incur the obligation to indemnify the agent against liability.

Ask Yourself

· How do you feel about the default duties owed by a principal to an agent? Why do you think these are the default standards? Do you believe there should be any other or additional duties of the principal?

· Ethan hires Naomi to serve as his buying agent. The employment agreement is very short and lists only Naomi’s primary responsibilities and compensation. Pursuant to her job description, Naomi will make purchases for the business but will not disclose that she is an agent of the business. One of her business deals goes bad and a client sues her for breach of contract. What are Ethan’s responsibilities in this situation?

Duties of an Agent

Agents generally have the following duties to the principal:

· loyalty—An agent has the duty of loyalty to act for the principal’s advantage and not to act to benefit herself at the principal’s expense. An agent is expected to refrain from undertaking actions personally that would conflict with the purpose of the agency. An employee has a lower duty of loyalty with regard to opportunities that are outside of the employee’s duties or responsibilities to the employer. Generally, this means that an agent may not simultaneously represent the principal and another party to a transaction.

Employees are agents of the employer. If an employee does not have permission, she violates a duty of loyalty by undertaking activities for a third party that are similar to the duties of the employee in the agency relationship. This is seen as competing with the employer. If, however, she performs services unrelated to or not the type of services the employer would seek to provide to the client, she does not a breach a duty by providing those services. This is true even if the employee provides those services to a client of the employer.

For example, I work for ABC Corp as a professional service provider. A potential client comes in to seek the services of ABC Corp. I cannot compete with ABC Corp by trying to convince the client to pay me to serve them personally rather than hire ABC Corp. I also have a side job selling supplies to construction contractors. This is a completely different line of business from ABC Corp. If it does not conflict with ABC Corp’s services, I can offer my supplies for sale to the client without violating my duty of loyalty.

· duty of care—An agent has a duty to exercise due care and diligence when carrying out the responsibilities of the agency. This is often referred to as a duty to not act negligently in carrying out the principal’s affairs. For example, I work for ABC Corp as an accountant. I represent ABC Corp in every action I undertake as part of my employment, such as preparing client taxes. I have a duty to ABC Corp and the client to exercise reasonable care in carrying out my job duties.

· information and disclosure—The agent has a duty to protect all confidential information of the principal, such as trade secrets. Further, the agent has a duty to keep the principal fully informed of all material information acquired as a result of the agency relationship. For example, I am a sale agent for ABC Corp. I receive an offer from a customer to undertake a joint venture with ABC Corp. I have a duty to transmit this information to ABC Corp. I acquired this information as a result of the agency relationship, and it is obviously outside of my unilateral decision-making authority.

· obedience—The agent has a duty to obey the reasonable instructions from the principal. For example, I work for ABC Corp selling insurance. ABC provides me detailed training and instructions on what types of policies to write and the client area that I can serve. I have a duty to obey these instructions as agent of my employer.

· accounting—The agent has a duty to account to the principal for monies handled. Further, the agent may have a duty to account to third parties for whom money is handled. This includes situations where an agent collects too much money from a third party and is still in possession of those funds or when an agent intentionally collects funds that belong to the third party and the principal is undisclosed. For example, I am a financial advisor for ABC Corp. I am responsible for reporting and keeping accurate records regarding all money or value transferred or received in carrying out my job duties. Note that the principal-agent relationship is a fiduciary or trust-based relationship. The agent may have any other duties as established in the agency agreement.

Ask Yourself

· Should the duty of loyalty and care be the same for an agent in every situation? Why or why not? Should these duties vary depending upon whether the agent is a limited or general agent? Why or why not?

· Carol is an employee of Rob’s accounting firm. She is a CPA, but she has been thinking of breaking away from the firm and starting her own practice. One day, a representative from a large corporation walks into the CPA firm and inquires about accounting services. Carol is strongly considering offering her personal services to the representative’s firm? Are there any issues in this situation?

Contractual Obligations

A principal is generally bound to third parties pursuant to the contracts entered into by the agent on behalf of the principal. This means that the principal is responsible for any obligations incurred by the agent that are within her authority. An agent has varying sources of authority when dealing with third parties.

· actual authority—Actual authority is the express authority from the principal allowing the agent to enter into obligations (contracts) on her behalf. It can be specific instructions to do so or generally included in her job duties. The principal is bound to third parties if disclosed, partially disclosed, or undisclosed. For example, Arnold is an employee of ABC Corp. He signs an employee agreement indicating that he will sell products manufactured by ABC Corp directly to retailers. He has express authority to enter into any contracts with retailers for the sale of ABC-manufactured goods.

· implied authority—Implied authority concerns the authority to enter into obligations that a reasonable person would imply from the agent’s position, title, or past course of dealings. If an employee has the title of vice president, it implies a great deal of authority to act on behalf of the business. Further, if an employee entered into a previous contract on behalf of the principal, it may imply that she can enter into similar contracts in the future. This principle can only apply to disclosed and partially disclosed principals. There can never be implied authority to act on behalf of an undisclosed principal. For example, Beth is hired by ABC Corp with the title of Senior Sales Manager. 123 Corp seeks to purchase a shipment of supplies manufactured by ABC Corp. Even if Beth is expressly prohibited in her employment agreement from entering into direct sales agreements, it is reasonable for a retailer to believe that a person with her title has that authority. If a retailer is unaware of Beth’s limitations and Beth signs a sales contract on behalf of ABC Corp, ABC Corp will be bound by the contract. Beth may be liable to ABC Corp, but her title implies this authority to transact with third parties in this manner.

· apparent authority—Apparent authority arises from the reasonable representations of the agent to third parties. That is, when the agent represents that she has authority to enter into a contract on behalf of the principal, her actions will bind the principal if a reasonable person would believe those representations. The 3rd party’s belief must generally result from some action or inaction by the principal. This principle applies to disclosed and partially disclosed principals. There can be no apparent authority if the principal is not disclosed to the third party. For example, Gina works for ABC Corp. She has a generic title of manager. She is limited in her ability to sign purchase agreements on behalf of ABC Corp. She does, however, routinely negotiate the terms of purchase agreements with vendors. She then transmits the purchase agreements to her boss who signs them. The vendor never deals with anyone other than Gina. If Gina decides to start by personally signing the purchase agreement, ABC Corp will likely be bound by the contracts. By signing the agreements, she is representing to vendors that she has authority to do so. It is likely reasonable for vendors to believe that she has this authority, as Gina is the primary point of contact for negotiating the agreements.

· ratification—While an agent may bind the principal to the extent of her authority, the principal is also bound if she ratifies the conduct of the agent that is beyond her express, implied, or apparent authority. That is, if the principal accepts or takes advantage of the agent’s actions, she impliedly ratifies those actions as taken on her behalf. In such a situation, this expands the implied and apparent authority of the agent when undertaking future actions. Ratification can only take place if the principal is disclosed or partially disclosed.

In each of the above situations, a disclosed principal is liable to third parties dealing with the agent. If the agent exceeds her express authority, the third party may still have the ability to back out of the contract. The third party is generally bound by the contract if the principal ratifies the agent’s conduct before the third-party finds out about the lack of authority and withdraws.

Ask Yourself

· How do you feel about the doctrines of implied and apparent authority? Should an agent have the ability to bind an agent in contract when the agent does not have actual authority to do so? Why or why not? Should the standard be different for limited and general agents? Why or why not? Should the onus be on the employer to protect itself by informing third parties of the limited authority of the agent, or should the onus be on the third-parties to verify the authority of the agent? What is your justification for this opinion?

· Kristy is an operations manager for ABC Corp. She has authority to enter into agreements for operational supplies. She does not, however, have authority to enter into sales agreements with retailers of ABC Corp products. In a couple of instances she is called upon to assist in putting together custom sales orders for large retailers. In these situations, Kristy was the primary point of contact with the retailers. 123 Corp learns about ABC Corps products through one of the retailers who previously worked with Kristy. 123 Corp contacts Kristy about putting together a custom sales package. What is Kristy’s authority to deal with 123 Corp.? If Kristy enters into an unauthorized agreement with 123 Corp, under what theory might ABC Corp be bound by the contract? Why?

Agents’ Liability

An agent acting within the scope of her authority is not liable to third parties on obligations entered into on behalf of the principal. Even if the agent exceeds her express authority, her implied authority may bind the principal to the agreement and relieve her from any contractual liability to the third party. The important point is that the agent must act on behalf of the principal and disclose that relationship to the third party. If the agent is acting on behalf of a principal, but fails to disclose her agency status, it may subject her to liability to the third party. In some cases, it may also serve to bind the principal once the agency relationship is determined.

If the agent goes beyond her express authority, she may be liable to the principal for any obligations binding the principal to third parties. That is, the principal may be able to recover damages suffered because of the agent exceeding her authority.

For example, I work for ABC Corp. I enter into an agreement with 123 Corp on behalf of ABC Corp. I am not personally obligated to perform the contract. If I fail to tell 123 Corp that I work for ABC Corp (123 Corp believes that I have my own business), I am liable to 123 Corp if ABC Corp does not perform the contract. ABC Corp is obligated to perform the contract if my entering the contract was in my express, implied, or apparent authority. If I did not have express or implied authority, but 123 Corp realized I was acting on behalf of an agent, ABC Corp may be liable if I had apparent authority. In such a situation, ABC Corp may be able to sue me for any losses suffered.

Ask Yourself

· Should an agent who exceeds her express authority be liable to the principal? Why or why not? Should she be liable to the third-party? Why or why not?

· Practice Question: Agnes is an agent of Emory Corp, a technology company that sells subscriptions to its cloud-based software. Agnes has the general title of manager, but has no express authority in her employment agreement. Agnes routinely negotiates sales agreements with large companies that are clients of Emory Corp. Agnes enters into an agreement with Tech, LLC that is far larger than any deal Agnes previously negotiated. The agreement is very poorly negotiated and it will cause a huge loss for Emory Corp. What is Emory Corp’s obligation? What are Agnes’s potential obligations and liabilities?

Principals’ Liability

An individual is always liable for her own conduct. Whenever an individual is held liable for the actions of another, this is known as vicarious liability. In the context of agency, the agent is acting vicariously for the principal. A principal is responsible for the tortious acts of an agent pursuant to a doctrine known as respondeat superior. More specifically, an agent may create legal liability for the principal for actions taken by the agent “within the scope of the agency.” In such cases, the principal and agent are “jointly and severally” liable for the harm caused by the agent’s conduct. An act is within the scope of the agency if the purpose behind the action taken is to advance the interests of the principal. As such, if any act taken by an employee in an effort to advance the employer’s interest is a tort, the employer may be liable for that conduct.

Generally, intentional torts are generally not considered to be within the scope of an employee’s duties or employment. As such, a principal will not be liable for the intentional torts committed by an employee unless the principal ordered or condoned the tortious conduct. Even if a tort is within the scope of employment, it will not relieve the agent from personal liability for her actions.

For example, I am an employee of a corporation. While carrying out my duties, I act negligently and harm a third party. The third party sues the corporation and me. The corporation will be liable for my negligent act because I was acting within the scope of my job responsibilities when I committed the tort.

Ask Yourself

· How do you feel about a business being held liable for the tortious activity of its agents (employees)? Does it matter if the tort is negligence, intentional, or strict liability? How do you think the court should define “within the scope of employment”?

· Mitchell is an employee of Big Corp. His primary responsibilities are to deliver company goods to retailers. When out driving to a retailer’s location, Mitchell is following to closely and accidentally rear ends Bertha. Bertha sues Mitchell for negligence. What is the likely result for Big Corp?

Frolic and Detour

A “frolic and detour” is a general defense to vicarious tort liability. It states that the principal should not be liable for the tortious acts of the agent when the agent is acting outside the scope of her employment and for the benefit of someone other than the employer. Plainly stated, an employee who is on a frolic or detour is no longer acting for the employer. 

A frolic is when an employee abandons the employer’s business objectives and pursues personal interests. A detour occurs when an employee substantially deviates from an employer’s instructions or rules. Generally, both a frolic and detour must be present to relieve an employer from liability for the agent’s actions.

For example, an employee providing services for her employer at the location of a client is an agent acting within the scope of her employment. If, however, the employee takes the company vehicle and goes on a personal errand that is not authorized, the employee is likely outside the scope of her employment. Suppose while running these errands she gets into an automobile accident that is her fault. The employer would be able to argue that the deviation from her duties as employee was a frolic and detour and relieved her of liability for the employee’s tort.

Ask Yourself

· How do you feel about the doctrine of respondeat superior? Should a principal be held liable for the tortious acts of an agent if committed within the scope of employment? Why or why not? How would you define scope of employment? Does it matter to you if the agent was also acting in her personal interest when committing the tort? In your opinion, how much of a deviation from her job duties must an employee vary in order for it to be considered a frolic and detour? Can you think of any situations in which a frolic or detour should still subject a principal to liability?

· Mitchell is an employee of Big Corp. His primary responsibilities are to deliver company goods to retailers. When out driving to a retailer’s location, Mitchell decides to stop by his house and have lunch. Big Corp has a strict policy against taking work trucks home or using company trucks for any purpose other than delivering Big Corp products to retailers. When backing out of his driveway, Mitchell hits Tom who is out jogging. Tom suffers injuries and sues Mitchell and Big Corp. What will Big Corp have to show to defend the action for Mitchell’s negligence? What facts in this situation may hinder Big Corp’s defense?

Termination of Agency Relationship

The establishment, duration, and termination of the agency relationship is generally governed by the agreement between the principal and agent. In the absence of an express agreement, several default rules apply regarding the point at which the agency relationship terminates. Below are common rules for terminating the agency relationship:

· withdrawal by either party—A principal or agent may withdraw from the relationship at any time. This legal authority is separate from the contractual right to withdraw. While withdrawal terminates the agency relationship, it may lead to liability of the withdrawing party. For example, Daisy hires Jeb as a sales agent for her new product line. Jeb will earn a commission on sales of the product. Jeb studies the product lines, develops a sales plan, and hits the road. Shortly after the relationship begins, Daisy decides to hire Luke and fire Jeb. Daisy’s withdrawal terminates the agency relationship with Jeb. Jeb, however, may have the legal right to seek damages against Daisy for terminating the relationship.

· withdrawal by both parties—The parties can terminate the agency relationship upon mutual consent.

· termination by the principal—Either party may terminate the agency relationship, even if it violates a contractual agreement between the parties. A principal will be subject to a breach of contract action for terminating the agency relationship if the agent’s status is part of an agreement that is supported by consideration and terminating the agency relationship will harm the agent’s rights. This scenario commonly arises in an agency coupled with an interest. An agency relationship is coupled with interest when the agent has a specific interest in the subject matter of the agency, such as a consignment of goods for resale. For example, I enter into a contract with Ernest to package and sell his products on the Internet. In exchange for my effort, I will keep in percentage of the sale value. As such, the agency is coupled with an interest and cannot be revoked without breaching a contract.

· renunciation by the agent—The agent can renounce the business of the principal and terminate her agency status and authority. This may, however, violate a contractual relationship between the parties. For example, I enter into a contract to serve as your agent. I may terminate the agency by renouncing my duties. Unless I have a justification, my actions will likely violate my contractual obligations to you.

· duties of agent complete—If the purpose of the agency ceases to exist, the agency relationship terminates. This often arises when the agent discharges all of her agency obligations. Further, it could arise when the subject matter of the agency no longer exists. For example, You higher me to represent you in the sale of your real estate. The real estate is the subject of an eminent domain action and is taken by the government. The agency relationship terminates when the purpose of my agency is gone.

· death or incapacity—The agency relationship terminates upon the death or incapacity of either party.

· bankruptcy—The agency relationship terminates upon the liquidation or reorganization of either party.

The above situations resulting in termination of the agency relationship are default rules. The parties may reserve any rights or restrictions on terminating the agency relationship within their agreement.

Ask Yourself

· How do you feel about either party’s right to terminate the agency relationship? What should the remedy be if termination of the agency relationship by a party violates a contract between the parties? Should a party have additional rights if she is harmed by the termination of the agency and the other party’s rights are not? Why or why not?

· Earl runs a showroom for baby products. Gayle, the inventor of a new product, consigns a large quantity of goods with Earl. Earl agrees to display the goods and represent them to potential retailers. Earl earns a percentage of all future sales to the retailer as compensation for his services. Can Gayle cancel the agency relationship?

Licenses and Attributions

Business Law: An Introduction, by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC. 

The video What is an Agency Relationship has been adapted with permission from Jason M. Gordon. © 2016, Business Professor, Inc.

The video What is the Scope of the Principal Agent Relationship has been adapted with permission from Jason M. Gordon. © 2016, Business Professor, Inc.

The video Employee vs Independent Contractor has been adapted with permission from Jason M. Gordon. © 2016, Business Professor, Inc